The Ontario government recently confirmed that the long-awaited amendments to the Arthur Wishart Act (Franchise Disclosure), 2000, and the General Regulation, O. Reg. 581/00, made under the Act will be coming into force on September 1, 2020. Franchisors are welcoming these changes, which provide clarity to certain provisions of the legislation.
In general, these amendments:
- provide that confidentiality agreements and agreements designating the location, site, or territory for the prospective franchise may be signed without triggering the franchisor’s disclosure obligations;
- allow for the franchisor to accept certain refundable deposits from prospective franchisees without being required to first provide a disclosure document;
- clarify certain disclosure exemptions dealing with grants of franchises to officers and directors, fractional franchises, and the size of initial investments;
- require a statement of material change to include a signed certificate that is similar to the certificate that must be included in a disclosure document; and
- permit the franchisor’s financial statements to be prepared in accordance with certain U.S. and international accounting standards.
Below is a more detailed summary of the key upcoming changes.
Confidentiality Agreements and Site-Selection Agreements
A franchisor and a prospective franchisee will be able to sign a confidentiality agreement without triggering the franchisor’s disclosure obligations if this agreement only contains terms that require any information or material that may be provided to a prospective franchisee to be kept confidential and prohibit the use of such information and material. However, a franchisor will not be able to rely on this exception to the disclosure obligations if the confidentiality agreement:
- requires information to be kept confidential or prohibits the use of information if the information is or becomes public information (other than as a result of a contravention of the agreement), is disclosed to any person (other than as a result of a contravention of the agreement), or is disclosed with the consent of all the parties to the agreement; or
- prohibits the disclosure of information to an organization of franchisees, other franchisees of the same franchise system, or a franchisee’s professional advisors.
In addition, a franchisor and a prospective franchisee will be able to sign an agreement that only designates a location, site, or territory for the prospective franchisee without triggering the franchisor’s disclosure obligations.
A franchisor will be able to accept a deposit from a prospective franchisee without first having to provide a disclosure document, provided that the deposit is fully refundable, does not exceed 20% of the franchise fee (to a maximum of $100,000), and does not require the prospective franchisee to enter into a franchise agreement.
Grant of Franchise to Directors and Officers
The disclosure exemption with respect to a grant of a franchise to director or officer of the franchisor or its associate will be narrowed. The exemption will apply to the grant of a franchise to a person for the person’s own account or to a corporation that the person controls if the person:
- is currently an officer or director of the franchisor or the franchisor’s associate and has been an officer or director of the franchisor or the franchisor’s associate for at least 6 months; or
- was an officer or director of the franchisor or the franchisor’s associate for at least 6 months and not more than 4 months have passed since the person was such an officer or director.
The fractional franchise disclosure exemption will apply where a franchise is granted to a person to sell goods or services within that person’s business if the sales arising from those goods or services during the first year of operation of the franchise, as anticipated by the franchisor and the franchisee, do not exceed 20% of the total sales of the business during that year.
Size of Franchisee’s Initial Investment
A franchisor will not be required to provide disclosure to a prospective franchisee if that prospective franchisee is required to make a total initial investment of:
- $15,000 or less; or
- over $3,000,000.
The amount of the total initial investment is to be calculated by adding up all of the franchisee’s costs associated with the establishment of the franchise, including the following:
- amount of any deposits and franchise fees;
- estimate of the costs for inventory, leasehold improvements, equipment, leases, rentals, and all other tangible and intangible property necessary to establish the franchise; and
- other costs or estimates of costs associated with the establishment of the franchise, including payment to the franchisor required by the franchise agreement.
Statement of Material Change
The statement of material change will be required to contain a certificate that certifies that it contains no untrue information, representations, or statements (whether of a material change or otherwise), and includes every material change. The certificate must be signed and dated:
- if the franchisor is not incorporated, by the franchisor;
- if the franchisor is incorporated but has only one director or officer, by that person; or
- if the franchisor is incorporated and has more than one officer or director, by at least 2 persons who are officers or directors.
Accounting Standards for Financial Statements
If the franchisor is not otherwise exempt from providing its financial statements to prospective franchisees, it must either provide audited financial statements or financial statements based on review engagement standards. The amendments expand these accounting standards.
If audited financial statements are to be provided, the franchisor will be required to prepare them in accordance with generally accepted auditing standards as set out:
- in the CPA Canada Handbook – Assurance;
- by the Auditing Standards Board of the American Institute of Certified Public Accountants or the Public Company Accounting Oversight Board of the United States, as applicable; or
- by the International Auditing and Assurance Standards Board.
If review engaged financial statements are to be provided, the franchisor will be required to prepare them in in accordance with generally accepted accounting principles that meet the review and reporting standards applicable to review engagements as set out:
- in the CPA Canada Handbook – Accounting;
- by the Financial Accounting Standards Board of the United States; or
- by the International Accounting Standards Board.
This blog post was written by Marina Abrosimov, a member of the Business Law team. Marina can be reached at 613-369-0363 or at firstname.lastname@example.org.