Exemptions from disclosure requirements
The council suggests amendments to four existing exemptions from Ontario’s franchise disclosure document requirements:
- Officer or director exemption—This applies when a franchise is granted to a former officer or director of the franchisor, for that person’s own account. The council supports recommendations from the Ontario Bar Association (OBA) that the relevant subsection of the act be amended to (a) clarify the exemption ceases to be available on the expiry of a 120-day period after the prospective franchisee ceases to hold such position as director or officer and (b) confirm the exemption also applies when the prospective franchisee is a corporation owned by a former director or officer.
- Fractional franchise exemption—This applies in the case of a ‘business within a business,’ whereby the franchise represents a relatively small part of the overall enterprise (i.e. anticipated to account for less than 20 per cent of total sales of the business). The period over which to calculate the anticipated percentage of sales is not specified. So, to ensure consistency in approach and certainty of compliance, the council recommends amending the relevant subsection of the act to explicitly state the period for calculating the anticipated percentage of sales is the first year of operation of the franchise.
- Small investment exemption—This applies when the total annual investment a franchisee has to make to acquire and operate a franchise is less than $5,000. To add certainty to the calculation, the council recommends replacing the concept of the ‘total annual investment’ with the ‘initial investment to acquire and set up the franchise’ that is anticipated by the parties at the time of the signing of the franchise agreement. This recommended language is consistent with other disclosure obligation language.
- Large investment exemption—At the other end of the spectrum, this applies when the prospective franchisee is investing $5 million or more to acquire and operate the franchise, also over a one-year period. Similar to the proposed amendments to add certainty to the small investment exemption calculation, the council recommends basing the calculation for the large investment exemption on the upfront investment amount, as calculated at the outset of the franchise relationship. And since the amendment would limit the prescribed amount to franchise acquisition and setup costs, as opposed to operational costs, the council further recommends reducing the threshold amount from $5 million to $3 million. This amendment would provide much relief and clarity in terms of understanding how the calculation should be made.
Frank Zaid practised franchise law for 40 years and has appeared as an expert witness in franchise disputes. Today, he is a franchise mediator, arbitrator and ombudsman with ADR Chambers in Toronto, where he chairs a special panel to resolve franchise disputes. He also operates his own franchise support business, Frank Zaid FRANlegal Support Services. For more information, contact him at (416) 322-8300 or (416) 362-8555 or via e-mail at firstname.lastname@example.org or email@example.com.