Carve-out from the obligation to disclose for confidentiality, site-selection agreements and deposits
Before the amendments, franchisors could not require prospective franchisees to sign a confidentiality agreement, or a site-selection agreement, or pay any deposit prior to providing a franchise disclosure document and waiting the 14-day disclosure period.
The amendments now make it possible for a franchisor to ask a franchisee to sign a confidentiality agreement, a site selection agreement or to provide a deposit during or before the 14 day disclosure period, provided the agreements meet certain criteria.
Clarifying the availability of exemptions
The amendments also clarify and revise a number of existing exemptions to the obligation to provide a disclosure document under the AWA.
There is an exemption from the requirement to disclose if the grant of the franchise is to a person who was the director or officer of the franchisor for at least 6 month. There was some debate about whether the exemption would apply to the grant of a franchise to a corporation owned by the director or officer. The amendments clarify that the exemption is available where the grant of the franchise is to a person for the person’s own account or to a corporation that the person controls if the person (i) has been an officer or director of the franchisor or of the franchisor’s associate for at least six months and is currently such an officer or director, or (ii) was an officer or director of the franchisor or of the franchisor’s associate for at least six months and not more than four months have passed since the person was such an officer or director.
Both the small and large investment exemptions have been reworked under the amendments to make each more clear and accessible. The small investment threshold has been increased to $15,000 (from $5,000), while the large investment exemption has been lowered to $3,000,000 (from $5,000,000). The amendment simplifies the language in both exemptions by referring to the single concept of a “total initial investment”, which is specified to be all of the franchisee’s costs associated with establishing the franchise.
Statement of material change
The amendments also set out that a material change certificate must include a franchisor’s certificate in a similar style to the certificate that must be included with the disclosure document.
The amendments expand the scope of the standard of audit or review engagement for the financial statements that must be included in the disclosure document. Now, the disclosure document must include either (a) an audited financial statement for the most recently completed fiscal year of the franchisor’s operations, prepared in accordance with generally accepted auditing standards as set out, (i) in the CPA Canada Handbook – Assurance, (ii) 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 (iii) by the International Auditing and Assurance Standards Board; or (b) a financial statement for the most recently completed fiscal year of the franchisor’s operations, prepared in accordance with generally accepted accounting principles that meet the review and reporting standards applicable to review engagements as set out, (i) in the CPA Canada Handbook – Accounting, (ii) by the Financial Accounting Standards Board of the United States, or (iii) by the International Accounting Standards Board.
The text of the Arthur Wishart Act (Franchise Disclosure), 2000 is available on IDI’s Canada legislation page.
Dominic Mochrie, IDI Country Expert for franchising in Canada