INFORMING THE GLOBAL INVESTOR OF FINANCIAL OPPORTUNITIES
August 19, 1997
Donald S. Clark, Secretary
Attn: Staff Contact - Steven Toporoff or Myra Howard
Re: 16 C.F.R. Part 436 FTC File No. 954402
In response to the Commission's solicitation of public comment on revisions to the Franchise Rule, we wish to address the Staffs focus on franchise sales in cyberspace. We believe that current advances in technology provide a unique opportunity for the Staff to amend the Franchise Rule in order to take advantage of the enormous potential embedded 'in the Internet which can raise consumer protection standards to a new level.
ABOUT THE AUTHOR
Over the past eighteen years my law practice (Bertrand T. Ungar, P.C., Attorney at Law, 3773 Cherry Creek N. Dr., Denver, CO) has specialized in corporate and securities matters. In this capacity I have represented both issuers of securities and investment bankers. This has resulted in my having extensive interaction with Staff members of the United States Securities and Exchange Commission as well as state securities regulators. In counseling clients I have often shared their frustration in attempting to faithfully discharge their obligation to maintain effective communication with their shareholders as well as members of the financial and business community.
To assist in meeting the needs of these companies, PR ONE, LLC ("PR ONE') was formed. PR ONE maintains a proprietary website (www.pr-one.com) on the Internet dedicated to disseminating comprehensive business and financial information about established and emerging growth companies, both public and private. At one location, shareholders, investors and other members of the financial community can review vital information in a timely manner about client companies, twenty-four hours a day, seven days a week. This information includes, corporate profiles, research reports, press releases, quarterly and annual reports, proxy materials as well as additional business information. Easy access to EDGAR (the SEC report site) provides additional historical information. PR-ONE's E-mail protocol permits direct targeted notification of updates to information provided on the site. While this information and data is available and could be culled from a variety of sources, this is a time consuming and laborious task. This website makes the information available in one place, in an organized and user friendly environment, which provides the consumer with ease of access.
In developing the protocol for PR-ONE my colleagues concurred that Franchisors face many similar issues in the marketing of their business opportunities and encouraged me to examine the possibilities for the system as it related to the franchise industry. It soon became apparent that the system developed for PR-ONE may well have application to franchise sales. As a result of this interest in the use of the Internet to provide disclosure documentation on behalf of Franchisors we offer our comments on the proposed changes to the Franchise Rule.
Transitional Nature of Use.
We believe the long term interests of the use of electronic mediums (i.e. the Internet) for dissemination of disclosure documents dictates a transitional approach, which allows all parties to develop confidence in the system. Such an approach dictates a gradual, rather than "all or nothing", transition from hard copy to the electronic medium. On-line providers of disclosure documents should provide easy alternative recourse to hard copy at any time in the process. Proposed changes in the Rule should provide maximum flexibility for the use of a combination of mediums.
Proposed changes in the Rule should take into consideration the diversity in the currently installed communication technology as well as the rapid change occurring in that technology. Methodology which may be possible for some, may not be practical for all. The Rule should try to anticipate this transitional nature as much as possible. (I.e. different capabilities of different browsers. (frame or non-frame); ability of website and user to engage in secure transactions for the transmission of sensitive information, etc.).
We believe proposed changes in the Rule should incorporate the following general provisions:
1. Information made available on the Franchisor website should not be unduly regulated by the applicable jurisdictions. In those cases where advanced approval is required, such approval should relate only to content, not format. Attempts to regulate format may severely limit the use of the potential advantages of the medium.
2. Information and marketing materials about the prospective Franchise whether subject to advance approvalor not, should be freely available without restriction for viewing by prospective Franchisees at any time.
3. Prospective Franchisees should be reminded that they have the night to seek any and all information regarding the Franchise in the standard hard copy medium (or diskette) at-any time in the process.
4. Upon deciding to seek additional information about the Franchise opportunity beyond that portrayed on the website, the prospective Franchisee could complete an on-line Qualification Questionnaire to be submitted to the Franchisor. The content of the Questionnaire or the method of seeking additional information could be determined by each Franchisor. To the extent that such Questionnaires request sensitive 'information, the prospect should have the opportunity to submit the information in a "secure" transaction, or resort to hard copy. (See Note A)
5. Depending upon whether the prospect Franchisee submits a Qualification Questionnaire, or requests additional information, the Franchisor would either make a determination about the qualification of the prospect or send additional information.
6. Upon determining that a prospect meets the Franchisors' requirements for a prospective Franchisee, the Franchisor could communicate a password to the prospect, which would grant the prospect access to the UFO of the appropriate jurisdiction.
7. When the prospect accesses the UFO they would be requested to submit a receipt form specific to the jurisdiction in which they reside. This receipt form would serve as evidence that they had received the correct UFOC for the Jurisdiction in which they live. This submission would begin the ten (1O) business day period which must elapse prior to the completion of the Franchise sale. In addition, if appropriate, the Franchisor could make available completed execution documents for the prospective Franchisee to view for the five (5) business days required prior to execution. (See Note B)
8. If, after reading the UFOC and exhibits on line, the prospect wishes to have any or all of the documents in hard copy, they could obtain them:
a) by printing the material from their browser
b) by downloading the file and browsing and/or printing off line
c) by being reminded that if they wish to have hard copy delivered, or if they would like to have the materials on a diskette, they can request that format.
9. Consummation of the actual legal transaction of purchasing the Franchise should occur off-line. Completing transactions of this magnitude on-line, although technologically feasible, should be completed in person.
(A) We do not believe a prospect should be required to register or in any other way identify themselves until they choose to submit the qualification questionnaire or make a request for additional information. Any prior requirement would increase the likelihood of using that information for pressure sales tactics.
(B) Requiring the positive acknowledgment of receipt of the appropriate UFOC a specific number of business days prior to entering into a transaction makes the definition of "first substantive discussion" moot with respect to Internet transactions. Web servers have the capability to "time stamp" these submissions so that independent verification of dates of receipt exist.
Delivery of disclosure documents by use of the Internet provides at least the following advantages:
Immediate availability of disclosure documents anywhere in the world at any time.
Availability of updated or amended documents immediately.
Ease of studying disclosure documents. Documents on the website can permit the user to easily move from section to section through the use of hyperlinks. Interlinking between documents can encourage the user to examine specific contractual obligations contained in the exhibits without shuffling through large documents.
Access to information about franchising and easy access to regulatory agencies websites, encourages the prospective Franchisee to educate themselves before purchasing.
RESPONSES TO SPECIFIC QUESTIONS
Our comments address the following issues raised by the Staff:
In view of the foregoing discussion and the reality of the technological market place we now live in, the term "personal meeting" has become obsolete. However, the proposed definition of "first substantive discussion" may be equally inappropriate for Internet usage. In view of the foregoing discussion it may be more practical for identifying that point in time at which the clock commences running prior to consummating a franchise sale, as that time when the prospective Franchisee confirms receipt of the required disclosure documents.
In view of the foregoing discussions we believe that both Franchisors and prospective Franchisees would be substantially benefited by providing disclosure documents on the Internet. The Franchisor would be afforded the opportunity to provide the latest document in the timeliest manner. Expensive duplication and delivery costs could be avoided. Prospective Franchisees would be afforded the opportunity to retrieve and study the UFOC's in the privacy of their own home without being subjected to high-pressure sales techniques. They would also be more likely to have access to the latest documents.
PR ONE has established a division, FRAN-ONE, to assist Franchisors in disseminating comprehensive information about their Franchise opportunities in the most timely, accurate and efficient manner. Our goal is to exploit the enormous potential embedded in the Internet to raise the level of marketing of franchise opportunities to a new level of protection for both the Franchisors and the prospective Franchisees.
FRAN-ONE is presently testing a website (www.fran-one.com) on the Internet, which will be dedicated to disseminating comprehensive information about Franchise opportunities to the broadest possible audience. At one location consumers can review and study initial franchise marketing materials, seven days a week, twenty-four hours a day. If a particular opportunity is of interest they can complete and submit by E-mail to that Franchisor an initial qualification request. The Franchisor, following a review of the qualification questionnaire and a determination that the prospective Franchisee meets its criteria, can send by E-mail to the prospect a unique password. This password will permit the prospect to access the database and retrieve and review only that UFOC which is appropriate for the jurisdiction in which the prospect resides. However, prior to being able to access the data base and retrieve the UFOC, the system discloses to the consumer notification pursuant to the recent Informal Staff Advisory Opinion 97-2, relating to the delivery of an offering circular on computer disc, that the consumer may request and will receive a printed copy of the UFOC, if desired. In addition the system's protocol requests the consumer to confirm receipt of the UFOC by re-entering the password provided. These entries are date and time recorded by the website's computer independently of the information provided by the user and provides an accurate record of a given documents delivery and confirmation of receipt.
We believe it is in the best interest of the prospective Franchisee to be able to retrieve and analyze these disclosure documents on their own and in the absence of a high-pressure sales environment. In addition current technology insures that a prospective Franchisee will receive only the current disclosure document. Such a system would minimize the stacks of copied UFOC's that Franchisors have on hand for distribution. Also, area developers can visit the website to retrieve the latest versions of documents. Following the annual updates or interim amendments, the cleared UFOC can be available on line almost immediately thus avoiding the danger of outdated material being circulated. Not to be ignored are the attendant potential cost savings in printing, duplication and delivery charges. The environmental impact of reducing the very large number of pages of printed material created by the current system should not be ignored. In view of recent litigation results involving overseas Franchisees there is no excuse for not providing a disclosure document.
We believe that following delivery of the disclosure document all further sales activities must be done off-line. We do not believe that most reputable Franchisors will consummate a Franchise sale without a face to face meeting. Furthermore, the execution of the definitive Franchise agreements with their attendant representations and warranties, as well as delivery of the consideration, will be undertaken off the website. It is naive to believe that in a legitimate transaction final documents would be executed and consideration paid without the parties ever having a face to face meeting. Accordingly the FRAN-ONE site will not provide any services beyond delivery of the disclosure documents.
Thank you for this opportunity to provide comments on the FTC Rules. We would be pleased to participate in a workshop relating to the issues raised in this letter.
Bertrand T. Ungar