Upcoming Amendments to the Arthur Wishart Act (Franchise Disclosure), 2000, and its Regulation

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This article was originally published in The Lawyer’s Daily on July 22, 2020, under the same title.  The assistance of Anthony Pugh, Associate at Law Works PC, in writing this article is acknowledged with thanks. 

The Ontario Government has now confirmed that key unproclaimed legislative amendments to Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000, will be brought into force on September 1, 2020.  Amendments to the General Regulation under the Act, O. Reg. 581/00, will also come into force on the same date. 

The following is a summary of the upcoming amendments to the Act and Regulation. 

Confidentiality Agreements  

(Act, s. 5(1)(a), 5(1.1)(a), (b), 5(1.2), 5(5)(a))

A franchisor’s disclosure obligation is not triggered by an agreement that only requires a prospective franchisee to keep certain information confidential. 

However, the franchisor cannot avail itself of this exception in these scenarios: 

• The information that the franchisor seeks to keep confidential is already in the public domain or is disclosed other than through violation of the confidentiality agreement. 
• If the confidentiality agreement prohibits the prospective franchisee from disclosing the information to an organization of franchisees, other franchisees in the system, or professional advisors. 

In addition, the deadline by which a statement of material change must be delivered (which is the signing of a franchise or related agreement) is not affected by the signing of such a confidentiality agreement. 

Agreement Designating Location, Site or Territory 

(Act, s. 5(1)(a), 5(1.1)(c), 5(5)(a)) 

A franchisor’s disclosure obligation is not triggered for an agreement that only designates a location, site or territory. 

In addition, the deadline by which a statement of material change must be delivered is not affected by the signing of such an agreement designating a location, etc. 

Refundable Deposits 

(Act, s. 5(1)(b), 5(5)(b); Regulation, s. 7.1(1)) 

A franchisor’s disclosure obligation is not triggered by requiring a prospective franchisee to pay a deposit that is (a) fully refundable without any deductions, (b) does not exceed a prescribed amount, which is 20% of the franchise fee, up to a maximum of $100,000, and (c) is given under an agreement that does not bind the prospective franchisee to sign the franchise agreement. 

In addition, the deadline by which a statement of material change must be delivered is not affected by the payment of such a refundable deposit. 

Statement of Material Change to Contain Franchisor’s Certificate 

(Act, s. 5(5.1); Regulation s. 7.1(2), 7.1 (3)) 

A franchisor must include a certificate with each statement of material change, much like the certificate that is required for the disclosure document.   

The certificate must certify that the statement contains no untrue information, representations or statements, and includes every material change.   

The criteria for the individuals who are required to sign the certificate are the same as those for a certificate in the disclosure document. 

Disclosure Exemption – Sale to Insiders 

(Act, s. 5(7)(b)) 

The disclosure exemption in a sale to an insider of the franchisor has been somewhat narrowed.  A franchisor can avail itself of this exemption if the sale is to a person or a corporation controlled by a person who (a) has been a director or officer of the franchisor or franchisor’s associate for at least six months and continues to occupy this position at the time of the disclosure obligation, or (b) was a director or officer for at least six months but not more than four months had passed since the person held that position. 

Disclosure Exemption – Fractional Franchise 

(Act, s. 5(7)(e)) 

This amendment clarifies the fractional franchisee exemption.  The franchisor can avail itself of this exemption if the parties anticipate that sales revenues do not exceed 20% of the total business sales during the first year of operation. 

Disclosure Exemption – Small and Large Investments 

(Act, s. 5(7)(g)(i), 5(7)(h); Regulation, s. 9) 

These amendments clarify the disclosure exemption criteria for small and large investments by limiting the factors to the initial investment.  

• For a small initial investment, the new prescribed amount for a maximum threshold is $15,000. 
• For a large initial investment, the new prescribed minimum investment threshold is $3 million. 

Other than the threshold amounts, the amendments address what qualifies for the calculation of an initial investment – these amounts now do not include operational costs which are no longer relevant: 

• the amount of any deposits or franchise fees; 
• an estimate of the costs for inventory, leasehold improvements, equipment, leases, rentals and all other tangible and intangible property necessary to establish the franchise; and 
• any other costs or estimates of costs associated with the establishment of the franchise, including any payment to the franchisor. 

Auditing and Review Engagement Standards for Franchisor’s Financial Statements 

(Regulation, s. 3(1)(a), (b), 11(2)(a), (b)) 

The amendments expand the accounting standards that govern the preparation of the franchisor’s financial statements to allow certain U.S. and international accounting standards: 

• the CPA Canada Handbook; 
• the Auditing Standards Board of the American Institute of Certified Public Accountants or the Public Company Accounting Oversight Board of the United States, or the Financial Accounting Standards Board of the United States; 
• the International Auditing and Assurance Standards Board. 

Service Marks 

(Regulation, throughout) 

The confusing term “service mark” is deleted throughout the Regulation.