The government of Ontario has made amendments to Ontario’s franchise regulations which will come into effect on July 1, 2005. These amendments will change the mechanism by which franchisors may gain exemption from the obligation to include their financial statements in disclosure documents. They also allow leeway for use of foreign financial statements when they must be produced.
Generally, the upcoming amendments will be welcomed by franchisors, because they eliminate the need to apply for exemption from the government. Furthermore, they slightly ease the exemption and compliance criteria.
Under Ontario’s Arthur Wishart Act (Franchise Disclosure) 2000 (the "Act"), franchisors are obligated to provide a disclosure document to each prospective franchisee at least 14 days before any franchise agreement (or related agreement) is signed, or any payment is made. The Act provides that the disclosure document must contain all material facts, copies of all agreements to be signed, other prescribed information and the franchisor’s financial statements. The financial statements must be either audited or in compliance with the review engagement standards set out in the Canadian Institute of Chartered Accountants Handbook.
Existing Exemption Mechanism
Notwithstanding this general requirement, subsection 13(1) of the Act provides an exemption from the obligation to produce financial statements upon disclosure. Where a franchisor has applied and meets the criteria set out in section 11 of Ontario Regulation 581/00, the Minister of Consumer and Business Services may grant an exemption by way of a regulation.
The exemption was meant to apply to large, well-established franchisors with a history of good relations with franchisees. Thus, the criteria include minimum net worth values, years of operation, number of franchisees and continuous years in the applicable line of business. Furthermore, the franchisor and its associates, directors, general partners and officers must have been free of judgments, orders or awards relating to fraud, unfair or deceptive practices or a law regulating franchises for at least ten years prior to the application date.
Ontario Regulation 9/01 sets out the list of the franchisors that have been exempted to date.
This exemption mechanism was intended to be a temporary measure only. Subsection 13(1) and O. Reg. 9/01 will expire on July 1, 2005. Amendments to O. Reg. 581/00 will come into force on the same date.
Proposed Exemption Mechanism
Under the new regime, franchisors will no longer have to apply for government exemption from the obligation to produce specified financial information. Instead, a self-assessment process will take effect. Franchisors who meet the criteria set out in s.11 of O. Reg. 581/00 are automatically exempt.
Moreover, instead of requiring that there have been no relevant judgment, order or award for ten years from the application date, the period is reduced to the five year period prior to the date of the disclosure document.
Foreign Financial Statements
Additionally, where specified financial information must be produced, franchisors will now be allowed to use financial statements prepared in other jurisdictions, so long as they conform to auditing or review engagement standards that are at least equivalent to those set out in the Canadian Institute of Chartered Accountants Handbook.
Generally speaking the proposed exemption regime will ease the burden on franchisors that qualify for exemption. It is also welcomed by those who are subject to the disclosure obligations, whose financial statements have been prepared abroad. The amendments are awaited with anticipation.
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