RONNIE R. VOLKENING
Mr. Donald S. Clark, Secretary
Dear Mr. Clark:
7-Eleven, Inc. ("7-Eleven") is pleased to submit this comment in response to the Federal Trade Commission's ("FTC") Notice of Proposed Rulemaking ("NPR") to amend its trade regulation rule entitled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures" ("Franchise Rule").
7-Eleven is the owner of the trademark 7-Elevenā and franchises or operates approximately 18,000 7-Eleven stores worldwide. In the U.S., 7-Eleven individually franchises approximately 3,100 stores in 32 states and the District of Columbia. In addition, 7-Eleven operates about 2,400 additional 7-Eleven stores in the U.S. through its own employees. 7-Eleven also has five area licensees operating about 550 stores in the U.S.
7-Eleven has been franchising since 1964 and has extensive experience in complying with both the FTC Rule and various state laws regarding pre-sale disclosure. 7-Eleven is a member of the National Franchise Council (NFC) and the International Franchise Association (IFA) and supports their comments to the FTC. 7-Eleven strongly supports regulatory policies designed to ensure that prospective franchisees receive relevant information about their proposed franchise purchase sufficiently in advance of their purchase to permit them to make an informed and considered purchase decision.
7-Eleven appreciates the FTC staff's approach in the manner in which it has conducted this FTC Rule review process.
7-Eleven believes the FTC's recommendation to remove business opportunities from coverage of the Franchise Rule is important and correct. The structure, operations and experiences of business format franchises are significantly different from business opportunities and thus warrant creation of separate rules for each.
Based upon 7-Eleven's extensive experience in using both the Uniform Franchise Offering Circular ("UFOC") and the FTC Rule format document, our practice has always been to use the UFOC format whenever possible. Also, in view of the recent revisions to the UFOC, which revisions provide for significantly greater information to prospective franchisees than does the current version of the FTC disclosure format, we believe the FTC's decision to replace the FTC Rule format of the Rule with the UFOC is an important and significant action.
Application of the Rule
Based upon our experience with in excess of 20 licensees from around the world we believe the FTC recommendation that the rule be clarified to reflect its application to exclusively domestic--as opposed to international--franchise sales is appropriate. Our experience is that these arrangements are heavily negotiated and there is no evidence of benefit to prospective foreign investors from attempting to apply the Rule extraterritorially. Additionally, application of the Rule in these circumstances may result in confusion about or conflict with regulatory and statutory obligations in foreign jurisdictions.
7-Eleven supports permitting electronic disclosure as this can be a swift, cost-effective method of disclosure. In addition, it is the future of communication. We further agree with the IFA position that technological advances and the ever-increasing use of electronic communication may make hard copy disclosures of the cover page, table of contents and receipt unnecessary and unduly burdensome in the near future. Therefore, we believe the IFA recommendation, suggesting that the FTC consider some mechanism (short of an additional rulemaking) that would permit the FTC to eliminate any paper requirements in the disclosure process as electronic disclosure technology advances permit, should be followed.
Our experience also tells us that exemptions for sophisticated investors are needed, and we, therefore, agree with the FTC's rationale that "the Rule's protections may be unnecessary where the likelihood of abuse does not exist." Prospective franchisees with the ability to make these significant financial investments tend to have access to attorneys, accountants and other advisors so as to make the protections of the Rule superfluous.
However, IFA suggests that the minimum threshold for the exemption be modified and we support their suggestion. Our experience also tells us that sophistication sufficient to justify an exemption from the disclosure requirements of the Rule exists in transactions that involve lower amounts than the proposed $1.5 million threshold. The IFA has suggested that a threshold of $1,000,000 as the trigger for exemption be considered and we believe that is an appropriate level. IFA submitted significant information on how few transactions would be executed involving amounts greater than the $1,000,000 threshold. Adoption of this threshold will allow the FTC to more effectively target its limited enforcement resources at those transactions involving unsophisticated investors.
We believe that the Rule should not contain a required mandatory earnings claim disclosure. Although 7-Eleven, in its individual store franchise program, does provide such a disclosure, our ability to do so comes principally due to the type of system and services we provide our franchisees. Even with possession of each franchisee's financials, which 7-Eleven has, a significant amount of work is required to produce the financial disclosure we provide. We recognize that without the abilities which are present in our system a franchisor could be hard pressed to produce such disclosure without very extensive and significant effort. In addition, in our area license franchise program we do not possess the same level of financial information and thus cannot produce earnings claims disclosures.
Timing of Disclosures
Our experience has shown us that the "first personal meeting" standard for triggering a disclosure obligation is contractual and does not work well. Many times disclosures are technically required very early in a very preliminary discussion which does not go any further. Because of confusion in determining what level of contact constitutes the "first personal meeting", usually the document is given at the initial meeting. This is not necessarily the optimal moment at which this disclosure should be made. Therefore, replacing it with a specific requirement will meet the needs of the parties much more effectively.
Because of our ability to produce, and our experience with providing, financial disclosures in our individual franchise program, we support the FTC's recommendation for revisions to Item 19, which will clarify that: (1) franchise systems are permitted to make financial performance information available under the Rule, and (2) unless such information is substantiated in writing, prospective investors should not rely on such information. We believe this approach - affirmatively informing would-be investors about the requirements under the Rule and the manner in which such information should be disclosed--when combined with the competitive force of the marketplace, ensures that earnings information can be identified and properly appraised by franchise investors.
We hope that our comments are helpful. We have attempted to draw on our extensive experience in franchising 7-Eleven stores in recommending what information should be disclosed to prospective franchisees and how to most effectively disclose that information. We appreciate being given this opportunity to provide input and stand ready to answer any questions the FTC may have.
Very truly yours,