NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, INC (“NASAA”) 2008 FRANCHISE REGISTRATION AND DISCLOSURE GUIDELINES (Amended and Restated UFOC Guidelines) On January 23, 2007, the Federal Trade Commission (“FTC”) adopted a final amended Franchise Rule (“Amended FTC Franchise Rule”). 16 C.F.R. Part 436. As of July 1, 2008, all franchisors must prepare and distribute disclosure documents that, at a minimum, comply with the disclosure format of the Amended FTC Franchise Rule. Under the Amended FTC Franchise Rule, states may impose additional requirements under state law consistent with the Amended FTC Franchise Rule. The North American Securities Administrators Association (“NASAA”) has adopted the disclosure requirements of the Amended FTC Franchise Rule, with minimal additional requirements, as the successor to the Uniform Franchise Offering Circular Guidelines adopted on April 23, 1994. The NASAA-adopted Amended FTC Franchise Rule is attached in Part VII. As of July 1, 2008, Franchise Filing States will only accept for filing Franchise Disclosure Documents prepared under the Amended FTC Franchise Rule in accordance with the Instructions set forth below. This requirement does not affect any Franchise Disclosure Document registered by a Franchise Filing State before July 1, 2008 if the Franchise Disclosure Document otherwise complies with applicable state law and the Amended FTC Rule. These NASAA Franchise Registration and Disclosure Guidelines replace the NASAA Uniform Franchise Offering Circular Guidelines as of July 1, 2008. I. Franchise Filing States The “Franchise Filing States” are the states that have adopted these NASAA Guidelines. II. Uniform Franchise Registration Application A. Forms In order to register a franchise in the Franchise Filing States, the following application documents must be used by a franchisor if and as required by the state: 1. Uniform Franchise Registration Application (Form A); 2. Franchisor’s Costs and Sources of Funds (Form B); 3. Uniform Franchise Consent to Service of Process (Form C); 4. Franchise Seller Disclosure Form (Form D); 5. Franchise Disclosure Document (see Part III below); 6. Application Fee (varies by Franchise Filing State); 7. Guarantee of Performance (if required) (Form E); 8. Consent of Accountant (or a photocopy of the consent) to the use of the latest audit report in the Franchise Disclosure Document (Form F); and 9. Advertising or promotional materials (if required by the Franchise Filing State). Copies of Forms A, B, C, D, E and F are attached in Part V. Instructions for preparation immediately follow each Form. American LegalNet, Inc. www.FormsWorkFlow.com B. Form of Initial Application 1. An application for an initial registration must contain: (a) One copy of a complete franchise registration application, including the Franchise Disclosure Document, on paper; and (b) One copy of the complete franchise registration application, including Franchise Disclosure Document, on a CD-ROM, in Portable Document Format (PDF) format. 2. 3. If a Franchise Filing State examiner requires changes to any documents submitted, the franchisor must file a complete clean copy of the revised Franchise Disclosure Document and any other revised documents, and a blacklined copy of all revised pages, unless the examiner directs otherwise. In addition to filing the complete clean Franchise Disclosure Document and blacklined pages on paper, a franchisor must include copies on a CD-ROM, in PDF format. 4. C. The cover letter submitting the filing must contain a representation that all of the information contained in the electronic file is identical to the paper documents. In addition, the electronic version of the Franchise Disclosure Document should be text searchable. Do NOT use margin balloons or color highlights to show changes. Form of Renewal or Amendment Application 1. An application to renew or amend a franchise registration must contain: (a) One copy of a complete franchise renewal or amendment application, including two copies of a complete updated or amended Franchise Disclosure Document on paper. One paper copy of the complete updated or amended Franchise Disclosure Document must be black-lined to show all additions, deletions and other changes from the applicant’s previous submission; and (b) One copy of the complete franchise renewal or amendment application, including a clean and black-lined copy of the Franchise Disclosure Document on a CD-ROM, in PDF format. 2. The cover letter submitting the filing must contain a representation that all of the information contained in the electronic file is identical to the paper documents. In addition, the electronic version of the Franchise Disclosure Document should be text searchable. 3. If a Franchise Filing State examiner requires changes to any documents submitted, the franchisor must file a complete clean copy of the revised Franchise Disclosure Document and any other revised documents, and a black- American LegalNet, Inc. www.FormsWorkFlow.com lined copy of all revised pages, unless the examiner directs otherwise. In addition to filing the complete clean Franchise Disclosure Document and blacklined pages on paper, a franchisor must include copies on a CD-ROM, in PDF format. 4. III. Do NOT use margin balloons or color highlights to show changes. The Franchise Disclosure Document A. Format The Franchise Disclosure Document must be prepared in the format required under the Amended FTC Franchise Rule (See Part VII below) and in accordance with the NASAA requirements listed below. B. State Cover Page The Franchise Disclosure Document must include the following State Cover Page prepared in accordance with these Instructions, which must immediately follow the FTC required Cover Page (See Part VII below): 1. State the following legend: STATE COVER PAGE Your state may have a franchise law that requires a franchisor to register or file with a state franchise administrator before offering or selling in your state. REGISTRATION OF A FRANCHISE BY A STATE DOES NOT MEAN THAT THE STATE RECOMMENDS THE FRANCHISE OR HAS VERIFIED THE INFORMATION IN THIS DISCLOSURE DOCUMENT. Call the state franchise administrator listed in Exhibit ___ for information about the franchisor or about franchising in your state. 2. State the following: MANY FRANCHISE AGREEMENTS DO NOT ALLOW YOU TO RENEW UNCONDITIONALLY AFTER THE INITIAL TERM EXPIRES. YOU MAY HAVE TO SIGN A NEW AGREEMENT WITH DIFFERENT TERMS AND CONDITIONS IN ORDER TO CONTINUE TO OPERATE YOUR BUSINESS. BEFORE YOU BUY, CONSIDER WHAT RIGHTS YOU HAVE TO RENEW YOUR FRANCHISE, IF ANY, AND WHAT TERMS YOU MIGHT HAVE TO ACCEPT IN ORDER TO RENEW. 3. If any of the following apply, state the following, using capital letters as shown: Please consider the following RISK FACTORS before you buy this franchise: THE FRANCHISE AGREEMENT REQUIRES YOU TO RESOLVE DISPUTES WITH US BY [LITIGATION/ARBITRATION/MEDIATION] ONLY IN [STATE]. OUT-OF-STATE [LITIGATION/ARBITRATION/MEDIATION] MAY FORCE YOU TO ACCEPT A LESS FAVORABLE SETTLEMENT FOR DISPUTES. IT MAY ALSO COST YOU MORE TO [LITIGATE/ARBITRATE/MEDIATE] WITH US IN [STATE] THAN IN YOUR OWN STATE. American LegalNet, Inc. www.FormsWorkFlow.com THE FRANCHISE AGREEMENT STATES THAT [STATE] LAW GOVERNS THE AGREEMENT, AND THIS LAW MAY NOT PROVIDE THE SAME PROTECTIONS AND BENEFITS AS LOCAL LAW. YOU MAY WANT TO COMPARE THESE LAWS. 4. In addition to the above, disclose other risk factors required by a State Administrator. 5. If one or more risk factors applies, also state: THERE MAY BE OTHER RISKS CONCERNING THIS FRANCHISE. 6. If you use the services of a franchise broker or referral source, state the following: We use the services of one or more FRANCHISE BROKERS or referral sources to assist us in selling our franchise. A franchise broker or referral source represents us, not you. We pay this person a fee for selling our franchise or referring you to us. You should be sure to do your own investigation of the franchise. 7. (a) State the following: Effective Date: (b) Leave the effective date blank until notified of effectiveness by the state administrator. (c) If an applicant is using a multi-state disclosure document, the applicant may list multiple state effective dates together on a separate page which is to be inserted immediately following the State Cover Page. A sample State Cover Page and State Effective Date page are attached as Form G of these Instructions. C. Disclosure Timing Requirements If applicable state law requires a franchisor to provide the Franchise Disclosure Document earlier than the 14 calendar-days provided for in the Amended FTC Franchise Rule, the franchisor must add a statement to the Receipt pages of the Franchise Disclosure Document to accurately reflect the state law requirements for delivery of the disclosure document. A sample Receipt Page is attached as Form H. IV. Instructions for Preparation of the Franchise Disclosure Document A. Preparation of Disclosure Documents NASAA has adopted the following instructions for preparation of Franchise Disclosure Documents: 1. Disclose all required information clearly, legibly, and concisely in a single document using plain English. Plain English means the organization of information and language usage understandable by a person unfamiliar with the franchise business. It incorporates short sentences; definite, concrete, everyday American LegalNet, Inc. www.FormsWorkFlow.com language; active voice; and tabular presentation of information, where possible. It avoids legal jargon, highly technical business terms, and multiple negatives. 2. The disclosure must be in a form that permits each prospective franchisee to store, download, print, or otherwise maintain the document for future reference. 3. The disclosure for each Item must be separately titled and in the required order. Do not repeat the question in the disclosure document. Respond to each question fully. If the disclosure is not applicable, respond in the negative, but if an answer is required “if applicable,” or “to the extent known,” respond only if the requested information applies. Do not qualify a response with a reference to another document unless permitted by the instructions to that Item. Precede each disclosure Item with the appropriate heading. 4. Franchisors may prepare multi-state disclosure documents by including nonpreempted, state-specific information in the text of the disclosure document or in State Addenda attached to the disclosure document. The State Addenda may be included in an exhibit attached to the Franchise Disclosure Document. Any amendments to the franchise agreement may be included in the State Addenda exhibit or in a separate exhibit immediately following the franchise agreement or document being amended. 5. The two copies of the Item 23 Receipt pages must be the last two pages of the Franchise Disclosure Document and attached after all the exhibits. 6. Before furnishing a disclosure document, the franchisor must advise the prospective franchisee of the formats in which the disclosure document is made available, any prerequisites for obtaining the disclosure document in a particular format, and any conditions necessary for reviewing the disclosure document in a particular format. 7. For the sole purpose of enhancing the prospective franchisee’s ability to maneuver through an electronic version of a disclosure document, the franchisor may include scroll bars, internal links, and search features. All other features (e.g., multimedia tools such as audio, video, animation, pop-up screens, or links to external information) are prohibited. 8. Franchisors must retain, and make available to the State Administrators, upon request, a sample copy of each materially different version of their disclosure documents for the period required by the applicable law of the Franchise Filing State. 9. For each completed franchise sale, franchisors must retain a copy of the signed receipt for the period required by applicable laws of the Franchise Filing States. 10. For each Item, type the Item’s Arabic numbers and title. Identify Exhibits by a letter of the alphabet. 11. Separate documents (for example, a confidential operations manual) must not make representations or impose terms that contradict or are materially different from the disclosure in the Franchise Disclosure Document. American LegalNet, Inc. www.FormsWorkFlow.com 12. Use 8½ by 11 inch paper for the Franchise Disclosure Document and other forms submitted to the Franchise Filing States. The text of the Franchise Disclosure Document must be clearly readable and presented in at least 11 point type. Tables in the Franchise Disclosure Document and separately attached documents not prepared by the franchisor may be presented in less than 11 point type as long as the text is clearly readable. 13. When the applicant is a master franchisor seeking to sell master franchises (subfranchises), references in these requirements and instructions to “franchisee” include the master franchisee (subfranchisor). 14. The offer of master franchises (subfranchises) is an offer separate from the offer of franchises and usually requires a separate registration or exemption. A single application may register the sale of single unit and multi-unit franchises if the disclosure document is not confusing. 15. In an offering by a master franchisee (subfranchisor), “franchisor” means both the master franchisor and master franchisee (subfranchisor). 16. Master franchisees (subfranchisors) must disclose the required information about the master franchisor, and to the extent applicable, the same information concerning the master franchisee (subfranchisor). 17. If the franchise agreement requires a franchisee to sign a release or waiver as a condition of consenting to some future action, such as a transfer or assignment of the franchise, include a sample copy of the document the franchisee will be asked to sign. This requirement does not apply to negotiated releases or waivers that a franchisee may sign to resolve a dispute with a franchisor. 18. In a multi-state offering, an exhibit may list all agents for service of process. The following additional statement may be used if accurate: “If a state is not listed, [franchisor] has not appointed an agent for service of process in that state in connection with the requirements of franchise laws. There may be states in addition to those listed above in which [franchisor] has appointed an agent for service of process. There may also be additional agents appointed in some of the states listed.” 19. When state requirements conflict with these Instructions, the state requirements control. The State Administrator may modify or waive these Instructions or may require additional documentation or information. 20. Grossly deficient applications may be rejected summarily by the State Administrator as incomplete for filing. It is not the function of a State Administrator to prepare, in effect, an applicant’s Franchise Disclosure Document application. The additional examiner time reviewing the grossly deficient product delays the processing of diligently prepared and pursued applications. American LegalNet, Inc. www.FormsWorkFlow.com B. Instructions for Updating Disclosures NASAA has adopted the following instructions for preparation of updated disclosure documents: 1. 2. File a renewal application before the prior registration has expired, or as required under applicable state law. If the prior registration has expired, mark “Initial Registration of an Offer and Sale of Franchises” on the Application page and pay the fee charged for initial registrations. Black-lining and bracketing changes from the last filing will speed a re-registration. Do not mark the “Amendment” boxes on the application page on the first renewal filing even if documents are revised. 3. C. When state law requires renewal or an annual report, mark “Renewal Application” or “Annual Report” on the Application page. Submit all documents required for an initial application with additions to the previously filed documents black-lined. Changes must be clearly marked so that each change is noticed easily. Do NOT use margin balloons or color highlights to show changes. Do not use less than 11 point type for changed text. Use a black-lining system that underlines changes and shows deletions by a strike through. Follow the form of renewal or amendment application instructions in Part II.C. of these Guidelines. Electronic Disclosure Unless a Franchise Filing State has adopted its own requirements regarding electronic disclosure, franchisors may deliver a Franchise Disclosure Document electronically by complying with the NASAA Statement on Policy Regarding Electronic Delivery of Franchise Disclosure Documents, adopted September 14, 2003. A copy of the NASAA Electronic Disclosure Policy is attached in Part VI. V. Forms The following forms are to be used in preparation of applications and Franchise Disclosure Documents as required by the Franchise Filing States: Form A: Uniform Franchise Registration Application Form B: Franchisor’s Costs and Sources of Funds Form C: Uniform Franchise Consent to Service of Process Form D: Franchise Seller Disclosure Form Form E: Guarantee of Performance Form F: Consent of Accountant Form G: Sample State Cover Page and Sample State Effective Dates Form H: Sample Receipt Page Instructions for preparing Forms A, B, C, D, E, F, G and H follow each of those forms. American LegalNet, Inc. www.FormsWorkFlow.com