In April 1998, China ordered an immediate ban on almost all direct marketing, a move which closed the multimillion-dollar market for many direct marketing giants. In line with China’s commitments to the WTO, the State Council of the PRC has promulgated the long awaited Administration Regulations for Direct Marketing on 1 September 2005 (“the Regulations”) to give legal standing to a business model that has been banned since 1998. Meanwhile, the State Council of the PRC has also issued the Anti-Pyramid Marketing Regulations effective on 1 November 2005 before the Regulations take effect on 1 December 2005.
Direct marketing for the purposes of the Regulations is a type of business model involving the recruitment of direct marketing sales agents or promoters and the selling of products to end consumers outside fixed business locations or outlets.
The Regulations impose stringent requirements on market entry for direct sellers, their operations and sales promoters, aiming to prevent fraud and protect customers’ and the general public’s interests.
When applying to be a direct marketing enterprise, the following conditions must be met: -
- the investor must have satisfactory goodwill and no record of material illegal operation over the past five years. Foreign investors must also have had three years of experience of direct marketing outside the PRC;
- the registered capital of the direct marketing enterprise must be no less than RMB 80 million;
- the direct marketing enterprise must have fully paid and maintained a deposit with a designated bank in accordance with the Regulations. The amount of deposit is RMB 20 million at the time of application and thereafter 15% of the turnover of the direct marketing enterprise in China for the previous month subject to a minimum of RMB 20 million but not exceeding RMB 100 million;
- the direct marketing enterprise must have established an information filing and disclosure system in accordance with the Regulations
(together referred to as “the Conditions”).
If the Conditions can be met, applicants should then complete the application form and submit the following documents to the examination and approval authority: -
- documents proving the Conditions have been met;
- Articles of Association, Sino-foreign Equity Joint Venture Contract (for Sino-foreign Equity Joint Venture Enterprises only) or Sino-foreign Cooperative Joint Venture Contract (for Sino-foreign Cooperative Joint Venture Enterprises only);
- a marketing plan;
- descriptions of the relevant products;
- a sample sales contract between the direct marketing enterprise and its sales persons;
- a capital verification report issued by an accounting firm;
- an agreement between the direct marketing enterprise and designated bank regarding use of the deposit in accordance with the Regulations.
According to Article 4 of the Regulations, direct marketing enterprises are allowed to sell either self-manufactured products or products manufactured by their parent or holding companies.
Direct marketing enterprises must establish a branch to carry on direct marketing in the provinces, autonomous regions and municipalities where they wish to conduct direct marketing activities. Furthermore, the direct marketing enterprise must establish a service network in all areas where sales are conducted to enable customers and sales persons to understand the product prices, method of returning goods and other services of the direct marketing enterprise.
To prevent pyramid selling, Article 14 of the Regulations prohibits direct marketing enterprises from hiring sales persons on condition of payment of fees or purchase of goods. Article 24 of the Regulations further restricts the maximum remuneration of sales persons paid by the direct marketing enterprise to below 30% of the product sales made by that sales person.
The enactment of the Regulations is welcomed by many multi-national direct selling companies like Amwaycorp and Avon. It should be noted that even though direct marketing activities complying with the Regulations will become legal from 1 December 2005, pyramid selling is still strictly prohibited in the PRC. We wait to see how the Regulations will be implemented in the future.
Lawyers in our China Practice Group regularly advise a wide range of issues relating to Chinese laws as well as transactional matters involving China. If you have any questions in relation to the above article or any other China related matters, please contact us.
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