Regulations for the Administration of Direct Selling

(Promulgated by the State Council on August 23 2005 and effective as of December 1 2005.)

Order of the State Council No.443

PART ONE: GENERAL PROVISIONS

Article 1: These Regulations have been formulated in order to regulate direct selling, strengthen oversight over direct selling activities, prevent fraud and protect the lawful rights and interests of Consumers and the public interest.

Article 2: When engaging in direct selling activities in the People's Republic of China, these Regulations shall be observed.

The State Council department in charge of commerce together with the State Council department of industry and commerce administration shall determine the scope of products that may be sold directly based on the state of development of the direct selling business and the demand of Consumers, and publish the same.

Article 3: For the purposes of these Regulations, the term 'direct selling' means a method of sale whereby a direct seller recruits direct salespersons and the direct salespersons promote products directly to end Consumers (Consumers) somewhere other than in a fixed place of business.

For the purposes of these Regulations, the term 'direct seller' means an enterprise approved in accordance with these Regulations that sells products through direct selling.

For the purposes of these Regulations, the term 'direct salesperson' means a person who promotes products directly to Consumers somewhere other than in a fixed place of business.

Article 4: Enterprises established in the People's Republic of China (Enterprises) may apply, in accordance with these Regulations, to become a direct seller that sells through direct selling the products it itself produces and those produced by its parent or holding company.

Direct sellers may obtain trading rights and distribution rights in accordance with the law.

Article 5: Direct sellers and their direct salespersons may not engage in fraudulent or misleading publicity or promotion when engaging in direct selling activities.

Article 6: The State Council department in charge of commerce and the State Council department of industry and commerce administration shall, based on their division of responsibilities and in accordance with these Regulations, be responsible for exercising oversight over direct sellers, direct salespersons and their direct selling activities.

PART TWO: ESTABLISHMENT AND CHANGE OF DIRECT SELLERS AND THEIR BRANCHES AND SUB-BRANCHES

Article 7: To apply to become a direct seller, the following conditions shall be satisfied:

(1) the investor(s) has/have a good commercial reputation, and does/do not have a record of a major violation of the law in the five years immediately preceding the application; a foreign investor shall additionally have at least three years experience in direct selling activities outside China;

(2) having paid in registered capital of not less than
Rmb80 million;

(3) having paid a bond in full at a designated bank in accordance with these Regulations; and

(4) having established information submission and disclosure systems in accordance with provisions.

Article 8: When applying to become a direct seller, an application form shall be completed and the following application documents and information submitted:

(1) supporting materials evidencing compliance with the conditions specified in Article 7 hereof;

(2) the Enterprise's articles of association and, in the case of a Sino-foreign equity or cooperative joint venture, the contract for the equity or cooperative joint venture;

(3) a marketing plan report, including the plan for the service outlets in the territory where the direct selling activities will be conducted approved by the local people's government at the county level or above and drafted in accordance with Article 10 hereof;

(4) product instructions complying with state standards;

(5) a sample of the promotion contract to be executed with the direct salespersons;

(6) a capital verification report issued by an accounting firm; and

(7) the agreement reached by the Enterprise with the designated bank agreeing to use the bond in accordance with these Regulations.

Article 9: The applicant shall submit its application to the State Council department in charge of commerce via the competent commerce department of the province, autonomous region or municipality directly under the central government where it is located. The competent commerce department of the province, autonomous region or municipality directly under the central government shall forward the application documents and information to the State Council department in charge of commerce within seven days of the date of receipt of such application documents and information. The State Council department in charge of commerce shall solicit the opinion of the State Council department of industry and commerce administration and render its decision on whether or not to grant its approval within 90 days of the date of receipt of all the application documents and information. If it grants its approval, it shall issue a direct selling business permit.

The applicant shall apply to the administration for industry and commerce for amendment of registration in accordance with the law on the strength of the direct selling business permit issued by the State Council department in charge of commerce. When conducting its examinations and issuing direct selling business permits, the State Council department in charge of commerce shall consider such factors as national security, the public interest and the state of development of the direct selling business.

Article 10: When it is to engage in direct selling activities, a direct seller must establish a branch or sub-branch in the province, autonomous region or municipality directly under the central government where it intends to engage in such activities, and such branch or sub-branch shall be responsible for its direct selling business in the said administrative territory (Branch).

A direct seller shall establish service outlets in those regions where it engages in direct selling activities so as to facilitate and satisfy Consumers' and direct salespersons' understanding of product prices, the return or exchange of goods and the other services provided by the Enterprise in accordance with the law. The establishment of a service outlet shall satisfy the requirements of the local people's government at the county level or above.

When a direct seller applies to establish a Branch, it shall submit supporting documents and information that comply with the conditions of the preceding paragraph and submit the application in accordance with the procedure specified in the first paragraph of Article 9 hereof. After receiving approval, registration shall be carried out with the administration for industry and commerce in accordance with the law.

Article 11: In the event of a material change in the particulars set forth in Article 8 hereof, the direct seller shall report the same to the State Council department in charge of commerce for approval in accordance with the procedure specified in the first paragraph of Article 9 hereof.

Article 12: The State Council department in charge of commerce shall post the list of direct sellers and their Branches on its government website and timely update the same.

PART THREE: RECRUITMENT AND TRAINING OF DIRECT SALESPERSONS

Article 13: Direct sellers and their Branches may recruit direct salespersons. No work unit or individual other than a direct seller or a Branch thereof may recruit direct salespersons.

The lawful sales promotion activities of a direct salesperson shall not be investigated and handled on the grounds of operating without a licence.

Article 14: A direct seller or a Branch thereof may not release advertisements publicizing the sales remuneration of direct salespersons nor make the payment of fees or the purchase of merchandise conditions for being a direct salesperson.

Article 15: A direct seller or a Branch thereof may not recruit the following persons as direct salespersons:

(1) persons less than 18 years of age;

(2) persons with limited or no civil capacity;

(3) full time students;

(4) teachers, medical personnel, civil servants or active military personnel;

(5) its regular employees;

(6) persons from outside China; or

(7) persons whom laws and administrative regulations specify may not concurrently hold two or more positions.

Article 16: When a direct seller or a Branch thereof recruits a direct salesperson, it shall execute a sales promotion contract with him/her and ensure that he/she engages in direct selling activities only in a region where a service outlet has been established in the administrative territory of a province, autonomous region or municipality directly under the central government where one of its Branches is located. No one may engage in direct selling activities in any manner without having executed a sales promotion contract with a direct seller or a Branch thereof.

Article 17: A direct salesperson may terminate his/her sales promotion contract within 60 days of the date of execution thereof. Thereafter, if he/she wishes to terminate his/her sales promotion contract, he/she shall give the direct seller 15 days' prior notice.

Article 18: A direct seller shall give vocational training to and set examinations for the direct salespersons it intends to recruit. After they have passed the examination, the direct seller shall issue them a direct salesperson certificate. No one may engage in direct selling activities without a direct salesperson certificate.

A direct seller may not charge direct salespersons any fee for the vocational training or the examinations it gives them.

No individual or work unit other than a direct seller may arrange to give vocational training to direct salespersons in any guise.

Article 19: An instructor who provides vocational training to direct salespersons shall be a regular employee of the direct seller and shall satisfy the following conditions:

(1) he/she has been working for the Enterprise for at least one year;

(2) he/she has at least an undergraduate education and relevant legal and marketing knowledge;

(3) he/she does not have a criminal record for an intentional crime; and

(4) he/she does not have a record of having committed a major violation of the law in business operations.

A direct seller shall issue instructors who satisfy the provisions of the preceding paragraph a direct selling trainer certificate and shall submit the list of its personnel who have obtained such certificates to the State Council department in charge of commerce for the record. The State Council department in charge of commerce shall post the list of persons who have obtained direct selling trainer certificates on its government website.

Persons abroad may not engage in the provision of vocational training to direct salespersons.

Article 20: The direct salesperson certificates and direct selling trainer certificates issued by direct sellers shall be printed in the format specified by the State Council department in charge of commerce.

Article 21: A direct seller shall be liable for the lawfulness of its direct salesperson vocational training, training order and the safety of its training premises.

A direct seller and its direct selling trainers shall be liable for the lawfulness of the contents of the vocational training given to direct salespersons.

The specific measures for the administration of direct salesperson vocational training shall be formulated separately by the State Council department in charge of commerce and the State Council department of industry and commerce administration together with relevant departments.

PART FOUR: DIRECT SELLING ACTIVITIES

Article 22: When promoting products to Consumers, a direct salesperson shall comply with the following provisions:

(1) he/she shall present his/her direct salesperson certificate and sales promotion contract;

(2) he/she may not enter the Consumer's domicile to forcibly promote the products without the Consumer's consent, and if the Consumer asks him/her to cease the sales promotion activities, he/she shall do so immediately and depart the Consumer's domicile;

(3) prior to completion of a transaction, he/she shall explain to the Consumer in detail the Enterprise's returns system; and

(4) after completion of the transaction, he/she shall provide an invoice to the Consumer and a sales receipt issued by the direct seller that explains the returns system, states the address and telephone number of the direct seller's local service outlet, etc.

Article 23: A direct seller shall mark the price on its direct sale products that shall be consistent with the product price displayed in its service outlets. A direct salesperson must promote the products to Consumers at the marked price.

Article 24: A direct seller shall pay remuneration to its direct salespersons at least once per month. The remuneration that a direct seller pays to a direct salesperson may be calculated based only on the revenue from the products sold directly to Consumers by him/her. The total amount of the remuneration (including commission, bonus, various types of incentives and other economic benefits) may not exceed 30% of the revenue from the products sold directly to Consumers by the direct salesperson.

Article 25: A direct seller shall establish and implement a sound exchange and return system.

A Consumer may, within 30 days of the date of purchase of a direct sale product, on the strength of the invoice or sales receipt issued by the direct seller, ask to exchange or return the same to the direct seller, its Branch, the service outlet in the place where he/she is located or the direct salesperson who sold the product, provided that he/she has not opened the product. The direct seller, its Branch, the service outlet in the place where the Consumer is located or the direct salesperson shall carry out the procedure for the exchange or return and refund him/her the amount indicated on the invoice or sales receipt within seven days of the date on which the Consumer made the request.

A direct salesperson may, within 30 days of the date of purchase of a direct sale product, on the strength of the invoice or sales receipt issued by the direct seller, carry out the procedure for the exchange or return thereof with the direct seller, its Branch or the local service outlet, provided that the product has not been opened. The direct seller, its Branch or the local service outlet shall carry out the procedure for the exchange or return and refund him/her the amount indicated on the invoice or sales receipt within seven days of the date on which the direct salesperson made the request.

If a Consumer or direct salesperson requests an exchange or return in circumstances other than those specified in the two preceding paragraphs, the direct seller, its Branch, local service outlet or direct salesperson shall carry out the procedures for the exchange or return in accordance with relevant laws and regulations or the contract.

Article 26: In the event of a dispute over the exchange or return of goods between a direct seller and a direct salesperson or between a direct seller and its direct salesperson on the one hand and a Consumer on the other hand, the former shall bear the burden of proof.

Article 27: A direct seller shall be jointly and severally liable for the direct selling acts of its direct salespersons, unless it can establish that the direct selling acts of its direct salespersons were unconnected with the Enterprise.

Article 28: A direct seller shall establish and implement sound information submission and disclosure systems in accordance with the provisions of the State Council department in charge of commerce and the State Council department of industry and commerce administration.

The provisions concerning the information to be reported and disclosed by direct sellers, the method of effecting the same and relevant requirements shall be formulated separately by the State Council department in charge of commerce and the State Council department of industry and commerce administration.

PART FIVE: BOND

Article 29: A direct seller shall open a dedicated account with a bank jointly designated by the State Council department in charge of commerce and the State Council department of industry and commerce administration, and deposit its bond therein.

The amount of the bond shall be Rmb20 million at the time the direct seller is established. After the direct seller commences operations, the bond shall be adjusted on a monthly basis such that it is maintained at a level equal to 15% of the direct seller's revenues from the sale of direct sale products during the previous month, provided that it does not exceed Rmb100 million or fall below Rmb20 million. The interest on the bond shall belong to the direct seller.

Article 30: Subject to a joint decision of the State Council department in charge of commerce and the State Council department of industry and commerce administration, the bond may be used if:

(1) the direct seller, without just cause, fails to pay remuneration to its direct salespersons or fails to refund to its direct salespersons or Consumers amounts for returned items;

(2) the direct seller ceases operations, merges, is dissolved, is transferred, goes bankrupt, etc. and is unable to pay remuneration to its direct salespersons or unable to refund to its direct salespersons or Consumers amounts for returned items; or

(3) Consumers incur a loss due to a problem in the direct sale products and the direct seller is required to pay compensation according to law, but refuses to do so without just cause or is unable to do so.

Article 31: A direct seller shall, within one month of the use of its bond in accordance with Article 30, top up the same to the level specified in the second paragraph of Article 29.

Article 32: A direct seller may not use the bond to provide security to a third party or use it, in violation of these Regulations, to discharge a debt.

Article 33: If a direct seller ceases engaging in Direct Sales activities, it may recover its bond from the bank on the strength of the supporting document issued by the State Council department in charge of commerce and the State Council department of industry and commerce administration.

Article 34: The State Council department in charge of commerce and the State Council department of industry and commerce administration shall be jointly responsible for the day-to-day oversight of bonds.

The specific measures for the administration of the deposit and use of bonds shall be formulated separately by the State Council department in charge of commerce and the State Council department of industry and commerce administration together with the relevant departments.

PART SIX: OVERSIGHT

Article 35: Administrations for industry and commerce shall be responsible for the day-to-day oversight of direct sellers, direct salespersons and their direct selling activities. An administration for industry and commerce may take the following measures to conduct onsite inspections:

(1) enter the premises of the relevant Enterprise to conduct an inspection;

(2) require the relevant Enterprise to provide relevant documents, information and supporting materials;

(3) question the persons concerned, materially interested persons and other relevant persons and require them to provide relevant materials;

(4) review, copy, place under seal and seize the relevant Enterprise's materials and illegal property connected to its direct selling activities; and

(5) inspect the certificates of relevant persons, such as direct selling trainer certificates, direct salesperson certificates, etc.

When an administration for industry and commerce conducts an onsite inspection in accordance with the preceding paragraph, there shall be at least two inspectors and they shall present their lawful credentials. The approval of the main person in charge of the administration for industry and commerce at the county level or above shall be required if materials or illegal property are to be placed under seal or seized.

Article 36: If an administration for industry and commerce discovers in exercising day-to-day oversight that a relevant Enterprise may have committed a violation of these Regulations, it may, subject to the approval of the main person in charge of the administration for industry and commerce at the county level or above, order it to suspend the relevant business activities.

Article 37: Administrations for industry and commerce shall establish and publish a telephone number for tips, accept tips on and complaints of violations of these Regulations and timely investigate and handle such violations.

Administrations for industry and commerce shall maintain the confidentiality of informers. They shall give rewards to those informers who have made important contributions in accordance with relevant state provisions.

PART SEVEN: LEGAL LIABILITY

Article 38: If a relevant department or any member of its working personnel that exercises oversight over direct sellers, direct salespersons and their direct selling activities approves applications that do not satisfy the conditions specified in these Regulations or fails to perform its/his/her oversight responsibilities in accordance with these Regulations, the person directly in charge and other persons directly responsible shall be subjected to administrative penalties in accordance with the law; if a criminal offence is constituted, criminal liability shall be pursued in accordance with the law. The relevant department that approved an application that does not satisfy the conditions specified in these Regulations shall revoke the same.

Article 39: If Article 9 or 10 hereof is violated by engaging in direct selling activities without approval, the administration for industry and commerce shall order rectification of the matter, confiscate the direct sale products and illegal sales revenues and impose a fine of not less than Rmb50,000 and not more than Rmb300,000. If the circumstances are serious, it shall impose a fine of not less than Rmb300,000 and not more than Rmb500,000 and shut down such activities in accordance with the law. If a criminal offence is constituted, criminal liability shall be pursued in accordance with the law.

Article 40: If an applicant obtains the permission specified in Article 9 or 10 hereof through fraud, bribery or such other means, the administration for industry and commerce shall confiscate the direct sale products and illegal sales revenues, impose a fine of not less than Rmb50,000 and not more than Rmb300,000 and the State Council department in charge of commerce shall revoke the relevant permission. The applicant may never submit another application. If the circumstances are serious, a fine of not less than Rmb300,000 and not more than Rmb500,000 shall be imposed and the direct seller or Branch shall be shut down in accordance with the law. If a criminal offence is constituted, criminal liability shall be pursued in accordance with the law.

Article 41: If a direct seller violates Article 11 hereof, the administration for industry and commerce shall order it to rectify the matter and fine it not less than Rmb30,000 and not more than Rmb300,000. If the direct seller no longer satisfies the conditions of its permission to engage in direct selling, the State Council department in charge of commerce shall revoke its direct selling business permit.

Article 42: If a direct seller violates provisions by engaging in direct selling business activities that exceed the scope of products that may be sold directly, the administration for industry and commerce shall order it to rectify the matter, confiscate its direct sale products and illegal sales revenues and fine it not less than Rmb50,000 and not more than Rmb300,000. If the circumstances are serious, it shall fine the direct seller not less than Rmb300,000 and not more than Rmb500,000, and punishment ranging from the administration for industry and commerce revoking the business licence of the Branch of the direct seller that operated in violation of the law to the State Council department in charge of commerce revoking the direct selling business permit of the direct seller shall be imposed.

Article 43: If a direct seller or a direct salesperson thereof violates these Regulations by engaging in fraudulent or misleading publicity or promotion, the administration for industry and commerce shall fine the direct seller not less than Rmb30,000 and not more than Rmb100,000. If the circumstances are serious it shall fine the direct seller not less than Rmb100,000 and not more than Rmb300,000, and punishment ranging from the administration for industry and commerce revoking the business licence of the Branch of the direct seller that operated in violation of the law to the State Council department in charge of commerce revoking the direct selling business permit of the direct seller shall be imposed. The administration for industry and commerce shall fine the direct salesperson not more than Rmb50,000. If the circumstances are serious, it shall order the direct seller to revoke his/her qualifications as a direct salesperson.

Article 44: If a direct seller or a Branch thereof violates these Regulations in recruiting direct salespersons, the administration for industry and commerce shall order it to rectify the matter and fine it not less than Rmb30,000 and not more than Rmb100,000. If the circumstances are serious, it shall impose a fine of not less than Rmb100,000 and not more than Rmb300,000, and punishment ranging from the administration for industry and commerce revoking the business licence of the Branch of the direct seller that operated in violation of the law to the State Council department in charge of commerce revoking the direct selling business permit of the direct seller shall be imposed.

Article 45: If these Regulations are violated by engaging in direct selling activities without a direct salesperson certificate, the administration for industry and commerce shall order rectification of the matter, confiscate the direct sale products and illegal sales revenues and may impose a fine of not more than Rmb20,000. If the circumstances are serious, it shall impose a fine of not less than Rmb20,000 and not more than Rmb200,000.

Article 46: If a direct seller violates these Regulations in giving vocational training to its direct salespersons, the administration for industry and commerce shall order it to rectify the matter, confiscate its illegal income and fine it not less than Rmb30,000 and not more than Rmb100,000. If the circumstances are serious, it shall fine the direct seller not less than Rmb100,000 and not more than Rmb300,000, and punishment ranging from the administration for industry and commerce revoking the business licence of the Branch of the direct seller that operated in violation of the law to the State Council department in charge of commerce revoking the direct selling business permit of the direct seller shall be imposed. The administration for industry and commerce shall fine the instructor not more than Rmb50,000 and if such instructor is a direct selling trainer, it shall order the direct seller to revoke his/her qualifications as a direct selling trainer.

If a work unit or individual other than a direct seller arranges for the vocational training of direct salespersons, the administration for industry and commerce shall order it/him/her to rectify the matter, confiscate its/his/her illegal income and fine it/him/her not less than Rmb20,000 and not more than Rmb200,000.

Article 47: If a direct salesperson violates Article 22 hereof, the administration for industry and commerce shall confiscate his/her illegal sales revenues and may fine him/her not more than Rmb50,000. If the circumstances are serious, it shall order the direct seller to revoke his/her qualifications as a direct salesperson and the direct seller shall be fined not less than Rmb10,000 and not more than Rmb100,000.

Article 48: If a direct seller violates Article 23 hereof, matters shall be handled in accordance with the relevant provisions of the Pricing Law.

Article 49: If a direct seller violates Article 24 or 25 hereof, the administration for industry and commerce shall order it to rectify the matter and fine it not less than Rmb50,000 and not more than Rmb300,000. If the circumstances are serious, it shall fine the direct seller not less than Rmb300,000 and not more than Rmb500,000 and punishment ranging from the administration for industry and commerce revoking the business licence of the Branch of the direct seller that operated in violation of the law to the State Council department in charge of commerce revoking the direct selling business permit of the direct seller shall be imposed.

Article 50: If a direct seller fails to submit or disclose information in accordance with relevant provisions, the administration for industry and commerce shall order it to rectify the matter within a specified period of time and fine it not more than Rmb100,000. If the circumstances are serious, it shall fine the direct seller not less than Rmb100,000 and not more than Rmb300,000. If the direct seller refuses to rectify, the State Council department in charge of commerce shall revoke its direct selling business permit.

Article 51: If a direct seller violates the relevant provisions of Part Five hereof, the administration for industry and commerce shall order it to rectify the matter within a specified period of time and fine it not more than Rmb100,000. If it refuses to rectify, a fine of not less than Rmb100,000 and not more than Rmb300,000 shall be imposed and the State Council department in charge of commerce shall revoke its direct selling business permit.

Article 52: If a violation of these Regulations additionally violates the Regulations for the Prohibition of Pyramid Selling, punishment shall be imposed in accordance with the Regulations for the Prohibition of Pyramid Selling.

PART EIGHT: SUPPLEMENTARY PROVISIONS

Article 53: If direct sellers intend to establish a direct sellers association or other such organization, the same shall be subject to the approval of the State Council department in charge of commerce. Such an association shall apply for registration in accordance with the law on the strength of the approval document.

Article 54: The investment in and establishment of direct sellers and the engagement in direct selling activities in mainland China by investors from the Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan shall, mutatis mutandis, be handled in accordance with the provisions on foreign investors hereof.

Article 55: These Regulations shall be effective as of December 1 2005.