In determining the terms mainly and reasonable market prices as stated in Article 23(1), the Commission, following discussions at its 19th Commissioners¡¦ Meeting, has decided that the terms may be analyzed in the following manner:

In relation to the ¡§mainly¡¨:

1. If the source of profit of the participants to a multi-level sales organization can be clearly divided into two, namely from introducing others to participate, and from promotion or sale of products or service rendered, the source of the profit should be first determined. If the profit is mainly derived from introducing others to participate, then such act is in violation of Article 23(1) of this Law. In determining the term mainly, the U.S. court has used 50% as the basis for determination, which is one of the criteria that the Commission will make reference. Apart from referring to the practices in other countries, the Commission will also take into account actual situations such as whether there is intent to violate the law, as well as the degree and extent of damage, when making determination in the future.
2. In many instances, however, the source of profit of the participants cannot be precisely differentiated, as to how much is derived from introducing others to participate, and how much is derived from promotion or sale of products or service rendered; the profit is a combination of these two types of payments. In this case, whether the price of the products is a reasonable market price should be used as the basis to determine whether the act is consistent with Article 23(1) of this Law.

In relation to the ¡§a reasonable market price¡¨:

1. Where there are similar competing goods or services in the market:
   To determine whether the price is a reasonable market price, the selling price and quality standard of similar goods or services in the domestic or foreign market shall be the major sources of reference. In addition, the profit rate of the multi-level sales enterprises, when compared to the profit rate of the other industries that do not use multi-level sales to promote identical or similar products, may also be used as reference. Other factors for consideration also include cost, special techniques, and quality of service.
2. Where there are no similar competing goods or services in the market:
   Since there are no similar competing goods or services in the market for comparison, determining the reasonable market price will be more difficult. However, where a multi-level sales enterprise has formulated its own policy on merchandise return that is consistent with the regulations governing multi-level sales, and where such policy is implemented in accordance with the law, the price of its products and services may in principle be considered of reasonable market value.

Relevant article of law: Fair Trade Law, Article 23

The current Supervisory Regulations Governing Multi-Level Sales (the ¡§Regulations¡¨) were amended and promulgated on 24 April 2002, and contain 26 articles divided into six chapters: General Provisions, Procedures of Report Filing for Record, Rights and Obligations of Participants, Sales Activities, Inspection of Business, and Supplementary Provisions. Key points of the amendment are as follows:

1. Amends, or deletes, relevant provisions of the Regulations in tandem with amendments to the parent law (the Fair Trade Law) and with the upgrading of some provisions formerly found in the Regulations into the Fair Trade Law itself. (Amended Articles 2 through 5, 11, 14, and 24)
   In tandem with amendments to the definition of multi-level sales enterprise under Article 8 of the Fair Trade Law and the scope of authority under Article 23-4 of the Fair Trade Law, corresponding provisions of the Regulations have likewise been amended. Also, as the former Articles 3 and 4 of the Regulations, defining ¡§multi-level sales enterprise¡¨ and ¡§participant,¡¨ and the former Article 24, concerning supervision of foreign enterprises, have been upgraded into the Fair Trade Law itself, the former provisions have been deleted from the Regulations accordingly.
2. Amends relevant provisions of the Regulations to agree with provisions of the amended Company Law and the Electronic Signature Law concerning company registration and electronic documents. (Amended Articles 5, 12, and 16)
   The original provision of Article 6 of the Company Law concerning issuance of company licenses has been deleted, therefore the provisions of the Regulations concerning company licenses have been amended accordingly. Also, in response to the provisions concerning electronic documents set forth in the Electronic Signature Law, a provision is added to expressly exclude the applicability of electronic documents in instances of written consent by statutory agents for minors.
3. Deletes interim provisions and specifies the enforcement date of the amended provisions. (Amended Articles 25 and 26)
   The interim period provided for in the previous amendment to the Regulations has already passed, and has no further applicability, consequently those provisions are deleted. Also, it is expressly provided that the latest amendments shall take force from the date of issuance.

Does a multi-level sales organization need to provide an additional report to the Fair Trade Commission each time there is a change in the previous report's contents?

1. In the course of its sales activities, a multi-level sales enterprise may have occasion to adjust its operating plan, transaction guidelines, or develop new products. An enterprise may even need to revise its bonus system or the participation contract that it executed with participants should its financial situation or operating costs so mandate. When a multi-level sales enterprise makes amendments to previously reported particulars, it shall report them to the Fair Trade Commission before implementation. The Commission has imposed this requirement to ensure that multi-level sales operations operate entirely under the supervision of the competent authority.
2. When an enterprise amends its company license, registers as a profit-seeking enterprise, or changes basic information for related enterprises, it may take some time to complete these processes. For this reason, the Supervisory Regulations Governing Multi-Level Sales permit enterprises to report these particulars within 15 days after the change. Unit costs of manufacturing (and materials and labor) fluctuate with the volume of shipments, prices, terms and conditions, and credit. Requiring enterprises to report these particulars each time they received materials would be onerous. Consequently, the Supervisory Regulations specifically provide that enterprises need only report changes in cost for the previous fiscal year each June. In other words, enterprises need to report information about costs to the central competent authority once each year.

Relevant article of law: Supervisory Regulation Governing Multi-Level Sales, Article 7

1. Since a multi-level sale enterprise may degenerate into conducting unlawful multi-level sales, regulation by law and governmental oversight is necessary. Legitimate multi-level sales organizations, however, can help other enterprises reduce marketing costs and develop sales channels. Consequently, when the Commission drafted the Supervisory Regulations Governing Multi-Level Sales, it adopted a reporting system. The adoption of this low-grade preventive measure of control was based on respect for freedom of commerce. Once a multi-level sales enterprise has submitted a report to the Fair Trade Commission 30 days prior to commencing multi-level sales, it may promote and market products without waiting for a government agency to issue an ¡§approval license.¡¨
2. It is of course unlawful for a multi-level sales enterprise to fail to submit a report to the Fair Trade Commission. Yet an enterprise that has submitted a report is not necessarily completely lawful. When an enterprise reports, it merely reports its sales scheme and manner of operation to the Fair Trade Commission for administrative and supervisory purposes. Only the actual situation can be used to determine whether the enterprise is operating lawfully.

Relevant article of law: Supervisory Regulation Governing Multi-Level Sales, Article 5

What information should a multi-level sales enterprise disclose to prospective participants pursuant to Article 11 of the Supervisory Regulations Governing Multi-Level Sales?

1. When a multi-level sales enterprise recruits participants and a potential participant indicates willingness to take part in a sales organization or sales plan, the multi-level sales enterprise shall truthfully disclose the following particulars:
   1. capitalization and gross business volume in the preceding year; or, if the enterprise has been operating for less than one year, the cumulative business volume for the months of operation. This requirement is primarily intended to let the participant know the scale and operational condition of the multi-level sales enterprise in which he will be taking part.
   2. multi-level sales organization or plan including conditions for joining and how advancement occurs.
   3. operational rules, transaction guidelines, and laws and regulations relevant to multi-level sales including items to which particular care should be given when conducting multi-level sales, what acts may breach the contract between the two parties, how to place orders and take delivery, and the relevant provisions of the Fair Trade Law and the Supervisory Regulations Governing Multi-Level Sales.
   4. obligations and responsibilities of a participant¡Xfor instance, whether the contract requires a participant to sell a certain volume or amount each month before he qualifies as a participant in the activity and can collect bonuses.
   5. contents of benefits a participant may obtain by directly promoting or selling goods or services; contents of benefits a participant may obtain when a person he/she introduced to take part in the plan or organization promotes or sells goods or services, and the conditions for obtaining such benefits. Care should be taken that the bonus system does not corrupt multi-level sales. In particular, care should be taken to avoid violations of Article 23 of the Fair Trade Law prohibiting ¡§participants¡K[from] receiv[ing] commissions, bonuses, or other economic benefit primarily from introducing others to participate, rather than from the marketing or sale of the goods or services at reasonable market prices.¡¨
   6. types, nature, quality, prices, and uses of the goods or services, and other matters related thereto.
   7. conditions, terms, and scope of warranties against defects of the goods or services including how goods can be returned if defects are discovered.
   8. conditions of withdrawal by a participant from organization or plan, and rights and obligations arising from the withdrawal. Detailed regulations may be found in Article 13 of the Supervisory Regulations Governing Multi-Level Sales.
   9. other matters specified by the central competent authority (the Fair Trade Commission).
2. Further, when a participant recommends joining the sales organization to a potential participant, the aforesaid disclosures shall be made in full to the potential participant.

Relevant article of law: Supervisory Regulation Governing Multi-Level Sales, Article 11

Can a multi-level sales organization set resale prices for its products?

Multi-level sales organization is considered as an enterprise referred to in Article 2 of this Law; relevant provisions of this Law are therefore applicable. The contract of participation between the multi-level sales enterprise and its distributor always clearly states that the distributors are neither employees nor representatives of the enterprise, i.e., the enterprise and the participants are separate entities. This relationship is the same as that existing in traditional marketing network among manufacturers, wholesalers, and retailers. Therefore, the pricing of the multi-level sales shall be subject to regulation by Article 18 of this Law, and enterprises shall not restrict the re-sale price of the goods.

Relevant article of law: Fair Trade Law, Articles 2, 18

If a participant of a multi-level sales organization establishes a company to handle the business arising from his participation will this act be subject to notification requirement?

In actual practice, participants to a multi-level sales may be a company, a commercial establishment, or an individual. A multi-level sales business can also be operated under more types of organizational arrangement compared to other business organizations. Therefore, whether it should be reported to the Commission when a participant establishes a new company shall depend on the following circumstances:

1. If the distributor (A) follows the business plan or guideline as formulated by the multi-level sales enterprise (B), or participates in contracted multi-level sales, such distributor is considered as a participant referred to in Article 8 of the Fair Trade Law, regardless of whether such distributor is an individual, a company, or business establishment. Therefore, such distributor does not have the obligation to report to the authorities.
2. If the distributor (A), apart from following the business plan or guideline as formulated by the multi-level sales enterprise (B), or participating in contracted multi-level sales, establishes another company (C), formulates another set of business plan or guidelines, and plans the multi-level sales activities, the new company (C) is considered as a multi-level sales enterprise referred to in Article 8 of the Fair Trade Law. In such case, the distributor (A) has a dual role as both the participant and the multi-level sales enterprise. In its role as a multi-level sales enterprise, the distributor has the obligation to report to the Commission.
3. Another situation is also often seen in actual practice. The distributor (A) initially follows the business plan or guidelines formulated by the multi-level sales enterprise (B), or participates in contracted multi-level sales. But later due to some reason, the distributor (A) comes into conflict with the multi-level sales enterprise (B), and, together with his down stream distributors, leaves the multi-level sales enterprise (B) to establish a new company, yet still retaining the business plan or guidelines formulated by the multi-level sales enterprise (B). In this case, the new company is also regarded as a multi-level sales enterprise referred to in Article 8 of the Fair Trade Law, and shall report to the Commission in accordance with Law.

Relevant article of law: Fair Trade Law, Article 8