Multi-level Marketing Supervision Act - Q & As

1. What is multi-level marketing?

A1:

  1. As stated in Article 3 of the Multi-level Marketing Supervision Act, "The term 'multi-level marketing' as used in this Act means the marketing practices to establish a multi-level organization by having participants introduce new participants to the multi-level marketing enterprise, and promote and sell goods or services."
    In Article 4, it is stipulated, "The term 'multi-level marketing enterprise' as used in this Act refers to companies, businesses, sole proprietorships or partnerships, groups or individuals that conduct overall planning or the carrying out of multi-level marketing activities as referred to in Article 3. A participant of a foreign multi-level marketing enterprise or a third party that introduces or carries out the multi-level marketing plans or organization of such enterprise shall be deemed a 'multi-level marketing enterprise' as referred to in the preceding paragraph."
    Again according to Article 5, "The term 'participants' as used in this Act refers to individuals who may earn commissions, bonuses and other economic benefits by taking part in the plans of a multi-level marketing enterprise and promoting or selling goods or services, and who may earn commissions, bonuses and other economic benefits by introducing other persons to participate, to promote, sell goods or services or introduce more persons. The persons who enter into contracts with multi-sale enterprises that after meeting specific conditions may become qualified to promote, sell goods or services, or to introduce other persons to participate shall be deemed as participants from the time such contracts are entered into."
    Simply put, multi-level marketing consists of sales of goods by a business through an established set of operating schemes or regulations and the use of a multi-level marketing organization developed through "interpersonal relations." The main purpose of members of such an operating scheme (participants), besides purchasing goods for themselves, is to obtain the qualification to promote goods, sell them to regular consumers and make profits on price differences. They can also introduce other individuals to join the scheme and become participants and thus establish their own sales networks. All the networks established by individual members form the sales network of the entire multi-level marketing operation.
  2. The term "goods" used here refers to "tangible goods." As for "services," "intangible goods" like Internet access services can also be promoted through multi-level marketing. Following the implementation of related multi-level marketing regulations, multi-level marketing has thrived and become an important "marketing channel" in the country.
  3. The essence of multi-level marketing is the replication of function to expand downward and set up "sales networks" level after level. Each participant plays the roles of "consumer," "retailer" and "manager" simultaneously. The sources of income include "retail profits," "personal performance bonuses" and "counseling bonuses for each level."

Relevant article(s) of law: Multi-level Marketing Supervision Act, Article 3 ,4 and 5

2. As specified in Article 6 of the Multi-level Marketing Supervision Act, Multi-level marketing businesses are required to file with the Fair Trade Commission before starting operation. What information do they need to provide?

A2:

According to Article 6 of the Multi-level Marketing Supervision Act, each multi-level marketing business is required to submit the following documents and information when filing with the Fair Trade Commission before beginning operation:
  1. Basic information on the multi-level marketing business and its office location
  2. The sales system and requirements for people to become participants
  3. The contents of the contract to be signed with participants
  4. Items, quality, prices and sources of goods or services
  5. Proof of marketing approaches complying with related regulations or the permit from the competent authority of the industry if such marketing approaches are subject to certain regulations or require the permission of the competent authority of the industry before the promotion or sales of goods can be initiated
  6. The calculation standards and reasons for the depreciation of goods or services returned by participants according to the second section of Paragraph 3 of Article 21 or Article 24 of the Multi-level Marketing Supervision Act.
  7. Other information specified by the competent authority

In general, the Fair Trade Commission will notify businesses whose submitted information is incomplete to make corrections. Such businesses are required to provide needed information within a given period; otherwise, the filings are considered invalid. The Fair Trade Commission will reject the applications and order such businesses to file anew after preparing complete information. The Fair Trade Commission will list businesses failing to make corrections and having their applications rejected as primary targets of business inspections and will launch investigations if finding any violation of related regulations.

Relevant article(s) of law: Multi-level Marketing Supervision Act, Article 6

3. Is notification to the Fair Trade Commission the only requirement for a multi-level marketing enterprise to be considered lawful?

A3:

  1. Since a MLM enterprise may degenerate into conducting unlawful multi-level marketing, regulation by law and governmental oversight is necessary. Legitimate multi-level marketing enterprise, however, can help other enterprises reduce marketing costs and develop sales channels. Consequently, when the Commission drafted the Multi-level Marketing Supervision Act, 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 marketing enterprise has submitted a report to the Fair Trade Commission prior to commencing multi-level marketing, it may promote and market goods without waiting for a government agency to issue an "approval license."
  2. It is of course unlawful for a multi-level marketing 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(s) of law: Multi-level Marketing Supervision Act, Article 6

4. Does a MLM enterprise need to provide an additional report to the Fair Trade Commission each time there is a change in the previous report's contents?

A4:

  1. In the course of its sales activities, a MLM enterprise may have occasion to adjust its operating plan, transaction guidelines, or develop new goods. 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 MLM 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 MLM 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 Multi-level Marketing Supervision Act permits 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.

Relevant article(s) of law: Multi-level Marketing Supervision Act, Article 7
5. If a participant of a multi-level marketing enterprise establishes a company to handle the business arising from his participation will this act be subject to notification requirement?

A5:

In actual practice, participants to MLM may be a company, a commercial establishment, or an individual. AMLM 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 an entity A follows the business plan or guideline as formulated by the MLM enterprise B, or participates in contracted MLM, such entity A is considered as a participant referred to in Article 4 of the Multi-level Marketing Supervision Act, regardless of whether such participant is an individual, a company, or business establishment. Therefore, such entity A does not have the obligation to report to the authorities.
  2. If an entity A, apart from following the business plan or guideline as formulated by the MLM enterprise B, or participating in contracted MLM, establishes another company C, formulates another set of business plan or guidelines, and plans the MLM activities, the new company C is considered as a MLM enterprise referred to in Article 4 of the Multi-level Marketing Supervision Act. In such case, the distributor A has a dual role as both the participant and the MLM enterprise. In its role as a MLM enterprise, the entity A has the obligation to report to the Commission.
  3. Another situation is also often seen in actual practice. The entity A initially follows the business plan or guidelines formulated by the MLM enterprise B, or participates in contracted MLM. But later due to some reason, the entity A comes into conflict with the MLM enterprise B, and, together with his down-stream participants, leaves the MLM 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 MLM enterprise referred to in Article 4 of the Multi-level Marketing Supervision Act, and shall report to the Commission in accordance with the law.

Relevant article(s) of law: Multi-level Marketing Supervision Act, Article 4 and 5

6.What information should a MLM enterprise disclose to prospective participants pursuant to Article 10 of the Multi-level Marketing Supervision Act?

A6:

  1. When a MLM enterprise recruits participants and a potential participant indicates willingness to take part in a sales organization or sales plan, the MLM enterprise shall truthfully disclose the following particulars:
    1. paid-up capital and gross business volume of the multi-level marketing enterprise;
    2. multi-level marketing plan, and conditions of participation;
    3. laws and regulations relevant to multi-level marketing;
    4. obligations and responsibilities of a participant;
    5. conditions of withdrawal by a participant from the organization or plan, and rights and obligations arising from the withdrawal;
    6. matters relevant to the goods or services;
    7. the calculation methods, criterion, and reasons, when multi-levels sale enterprises deduct the devaluation amount from the price in repurchasing the goods or services pursuant to the later sentence of Articles 2(3) or 24 of the Act;
    8. such other matters as may be required by the competent authority.
  1. Further, when a participant introduces another person to participate in the organization or plan, such participant shall make no false or misleading presentations on items listed in the preceding paragraph

Relevant article(s) of law: Multi-level Marketing Supervision Act, Article 10, 14, 21 and 24

7.What are the definitions of "mainly from introducing new participants" and "reasonable market price" in Article 18 of the Act?

A7:

In determining the terms mainly and reasonable market price as stated in Article 18, 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 sources of profits of the participants to a MLM enterprise can be clearly divided into two, namely from introducing others to participate, and from promotion or sale of goods 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 18 of the Act. In determining the term mainly, the Commission has used 50% as the basis for determination. Besides, 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 goods or service rendered; the profit is a combination of these two types of payments. In this case, whether the price of the goods is a reasonable market price should be used as the basis to determine whether the act is consistent with Article 18 of the Act.

In relation to the " 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 MLM enterprises, when compared to the profit rate of the other industries that do not use MLM to promote identical or similar goods, 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 MLM enterprise has formulated its own policy on merchandise return that is consistent with the regulations governing MLM, and where such policy is implemented in accordance with the law, the price of its goods and services may in principle be considered of reasonable market value.

Relevant article(s) of law: Multi-level Marketing Supervision Act, Article 18

8. What types of practices adopted by multi-level marketing businesses and participants are prohibited by the Multi-level Marketing Supervision Act?

A8:

According to Article 19 of the Multi-level Marketing Supervision Act, the following types of practices adopted by multi-level marketing businesses and participants are prohibited:
  1. Requesting that participants pay fees obviously incompatible with the corresponding expenses needed for training, workshops, get-togethers, meetings, promotions or activities under any other titles
  2. Demanding that participants pay obviously inappropriate guarantees, breach-of-contract fines or expenses
  3. Forcing participants to purchase good quantities that are impossible to sell within a short period under normal circumstances; situations in which agreements are established for participants to make payments after selling the goods are not included
  4. Giving certain individuals special offers that are in violation of established sales plans or structures and causing damage to the interests of other participants
  5. Using inappropriate methods to push participants to make purchases or give them the right to set up sales networks at multiple levels
  6. Imposing obviously unfair obligations on participants

As for participants, they may not engage in practices other than the type described in Item (D).

In addition to the prohibited practices specified above, all other sales practices adopted by multi-level marketing businesses and participants must comply with related regulations set forth in the Multi-level Marketing Supervision Act.

Relevant article(s) of law: Multi-level Marketing Supervision Act, Article 19

9. Can participants withdraw from multi-level marketing schemes? Can they return the goods they have purchased and get refunds? Are there time limits? Do such goods have to be intact?

A9:

  1. According to Articles 20 and 21 of the Multi-level Marketing Supervision Act, participants of multi-level marketing businesses have the right to cancel contracts, terminate contracts, return goods and get refunds for the goods returned.
  2. As for time limits, it is specified in Articles 20 and 21 that participants may notify their multi-level marketing businesses in writing within 30 days after contract signature that they want to cancel contracts and the multi-level marketing businesses concerned are obligated to accept requests from such participants to return goods within 30 days after the contracts take effect and give back the purchasing funds for all the goods returned as well as other expenses paid when the participants became members. Moreover, participants may also issue contract termination notices in writing after the aforesaid hesitation period (within 30 days after contract signature) to withdraw from multi-level marketing schemes or organizations. Then, within 30 days of contract termination, the multi-level marketing businesses concerned are required to buy back the goods in the possession of such participants at 90% of the original purchasing prices. However, if the goods have been in the possession of participants for more than six months since the day they were collectible, they may not be returned.
  3. As for whether the goods returned must be intact, this is subject to agreements established between multi-level marketing businesses and participants in accordance with the characteristics, usability and marketability of the goods returned under the premise that such agreements are reasonable and not in violation of Articles 20 and 21 of the Multi-level Marketing Supervision Act and the policy conventionally adopted for the return of similar goods in the market.

Relevant article(s) of law: Multi-level Marketing Supervision Act, Article 20 and 21

10. Can multi-level marketing businesses charge processing fees when participants apply for contract cancellation?

A10:

Related regulations allow a party to a contract to cancel the contract within a certain period after contract signature. The regulations are designed to give such a party the right to hesitate. Hence, when a party to a contract makes a request to cancel a contract, it is an exercise of the right to hesitate and the party is not responsible for any damage caused to the other party to the contract as a result. If the exercise of the right to hesitate is agreed upon in advance, paying a contract cancellation processing fee or other expenses to the other party to the contract is therefore inconsistent with the purpose of the right to hesitate. No participant contracts established by multi-level marketing businesses may include such or similar provisions.

Relevant article(s) of law: Multi-level Marketing Supervision Act, Article 20 to 24

11.According to Article 20 and 21 of the Multi-level Marketing Supervision Act, after rescission or termination of the contract takes effect, the multi-level marketing enterprise may deducted the bonuses or remuneration paid to the participant. Does it include the bonuses or remuneration paid to other participants?

A11:

As stated in Articles 20 and 21, "...the multi-level marketing enterprise may deduct upon the time of returning of the goods...any bonus or remuneration already paid to the participant for purchase of such goods", the so-called participant refer only to the party who rescind or terminate the contracts, and does not include other participants. As for the bonus or remuneration paid to other related participants for the returned transaction, the multi-level marketing enterprise shall claim it from the other participants separately.

Relevant article(s) of law: Multi-level Marketing Supervision Act, Article 20 to 21

12. If a multi-level marketing enterprise refuses a participant’s request of rescission or termination of contract, how can the participant seek for remedies?

A12:

If a multi-level marketing enterprise does not comply with Article 20 and 21 of the Multi-level Marketing Supervision Act and fail to take any participant’s request of rescission or termination of the contract, the participant may make a complaint to the FTC for investigation. After investigation, the FTC may impose a sanction if the multi-level marketing enterprise fails to accept the return of goods and refund according to the aforesaid provisions. In addition to the administrative measures mentioned above, the participant still has the right to exercise in accordance with the relevant provisions of the Civil Law and seek a civil remedy.

Relevant article(s) of law: Multi-level Marketing Supervision Act, Article 20 and 21

13. What information should a multi-level marketing enterprise disclose in its primary place of business?

A13:

A multi-level marketing enterprise shall record the organization development, sales of goods or services, payment of bonuses, and handling of goods returning within the territory of the Republic of China on a monthly basis and keep such records in its primary place of business for inspection by the competent authority.The materials in the preceding paragraph shall be kept for 5 years; the same shall apply in the case of an enterprise that ceases multi-level marketing practice.

Relevant article(s) of law: Multi-level Marketing Supervision Act, Article 25