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Introduction of New Multi-Level Sales Act in Taiwan

THE HISTORY OF MLM IN TAIWAN AND IN ASIA

Multilevel marketing (“MLM”) sales have a long history in Asia, and Taiwan is one of the first to have this type of sales activity. According to statistics made by the Fair Trade Commission (“FTC”), the supervising authority of the Executive Yuan of Taiwan, of the 23 million population, 2.7 million are involved in MLM activities, generating around NTD 6.6 billion in sales, not counting unreported numbers. These statistics make Taiwan the 13th largest MLM market in the world. Additionally, its “per person sales number” is ranked 4th in the world, according to a survey made by the World Federation of Direct Selling Associations of 2002, published in June, 2013.

With an extensive history of MLM businesses, and the advantages of local OEMs and ODMs manufacturers that provide quality consumer products at a reasonable cost (skincare, dietary supplements, everyday products, etc.), Taiwan has generated many professionals and entrepreneurs in its MLM industry. Throughout the years, these professionals have been retained by international MLM or direct selling companies aimed at developing international markets.  In recent years, there has been huge development of MLM businesses in China, Indonesia, Vietnam, and other Asian countries, many of these businesses having Taiwanese managers and professionals.

THE CHANGES OF TAIWAN LAWS  (proposed amendment of 2013-2014)

Taiwan’s long history of MLM activity leads to a deviation of cases. In recent years, multi-level sales (“MLS”) activity in Taiwan has sharply deteriorated due to illegal activities, prompting authorities to propose amendments to certain relevant regulations. Examples of past illicit activities are described below:

a            In June of 2011, hundreds of seminars were held in New Taipei City and Taoyuan County, with more than 10,000 participants joining in on MLM activities over “magnetic energy powered cars”, but the activities were revealed as fraudulent under the district attorney’s investigation;

b           In March of 2013, in Kaohsiung, a company cheated 10,000 people through MLM activities for over one billion New Taiwan Dollars under the name of “Cross-Strait Exchange Association”; and

c           In April of 2013, in several churches in Hualien and Taitung, offenders cheated participants with fraudulent company stock certificates by means of MLM activities, which violated the Banking Act, Fair Trade Act, and Securities and Exchange Act, since prompting authorities to levy strict punitive action.

Therefore, the Economic Affairs Commission of the Legislative Yuan in Taiwan has passed the preliminary review of the Multi-Level Sales Act (“MLSA”) on April 8, 2013 to strengthen supervision on MLS enterprises.  Until August 16, 2013, the MLSA will still be under the Legislative Yuan’s review. The original regulation under the FTA shall cease effect after the MLSA becomes effective.  We hereby summarize important articles regarding the MLSA as follows:

  1. 1.               Definition – whether or not the member pays an enrollment fee is no longer a standard to identify MLM activities

In the past, the definition of MLS under Article 8 of the FTA includes the standard that the participants shall “pay a certain consideration” to become a member of the MLS enterprise.  However, this has been removed under the new MLSA, which means that “to pay certain consideration as an enrollment fee” is no longer relevant to the identification of whether or not one is a participant of the MLS enterprise; the important standard is whether a person, by entering into an agreement with the MLS enterprise (no matter if an enrollment fee is paid), obtains a right to distribute certain services or products, and may also recommend other people to participate in the MLS enterprise.  Thus, as soon as the participant and the MLS enterprise enter into a participation agreement, the participant will be regarded as the sales division of the MLS enterprise and shall be governed by the MLSA.

  1. 2.               The content of the participation agreement

The participation agreement between the MLS enterprise and its members shall contain the MLS enterprise’s operational plan, the conditions of sales participationthe MLSA guidelines, and the clauses of “breaching the agreement and the methods to handle such breaches”.  This means that after the amendment, the MLS enterprise may need to modify the participation agreement.  Failure to do so is punishable by an administrative fine of New Taiwan Dollar (NTD) 50,000 to NTD 1,000,000.  If the MLS enterprise does not correct its violation, an administrative fine of NTD 100,000 to NTD 2,000,000 will be imposed on each further violation.

  1. 3.               Period of hesitation/ cool-down period (30 days) and the product return period (6 months)

Under the new MLSA, the member may choose to “rescind or terminate the participation agreement” within 30 days after entering into such agreement. This new time frame is more than twice the number of days than the period of hesitation/ cool-down period (14 days) provided under the current FTA.   The MLSA also dictates that the member may return the products to the MLS enterprise within 6 months upon delivery or pick-up of the products.

  1. 4.               Prohibited activities – recruiting members under the label of “recruiting employees” is prohibited  

Currently, some MLS enterprises advertise “hiring employees” with the true purpose of attracting and recruiting people as “members” instead of as “employees.” Under the new MLSA, this method is prohibited. Failure to comply is punishable by an administrative fine of NTD 50,000 to NTD 1,000,000.  If the MLS enterprise does not correct its violation, an administrative fine of NTD 100,000 to NTD 2,000,000 will be imposed on each further violation.

  1. 5.               Prohibited activities – major incomes generated from “enrollment of persons” instead of “marketing and sales” or “products or services” is strictly prohibited and relevant criminal sanctions are increased

It is strictly prohibited that an MLS enterprise generates its major income from “fees or other benefits from enrolled persons” instead of “marketing and sales of products or services.”  The new MLSA imposes a punishment of seven-years imprisonment for violation of relevant clauses; this is longer than the punishment of three-years imprisonment stipulated in current regulations.

  1. 6.               Guarantee Bond

The MLS enterprise shall deposit a certain amount of cash into an account approved by the FTC as the guarantee bond.  The guarantee bond shall be NTD 10 million at the time that the MLS enterprise is established.  During the operation of the MLS enterprise, the guarantee bond shall be 15 percent of the sales income in the former month and shall not be more than NTD 100 million. In addition, the FTC may decide to confiscate such guarantee bonds for the purpose of compensation payment if the MLS enterprise has outstanding liabilities to its members or to its consumers.  The MLS enterprise shall make up the guarantee bond for the deficiency within one month.

  1. 7.               MLS Association

Under the MLSA, members of the MLS enterprise may submit an application with the FTC to establish the MLS Association in order to improve working conditions, confirm sales prices, and confirm marketing plans or strategies.  In addition, the MLS Association shall be instructed and supervised by the FTC.

The following may be handled by the MLS Association:

(1)   Members’ welfare matters;

(2)   Members’ training matters;

(3)   Mediation of dispute between members or between members and the MLS enterprise;

(4)   Matters authorized by the government; and

(5)   Self-governance and self-imposed limitations and guidelines for members.

With respect to matters authorized by the government such as the FTC, after the MLSA comes into effect, some authoritative roles from the FTC may be referred to the MLS Association for future execution.

  1. 8.               Report Obligation of MLS Enterprise after the Enforcement of the MLSA

 

After the MLSA comes into effect, the MLS enterprise, which reports to the FTC under current regulations, shall provide supplemental amendments to the report filing within “one month.”

 

Furthermore, after the MLSA comes into effect, the MLS enterprise, which reports to the FTC under the current regulations, shall modify the participation agreement and provide the original copy of the modified version to the FTC within “two months.”

Failure to abide with the above regulations is punishable by an administrative fine of NTD 50,000 to NTD 1,000,000.  If the MLS enterprise does not correct its violation, an administrative fine of NTD 100,000 to NTD 2,000,000 will be imposed on each further violation until corrections are made. 

The above are major amendments of the MLSA. We are closely watching the development of the legislative review process, and will update our clients with the final version of the MLSA on a timely basis.

SERVICES WE PROVIDE (Taiwan as a gateway to Asia MLM / Direct Selling Market)

Years of experience have allowed us to develop a unique MLM / direct selling practice, and distinguished us as the most recognized law firm to provide legal and relevant consulting services to MLM company clients.

(1)  We have a dedicated team focused on MLM consulting services.

(2)  We have full understanding of the marketing plan (bonus plan) that is used and, furthermore, the different types of marketing plans used in the industry.

(3)  We are familiar with the products that MLM companies regularly sell, and we are familiar with these products’ supply chains (skin care products, dietary products, etc.)

(4)  We have a solid legal team to support and solve authority issues for MLM companies that sell internet-related services or new types of services that require special approval.

(5)  We are experienced in arranging full service packages for our clients to enter a market in Asia (including Malaysia, Thailand, Korea, Indonesia, Singapore, Hong Kong, Macau, etc.)

(6)  We understand the unique culture of the MLM industry and can help connect the company with managers and trainers in Asia.

(7)  We have strong project management experience and deliver results efficiently.

If you are interested in entering the MLM market in Asia, please contact us at service@zhongyinlawyer.com.tw

Charlotte.wu@zhongyinlawyer.com.tw

Charlotte S.H. Wu

+886 2 2377 1858 * 1888
Table A:Ranking of World MLM market sales

Ranking

Country

Sales (Unit: 100 million USD)

Number of Person involved in the MLM industry

1

United States

316.3

15,900,000

2

Japan

227.1

3,380,000

3

China

199.6

NA

4

Brazil

146.0

6,687,898

5

South Korea

119.7

2,832,654

6

Mexico

72.5

1,649,202

7

France

49.5

521,000

8

Malaysia

46.7

4,750,000

9

Russia

42.6

4,305,033

10

German

38.2

287,185

11

England

31.6

420,000

12

Columbia

29.9

1,477,517

13

Taiwan

29.8

2,660,000

Table B : Ranking of per person MLM sales revenue in the world (2012)

Ranking

Country

Sales (Unit: 100 million USD)

Total Population (Unit: million)

Sales revenue / per person (Unit: USD)

1

Korea

132.7

49

271

2

Japan

227.1

127

178

3

Malaysia

46.7

28

165

4

Taiwan

29.8

23

128

5

United States

316.3

31

102

6

France

49.5

63

79

7

Brazil

199.6

193

76

8

Australia

15.1

22

68

9

Mexico

72.5

109

67

10

Columbia

29.9

46

66

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