REGULATIONS ON THE ADMINISTRATION OVER PYRAMID MARKETING

(Effective Date:1997.01.10)

CHAPTER I GENERAL PROVISIONS
CHAPTER II APPROVAL FOR REGISTRATION OF ENTERPRISES ENGAGED IN PYRAMID MARKETING
CHAPTER III PARTICIPANTS IN PYRAMID MARKETING ACTIVITIES
CHAPTER IV PYRAMID MARKETING ACTIVITIES
CHAPTER V SUPERVISION AND INSPECTION
CHAPTER VI LEGAL RESPONSIBILITY
CHAPTER VII SUPPLEMENTARY PROVISIONS

Article 1 The regulations have been formulated according to State laws, regulations and relevant policies with a view to strengthening the supervision and control of pyramid marketing to maintain normal order of the market economy and protect legal rights and interests of consumers.

Article 2 Pyramid marketing refers to direct selling by a production enterprise of its products to consumers through the medium of pyramid sales agents without going through shops. It includes both multi-level and single-level pyramid marketings.

Multi-level pyramid marketing refers to such a kind of marketing through multiple levels (two or more levels) of sales agents waith the product concerned being transmitted from one to other level.

Single-level pyramid marketing refers to the same kind of marketing through only one level of sales agents.

Article 3 An enterprise should get the examination and approval of relative administration for industry and commerce in undertaking such kind of marketing.

Administrations for industry and commerce shall exercise supervision and control over pyramid marketing activities.

Article 4 Foreign enterprises and individuals are forbidden to engage in pyramid marketing within the territory of the People's Republic of China.

Article 5 All enterprises and individuals engaged in pyramid marketing within the territory of the People's Republic of China must observe the provisions of this set of regulations.

CHAPTER II APPROVAL FOR REGISTRATION OF ENTERPRISES ENGAGED IN PYRAMID

Article 6 For engaging in pyramid marketing, an enterprise should meet the following condition:

1. It has the status of a corporate legal person;

2. It has at least a registered capital of RMB5 million;

3. It sells products it produces within the territory of China;

4. Quality of its products has been verified as up to standard;

5. It has a pyramid marketing plan and a sound pyramid sales agents management system.

Article 7 For carrying out pyramid marketing, an enterprise and its subsidiaries should file an application with an administration for industry and commerce with which it was registered to be examined by relative administrations of the province (autonomous region or municipality under the direct administration of the State Council) where the enterprise concerned resides. After verified as being qualified, the application shall be submitted to the State Administration for Industry and Commerce for approval.

Article 8 In applying for pyramid marketing, an enterprise should submit the following documents:

1. An application form signed by the legal representative;

2. Business license of the corporate legal person or business licenses of its subsidiaries;

3. Business conditions, including investment scale, production sites, technical conditions and subsidiaries;

4. A plan for the marketing operations, including requirements and formalities for participating in pyramid selling, computation procedures in concern of payments to pyramid sales agents, methods of withdrawal from pyramid marketing, code of conduct for pyramid sales agents and method of training and management and other related materials;

5. Areas for pyramid marketing;

6. Varieties, specifications and trademarks of the products for pyramid marketing;

7. Certificates certifying the quality of the products for pyramid marketing;

8. Costs and selling prices of the products for pyramid marketing;

9. Rules for returning goods, claiming for damages and after-sales services;

10. Sample contracts between the enterprise and pyramid sales agents and sample of the certificates for the pyramid agents;

11. Other materials deemed as necessary by laws and regulations or by organizations of examination and approval.

The term "organizations of examination and approval" used in the preceding paragraph refers to the administration for industry and commerce with which the enterprise concerned is registered, provincial (autonomous regional and municipal) administrations for industry and commerce and the State Administration for Industry and Commerce (the same below).

Article 9 The State Administration for Industry and Commerce shall, according to the relevant regulations and the provisions of this set of regulations, examine the qualification of an enterprise for multi-level or single-level pyramid marketing after such a qualification has been verified by provincial (autonomous regional and municipal) administrations for industry and commerce and take the dicision of approval or disapproval. It shall issue a Certificate of Multi-level Pyramid Marketing or Certificate of Single-Level Pyramid Marketing to the enterprise concerned if the decision of approval is made.

An enterprise approved to engage in multi-level or one-level pyramid marketing should, within 15 days after receiving the Certificate of Multi-level Pyramid Marketing or Certificate of Single-Level Pyramid Marketing, go through registration procedures for altering the line of business and methods of operation.

Article 10 An enterprise approved to engage in multi-level or single- level pyramid marketing should change the registration according to the procedures provided for in Article 7 of this set of regulations if it increases or reduces subsidiaries for pyramid marketing, changes the products for or terminates the pyramid marketing.

In changing the contents provided for in 4, 8, 9 and 10 of Article 8 of this set of regulations, an enterprise should report to the organization of examination and approval for the record within 30 days after the changes.

Article 11 An enterprise engaging in pyramid marketing should not transfer or consign its right of the marketing concerned.

It is forbidden for an enterprise engaged in single-level pyramid marketing to engage in multi-level pyramid marketing.

CHAPTER III PARTICIPANTS IN PYRAMID MARKETING ACTIVITIES

Article 12 Citizens at the age of 18 and above and with the full ability of performing civil acts may serve as agents for a pyramid marketing.

The following people are not allowed to serve as such agents:

1. Government functionaries;

2. Military persons in service;

3. Students of full-time schools;

4. Other people who are forbidden to engage in part-time sales by law and regulations.

Multi-level pyramid sales agents should have permanent resident ID card in the administrative area in which the enterprise for the pyramid marketing resides.

Article 13 An enterprise engaged in pyramid marketing should inform its sales agents of the following matters before they start operations:

1. Items registered in the Business License of Corporate Legal Person and the Business Licenses of its subsidiaries;

2. The varieties of products to be put on sales by the pyramid marketing and the areas for the marketing as approved by the administration for industry and commerce concerned;

3. Development and plans for pyramid marketing;

4. Operational rules and notices for the trading;

5. Prices, properties, uses and results of quality inspection of the products for pyramid marketing;

6. Requirements for participating in pyramid marketing.

The matters mentioned above should be affirmed by the agents concerned of notice in a written form.

Article 14 An enterprise with pyramid marketing operations should sign written contracts with pyramid sales agents to define each other's rights and obligations. Such a contract should mainly contain the following:

1. Rights and obligations of pyramid sales agents;

2. Conditions, method of computation and procedures of payments to the agents concerned and the means of withholding their individual income taxes concerned;

3. Responsibility of the quality of products;

4. Time limit, procedures and costs of returning of products;

5. Procedures for withdrawal from pyramid marketing;

6. Settlement of disputes;

7. Other matters as prescribed by law and regulations.

Article 15 An enterprise approved to carry out pyramid marketing is not allowed to ask the sales agents to pay membership fees, honest money or buy a certain amount of products as the preconditions for participating in pyramid marketing. Neither should it collect training fees, commissions and other fees under any other pretexts from the agents nor force them to buy related materials.

Article 16 A pyramid sales agent is free to withdraw from the marketing activities. When withdrawing from pyramid sales, a pyramid sales agent may return to the enterprise products remaining unsold and the enterprise should accept the goods returned, except in cases where the products have been so damaged that they have no value of re-selling due to the fault of the pyramid sales agent.

When a pyramid sales agent withdraws from the activities within 30 days after the activities start and returns the products unsold, the enterprise may deduct a certain amount of expenses, but the expenses deducted should not exceed 10 percent of the sale amount of the returned products.

In case of goods returned as provided for in the first and second paragraphs of this article, the enterprise may deduct from the part due to the agent concerned an amount that has been before hand paid to the agent in concern of that part of returned products.

Article 17 An enterprise should not force an agent to develop a fixed number of sales agents at the next lower level or compute remuneration to the said agent according to the number of sales agents at the next lower level.

Article 18 An enterprise engaged in pyramid marketing should strength its control over its pyramid sales agents.

An enterprise engaged in pyramid marketing should provide training to its sales agents before they start work. The contents of training should cover professional knowledge, State laws and regulations and professional ethical codes.

If a pyramid sales agent is found to be engaged in illegal selling activities and the enterprise concerned has failed to perform its duties, both the agent and the enterprise should hold responsibility.

Article 19 Employment of foreigners by an enterprise engaged in pyramid marketing should observe the relevant regulations on the entry and exit of foreigners and the administration in concerns of foreigners taking up jobs in China.

Lecturers for professional training must have definite identification certificates and have no criminal records. Employment or invitation of people from Hong Kong, Macao and Taiwan or foreigners as training lecturers should abide by relevant regulations of the State.

CHAPTER IV PYRAMID MARKETING ACTIVITIES

Article 20 Pyramid marketing of enterprises and agents should be undertaken in areas as having been approved by the State Administration for Industry and Commerce and is not allowed to be carried out beyond the administrative area of the enterprises registration.

Article 21 Pyramid enterprises can only sell products they produce within the territory of China in varieties approved by the State Administration for Industry and Commerce.

Pyramid marketing enterprises should not sell products whose sales are forbidden or restricted by law and regulations and other products which are considered as not fit for pyramid marketing by the State Administration for Industry and Commerce.

Article 22 A consumer may return goods to or claim for damages from pyramid marketing enterprises or agents due to infringement of legal rights and interests arisen from quality of the products for pyramid selling, and the enterprises or agent concerned should accept the goods returned or pay compensation.

A request for a return of goods by a consumer should be made within 30 days after the purchase and the pyramid marketing enterprise and sales agent concerned should accept the goods returned and not demand for any cost from the consumer, except that the goods returned have been so damaged as to lose all their value of reselling due to fault of the consumer.

After accepting goods returned from or paying compensation to the consumer concerned, the sales agent may claim for compensation from the pyramid marketing enterprise concerned if the latter should be responsible for the default according to the marketing contract signed.

In pyramid marketing, the sales agent should make immediate settlement with the enterprise concern and is not allowed to make advanced payments.

Article 23 The prices for pyramid marketing should not be higher than the mean prices of the same or similar products at the same grade, same areas and the same period. Fraudulence in prices is forbidden.

Article 24 Enterprises engaged in pyramid marketing must not induce people to participate in the pyramid selling or buy their products by making false or mis leading statements about the nature of work and income of pyramid sales agents and the quality, uses, place of origin and effect of the products for pyramid marketing.

Advertisements, training and gatherings organized by enterprises engaged in pyramid marketing must not include materials that are detrimental to social stability and security or involving religions and superstition propagation.

Article 25 In promoting sales, pyramid sales agents should observe the following rules:

1. Present to the consumers the pyramid sales certificate which should bear the photographs, names, numbers of identification cards of the agents concerned and the variety of products and places of the pyramid marketing and the seal of the enterprises engaged in pyramid marketing.

2. Acknowledge the consumers the addresses of the enterprises engaged in pyramid marketing and of the pyramid sales agents and ways of making contacts.

3. Explain faithfully to the consumers the quality, property, uses, validity period, method of use, effect, points for attention and after- sale services of the products for pyramid marketing and the conditions, time limit and method of returning goods. False or misleading explanations must not be made.

4. Demonstrate the use of the products if possible.

5. Carry out the sales at reasonable time of the day.

6. Before carrying out door-to-door sales, agreements of the consumers should be solicited in advance. Once a consumer wishes a withdrawal or expressed inconvenience, the sales should stop.

7. Present to consumer certificates of the purchases, which should bear the seal of the enterprises engaged in pyramid marketing and the signature of the pyramid sales agents.

CHAPTER V SUPERVISION AND INSPECTION

Article 26 An enterprise engaged in pyramid marketing should report to the original administration for industry and commerce to which it has been registered the number of pyramid sales agents, amount and sales of products and remuneration to pyramid sales agents for the record.

Article 27 An enterprise engaged in pyramid marketing should report to the original administration for industry and commerce to which it has been registered its training program for the record. The training program should include contents of training courses, training sites, the number of people participating, time of training and trainers.

Article 28 Related administrations for industry and commerce may carry out on-the-spot supervisions and checks of the sales and training activities of the enterprises engaged in pyramid marketing and punish any acts that violate the State laws and regulations and the provisions of this set of regulations.

For acts falling into the jurisdiction of other departments, the acts concerned should be sent to and handled by the related departments.

Article 29 An enterprise engaged in pyramid marketing should, apart from keeping related materials as required by law and regulations, should also keep the following materials in a period of at least five years and accept the inspection by administrations for industry and commerce.

1. The original bills and documents for pyramid marketing of products, accounting books, bank bills and vouchers, bills and vouchers for transportations and storage;

2. Books recording the names, addresses, identification numbers and the numbers of pyramid sales agents;

3. Information about training of pyramid sales agents;

4. Records and documents concerning remunerations paid to pyramid sales agents; and

5. Other materials related to pyramid marketing.

Article 30 Punishments shall be meted out by administrations for industry and commerce according to the following provisions for any violation of the provisions of this set of regulations by enterprises or individuals:

1. For cases that have violated the provisions of first paragraph of Article 3 and Article 20 of this set of regulations a ban to the operation of corresponding business with a confiscation of the products for pyramid marking and the sales proceeds and illegal income shall be imposed by administrations for industry and commerce according to the Law of the People's Republic of China on the Protection of the Rights and Interests of Consumers.

2. For cases that have violated the provisions of the second paragraph of Article 11 of this set of regulations, confiscation of products, sales proceeds and illegal proceeds from multilevel pyramid marketing plus a fine shall be imposed by the administrations for industry and commerce according to the provisions of the Law of the People's Republic of China on the Protection of the Rights and Interests of Consumers. If the case is serious enough, the enterprise involved shall be disqualified for single-level pyramid marketing.

3. For cases that have violated the provisions of Article 8 and Article 10 in obtaining the registration for pyramid marketing by submitting false documents or by other means, punishments shall be meted out by administrations for industry and commerce according to the provisions of Article 59 of the Regulations of the People's Republic of China on the Management of Registration of Corporations or the provisions of 1(2) of Article 66 of the Detailed Rules for the Implementation of the Regulations of the People's Republic of China on the Management of Registration of Corporations.

4. For cases that have violated the provisions of first paragraph of Article 11 of this set of regulations, punishments shall be meted out according to the provisions of Article 59 of the Regulations of the People's Republic of China on the Management of Registration of Corporations or the provisions of 1(6) of Article 66 of the Detailed Rules for the Implementation of the Regulations of the People's Republic of China on the Management of Registration of Corporations.

5. For cases that have violated the provisions of Article 21 of this set of regulations, the enterprises involved shall be punished according to the provisions of Article 71 of the Regulations of the People's Republic of China on the Management of Registration of Corporations or the provisions of 1(4) of Article 66 of the Detailed Rules for the Implementation of the Regulations of the People's Republic of China on the Management of Registration of Corporations; and the pyramid sales agents involved shall be fined for more than RMB500 and less that RMB2,000 and be disqualified for pyramid sales.

6. For cases that have violated provisions of Article 12, Article 13, Article 14, second paragraph of Article 18, Article 19, second and fourth paragraphs of Article 22, Article 26, Article 27 and Article 29, the enterprises involved shall be ordered to correct within a prescirbed time limit and a fine of less than RMB30,000 shall be imposed. For more serious cases, the enterprises involved shall be disqualified for pyramid marketing.

7. For cases that have violated the provisions of Article 15, Article 16 and Article 17, the products, sales amount and illegal proceeds from the pyramid marketing shall be confiscated, together with a fine according to the provisions of the Law of the People's Republic of China on the Protection of the Rights and Interests of Consumers.

8. For cases that have violated provisions of the first and third paragraphs of Article 22 of this set of regulations, the enterprises involved shall be punished according to the Law of the People's Republic of China on the Protection of the Rights and Interests of Consumers, with a fine ranging from more than RMB500 to less than RMB2,000, and the enterprises involved shall be ordered to terminate the qualifications of the pyramid sales agents involved.

9. For cases that have violated the provisions of Article 23 of this set of regulations, the administration for industry and commerce that undertook the examination and registration shall order the enterprises involved to correct within a prescribed time limit. If the enterprises involved refuse to correct, the products and sales income and illegal proceeds from the pyramid marketing shall be confiscated, together with a fine according to the provisions of the Law of the People's Republic of China on the Protection of the Rights and Interests of Consumers.

10. For cases that have violated the provisions of Article 24 of this set of regulations, punishments shall be meted out according to the provisions of the Advertising Law of the People's Republic of China and the Anti-Unfair Competition Law of the People's Republic of China.

11. For cases that have violated the provisions of Article 25 of this set of regulations, a fine ranging from more than RMB500 to less than RMB2,000 shall be imposed on a pyramid sales agent involved and the enterprises involved shall be ordered to terminate the operations of the pyramid sales agent involved.

CHAPTER VII SUPPLEMENTARY PROVISIONS

Article 31 The power of interpreting the provisions of this set of regulations rests with the State Administration for Industry and Commerce.

Article 32 The regulations shall become effective as of the date of promulgation.