China has become the testing ground of many international network marketing companies, as many Chinese consumers prefer foreign brands. But apart from opportunities, Shanghai-based lawyer Mark Schaub also sees legal challenges of operating in this new promised land, he writes in Lexology.
However, it is very important to note that despite this opportunity network marketers do face real and serious challenges in China:
Pyramid selling or selling via multi-level marketing (MLM) is illegal in China.
If Network Marketing companies wish to operate within China it is crucial that they adjust their business in order to operate legally. The main restrictions are that a distributor cannot earn compensation based on sales of products to distributors lower down the hierarchy or “down-line” in the same network.
Non-compliance can have very serious repercussions: companies branded as being illegal pyramid schemes will face official investigation which will often result in the arrest of person-in-charge of affiliates within China and company executives who travel to China. In addition, the non-compliant company will quickly find out how fragile its business in China is – the Chinese authorities can quickly move to shut down the company’s website and all social media channels – given the importance of social media and the internet in most network marketing companies this will effectively shut down a company’s operations overnight.
Many international Network Marketing companies are currently using cross-border e-commerce as a means to circumvent regulatory restrictions on MLM. Basically, international Network Marketing companies operate by selling offshore products or services into China and having the business operate offshore to the maximum extent possible. Many of these companies have been very successful in generating revenue and profit in China; some extremely so – indeed China has become the main market for a number of these companies as they abandon less lucrative markets.
However, these “offshore” Network Marketing companies often fail to take into account the potential fragility of their business in China. They prefer to believe (or possibly pretend to believe) that their offshore model allows them to avoid the PRC’s legal restrictions on Network Marketing. Nothing could be further from the truth. If your business is operating in China then you are required to be compliant in China or risk the serious consequences of non-compliance outlined above. In some cases this will involve obtaining a Direct Sales License in other cases it may involve a fundamental revamping of the business model.
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