Newsletter
The Act Governing Multi-Level Sales Will Be Enacted on 29 January 2014
The draft Act Governing Multi-Level Sales (the "Act") passed the Legislature's third reading on 14 January 2014 and will be promulgated by the President and enacted on 29 January 2014. Upon its enactment, the Act will replace the current provisions governing multi-level sales under the Fair Trade Act (FTA).
Multi-level sales activities are regulated mainly by five articles (Articles 23 to 23-4) of the FTA and the Supervisory Regulations Governing Multi-Level Sales ("Regulations"). Given that the regulations governing market competition and multi-level sales business are different in nature and that multi-level sales business could be quickly expanded through personal networking thereby causing severe social problems if and when there is any illegal conduct, the Fair Trade Commission (FTC) proposed the draft Act in order to establish a comprehensive regulatory system and strengthen the regulation and supervision of multi-level sales activities.
The Act is based on the relevant provisions under the FTA and the Regulations, and strengthens the regulation of those illegal multi-level sales activities that have been found to be most likely to cause damage to participants. Upon its enactment, the Act will replace the current provisions governing multi-level sales under the FTA and the Regulations. We have highlighted the major provisions under the Act as follows:
1. Increase of the Imprisonment Sentence for Illegal Multi-level Sales Activities from Three to Seven Years
An enterprise is prohibited from conducting multi-level sales where the participants receive commissions, bonuses, and/or other economic benefits mainly from introducing others to participate in the plan. The maximum imprisonment sentence that an individual involved in the violation may receive is extended from the current three to seven years, while the violating enterprise may receive a criminal fine of up to NT$100 million.
2. Extension of the Period for Participants to Rescind the Agreement Without Cause from 14 to 30 Days of Signing the Agreement
The period within which a multi-level sales enterprise is required to permit a participant to unilaterally rescind a participation agreement without cause is extended from the current 14 to 30 days of signing such agreement. Even after the 30-day period expires, a participant may still unilaterally terminate the participation agreement without cause. A multi-level sales enterprise is prohibited from demanding any penalty or damages from a participant for the rescission or termination of a participant agreement, and from rejecting, without justification, the return or refund of goods or services already purchased by the participant.
3. Multi-level Sales Enterprises' Notification and Disclosure Obligations
Before an individual becomes a participant, a multi-level sales enterprise is required to inform him/her of (i) its paid-in capital and turnover, (ii) its multi-level sales structure and the criteria for an individual to participate in its multi-level sales plan or organization, (iii) laws and regulations governing multi-level sales, (iv) a participant's responsibilities and obligations, the conditions for him/her to withdraw from the multi-level sales plan or organization, and his/her rights and obligations as a result of the withdrawal, (v) information on goods and/or services, (vi) if the multi-level sales enterprise has any partial refund policy for buying back goods and/or services (based on the degree of use or damage), andwhen the participant unilaterally terminates the participation agreement without cause, the formula for calculating the amount of refund and the reason for the formula, and (vii) any other matters to be designated by the FTC.
A multi-level sales enterprise is required to, by the end of May each year, prepare a balance sheet and income statement for its multi-level sales operations in the previous accounting year. If its paid-in capital reaches or exceeds a certain amount (currently : NT$30,000,000) or its total sales in the previous accounting year reach or exceed a certain amount (currently : NT$100,000,000), it is required to have the aforesaid balance sheet and income statement audited by a CPA. A multi-level sales enterprise must make all of these financial statements available at its main business place for its participants' review.
4. FTC's Authority to Approve and Examine Multi-level Sales Businesses and Punish Violators
Before commencing its operation of multi-level sales business, a multi-level sales enterprise is required to apply for the FTC's approval. In addition, a multi-level sales enterprise must prepare a monthly record of its business development in Taiwan, sales of goods and/or services, payment of commissions and bonuses, and return and refund of goods and/or services. It must make all of these records available at its main business place for the FTC's review.
The FTC may from time to time examine or order a multi-level sales enterprise to submit its business development report. It may also on its initiative or upon its receipt of a complaint investigate any suspected or reported violations of the Act and punish violators.
5. Establishment of Participants Protection Institution
Any multi-level sales enterprise approved by the FTC is required to make a donation towards the establishment of a participants protection institution and pay annual fees and dues designated by the FTC to the institution after it is established. The initial donation could offset the annual fees and dues payable to the institution.
The objectives of the institution are to protect the rights of both participants and multi-level sales enterprises and mediate the disputes between them. Nevertheless, a multi-level sales enterprise may seek such services from the institution only if it has paid the required annual fees and dues. Any multi-level sales enterprise that fails to donate or pay the fees and dues in full as required will receive an administrative fine of NT$100,000 to NT$5,000,000. If it still fails to rectify the failure within the time limit set by the FTC, it will receive successive fines of NT$200,000 to NT$10,000,000 until it rectifies the failure.
Lee and Li has assisted several international multi-level sales companies in establishing their businesses and advising them on various compliance issues in Taiwan. Please feel free to contact us if you have any inquiry about the Act.