Administration of Direct Selling Regulations

(Promulgated by the State Council on and effect as of 1 December 2005)

PART ONE

GENERAL PROVISIONS

Article 1 These Regulations have been formulated in order to standardize the acts of direct selling, strengthen the regulation of direct selling, prevent fraud and protect the lawful rights and interests of consumers and public interests. Article 2 Direct selling activities in the People’s Republic of China shall comply with these Regulations. The scope of direct selling products shall be determined and announced by the State Council department in charge of commerce in conjunction with the State Council administration for industry and commerce in accordance with the development of the direct selling industry and consumer demands. Article 3 For the purposes of these Regulations, the term ‘direct selling’ means a form of distribution by which a direct selling enterprise recruits direct sellers to directly market products to end consumers (hereafter, the ‘consumers’) outside the fixed business premises. For the purposes of these Regulations, the term ‘direct selling enterprises’ means enterprises that have been approved in accordance with the provisions hereof to sell products by way of direct selling. For the purposes of these Regulations, the term ‘direct sellers’ means persons that directly market products to consumers outside the fixed business premises. Article 4 An enterprise established in the People’s Republic of China (hereafter, an ‘enterprise’) may apply in accordance with the provisions hereof to become a direct selling enterprise that sells the products produced by itself or by its parent company or holding company

by way of direct selling. Direct selling enterprises may obtain trading right and distribution right in accordance with the law. Article 5 Direct selling enterprises and their direct sellers may not have fraudulent and misleading publicity and marketing acts when engaging in direct selling. Article 6 The State Council department in charge of commerce and the State Council administration for industry and commerce shall, according to their respective duties and the provisions hereof, be responsible for implementing regulation of direct selling enterprises and direct sellers and their direct selling activities. PART TWO ESTABLISHMENT OF AND CHANGE IN DIRECT SELLING ENTERPRISES AND THEIR BRANCHES Article 7 To apply to become a direct selling enterprise, the following conditions shall be met: 1. the investor has good business reputation and no record of operation in major violation of law in the five consecutive years prior to the application; in the case of a foreign investor, it shall also have at least three years of experience in direct selling activities outside China; 2. the paid-up registered capital is not less than RMB 80 million; 3. the security deposit has been fully paid to the designated bank in accordance with the provisions hereof; and 4. an information filing and disclosure system has been set up as required. Article 8 To apply to become a direct selling enterprise, an application form shall be completed, and the following application documents and information shall be submitted: 1. materials proving that the conditions set out in Article 7 hereof are met; 2. the articles of association of the enterprise and, in the case of a Sino-foreign

equity or cooperative joint venture, the contract of the equity or cooperative joint venture; 3. the marketing plan report, including a service outlet plan for the direct selling area prepared in accordance with Article 10 hereof and approved by the local government at the county level or above; 4. product descriptions that meet the State standards; 5. sample of the marketing contract to be signed with direct sellers; 6. the capital verification report issued by an accounting firm; and 7. the agreement between the enterprise and the designated bank on the use of security deposit in accordance with the provisions hereof. Article 9 An applicant shall submit its application to the State Council department in charge of commerce through the department in charge of commerce of the province, autonomous region or municipality directly under the central government in which it is located. The department in charge of commerce of the province, autonomous region or municipality directly under the central government shall submit the application documents and materials to the State Council department in charge of commerce within seven days of receipt of the same. The State Council department in charge of commerce shall, within 90 days of receipt of the complete application documents and materials, make a decision on whether or not to approve the application after soliciting the opinion of the State Council administration for industry and commerce. If the application is approved, the State Council department in charge of commerce shall issue a direct selling business license. The applicant shall, on the strength of the direct selling business license issued by the State Council department in charge of commerce, apply to the administration for industry and commerce for change of registration in accordance with the law. When conducting examination and issuing direct selling business licenses, the State Council department in charge of commerce shall consider such factors as national security, public interests and the development of the direct selling industry. Article 10 To engage in direct selling activities, a direct selling enterprise must establish a branch in the provinces, autonomous regions and municipalities directly under the central government in which it intends to carry out such activities to be responsible for the

direct selling business in that administrative region (hereafter, a ‘branch’). A direct selling enterprise shall set up service outlets in the areas where it engages in direct selling activities to facilitate consumers and direct sellers as well as to satisfy their requirement to be informed of product prices and to return or exchange goods and to provide other services by the enterprise according to law. The establishment of service outlets shall meet the requirements of the local people’s government at the county level or above. To apply to establish a branch, a direct selling enterprise shall provide supporting documents and information that meet the conditions stipulated in the preceding paragraphs, and shall submit an application in accordance with the procedure stipulated in Paragraph One of Article 9 hereof. Upon obtaining approval, it shall complete registration with the administration for industry and commerce in accordance with the law. Article 11 If a major change of the matters listed in Article 8 hereof occurs in a direct selling enterprise, the direct selling enterprise shall apply to the State Council department in charge of commerce for approval in accordance with the procedure stipulated in Paragraph One of Article 9 hereof. Article 12 The State Council department in charge of commerce shall announce the list of direct selling enterprises and their branches on the government website, and update the same in a timely manner. PART THREE

RECRUITMENT AND TRAINING OF DIRECT SELLERS

Article 13 Direct selling enterprises and their branches may recruit direct sellers. No work unit or individual other than a direct selling enterprise and its branches may recruit direct sellers. The legitimate marketing activities of direct sellers may not be investigated and handled as unlicensed business. Article 14 Direct selling enterprises and their branches may not publish any advertisement that advertises the sales remuneration of direct sellers, or require payment of fees or

purchase of goods as the conditions of becoming a direct seller. Article 15 Direct selling enterprises and their branches may not recruit the following persons to be direct sellers: 1. persons under the age of 18; 2. persons that have no or limited capacity for civil acts; 3. enrolled full-time students; 4. teachers, medical practitioners, civil servants and military personnel in active service; 5. official employees of the direct selling enterprise; 6. foreigners; and 7. persons that are forbidden by laws or administrative regulations to hold concurrent posts. Article 16 A direct selling enterprise and its branches shall sign a marketing contract with every direct seller they recruit, and shall ensure that the direct sellers carry out direct selling activities only in areas where a service outlet has been established within the administrative region of the province, autonomous region or municipality direct under the central government in which one of its branches is located. Personnel that have not signed a marketing contract with a direct selling enterprise or its branch may not carry out direct selling in any manner. Article 17 Direct sellers may terminate a marketing contract any time within 60 days after signing it; after 60 days, the direct seller shall give 15 days’ notice to the direct selling enterprise if he wants to terminate the marketing contract. Article 18 A direct selling enterprise shall conduct business training and examination on the direct sellers it intends to recruit, and shall issue direct seller certificates to them after they pass the examination. No one may carry out direct selling activities without obtaining a

direct seller certificate. Direct selling enterprises shall not charge any fee for business training and examination on direct sellers. No work unit and individual other than a direct selling enterprise may organize business training of direct sellers in any name. Article 19 Instructors that conduct business training on direct sellers shall be official employees of a direct selling enterprise and shall meet the following conditions: 1. has worked in that enterprise for at least one year; 2. has a university undergraduate or higher level education and the relevant professional knowledge in law and marketing; 3. has no record of being subject to criminal penalty for willful criminal offence; and 4. has no record of operation in major violation of law. The direct selling enterprise shall issue a direct selling trainer certificate to the instructor that meets the provisions stipulated in the preceding paragraph and submit the list of the persons that have obtained the direct selling trainer certificate to the State Council department in charge of commerce for record filing. The State Council department in charge of commerce shall announce on the government website the list of the persons that have obtained a direct seller trainer certificate. No foreigner may engage in the business training of direct sellers. Article 20 Direct seller certificates and direct seller trainer certificates issued by direct selling enterprises shall be printed in the format specified by the State Council department in charge of commerce. Article 21 Direct selling enterprises shall be responsible for the lawfulness of the business training of direct sellers, the orderliness of the training and the safety of the training venue. Direct selling enterprises and their direct seller trainers shall be responsible for the lawfulness of the training contents of the business training of direct sellers.

The specific administration procedures on the business training of direct sellers shall be separately formulated by the State Council department in charge of commerce and the State Council administration for industry and commerce in conjunction with other relevant authorities. PART FOUR

DIRECT SELLING ACTIVITIES

Article 22 Direct sellers shall comply with the following provisions when marketing products to consumers: 1. he shall produce his direct seller certificate and marketing contract; 2. he may not enter the premises of a consumer to market products in a forcible manner without the permission of the consumer, and shall discontinue the marketing activity and leave the premises of the consumer immediately upon the request of the consumer; 3. before closing a deal, he shall explain the goods return policy of the enterprise to the consumer in detail; and 4. after closing a deal, he shall provide the consumer with an invoice and a sales voucher containing such particulars as the goods return policy and the address and telephone number of the local service outlets of the direct selling enterprise. Article 23 Direct selling enterprises shall mark prices on direct selling products and such prices shall be consistent with the product prices displayed at the service outlets. Direct sellers must market products to consumers at market prices. Article 24 Direct selling enterprises shall pay remuneration to direct sellers at least once a month. The remuneration payable to a direct seller by a direct selling enterprise shall be calculated exclusively on the basis of the income from the sales of products made by the direct seller directly to consumers. The total amount of the remuneration (including commissions, bonuses, rewards in all forms and other economic benefits) may not exceed 30% of the income from the sales of products made by the direct seller directly to consumers. Article 25

Direct selling enterprises shall set up and implement a sound goods replacement and return system. Consumers may, within 30 days of the purchase of a direct selling product that has not been unsealed, request to the direct selling enterprise and its branch or the local service outlet or to the direct seller that marketed the product for replacement or return of goods on the strength of the invoice or sales voucher issued by the direct selling enterprise. The direct selling enterprise and its branch, the local service outlet or the direct seller shall handle replacement or return of goods on the basis of the price marked on the invoice or sales voucher within seven days after the consumer has made the request for replacement or return of goods. Direct sellers may, within 30 days of the purchase of a direct selling product that has not been unsealed, request to the direct selling enterprise and its branch or the local service outlet for replacement or return of goods on the strength of the invoice or sales voucher issued by the direct selling enterprise. The direct selling enterprise and its branch or the local service outlet shall handle replacement or return of goods on the basis of the price marked on the invoice or sales voucher within seven days after the direct seller has made the request for replacement or return of goods. Where a consumer or direct seller requests replacement or return of goods in circumstances other than those stipulated in the preceding two paragraphs, the direct selling enterprise and its branch, the local service outlet or the direct seller shall handle replacement or return of goods in accordance with the provisions of the relevant laws or regulations or the stipulations in the contract. Article 26 If a dispute over replacement or return of goods arises between a direct selling enterprise and a direct seller or between a direct selling enterprise together with its direct seller and a consumer, the former party shall bear the burden of proof. Article 27 Direct selling enterprises shall bear joint and several liabilities for the direct selling acts of their direct sellers except where it can be proved that the direct selling acts of a direct seller are not related to the enterprise. Article 28 Direct selling enterprises shall set up and implement a sound information filing and disclosure system in accordance with the provisions of the State Council department in charge of commerce and the State Council administration for industry and commerce.

The contents, methods and related requirements of the information filing and disclosure by direct selling enterprises shall be stipulated separately by the State Council department in charge of commerce and the State Council administration for industry and commerce. PART FIVE

SECURITY DEPOSIT

Article 29 Direct selling enterprises shall open a dedicated account with a bank designated jointly by the State Council department in charge of commerce and the State Council administration for industry and commerce, and make a security deposit into the account. At the time of establishment of a direct selling enterprise, the amount of security deposit shall be RMB 20 million. After the direct selling enterprise has commenced operation, the amount of the security deposit shall be adjusted monthly to be maintained at 15% of the sales income from direct selling products of the direct selling enterprise in the previous month, but it may not exceed RMB 100 million at maximum or be less than RMB 20 million at minimum. The interests on the security deposit belong to the direct selling enterprise. Article 30 The State Council department in charge of commerce and the State Council administration for industry and commerce may jointly decide to use the security deposit under any of the following circumstances: 1. failure of the direct selling enterprise to pay remuneration to direct sellers or refund direct sellers or consumers for returned goods without proper reason; 2. the direct selling enterprise is unable to pay remuneration to direct sellers or refund direct sellers and consumers for returned goods due to termination of operation, merger, dissolution, transfer or bankruptcy, etc.; or 3. refusal without proper reason by or inability of the direct selling enterprise to provide compensation where compensation shall be provided according to law for the loss caused to consumers due to problems with a direct selling product. Article 31 Direct selling enterprises shall make up the amount of the security deposit to the level specified in Paragraph Two of Article 29 hereof within one month after the security deposit is used in accordance with Article 30 hereof.

Article 32 Direct selling enterprises may not use the security deposit to provide security for other parties, or to discharge its debts in violation of the provisions hereof. Article 33 If a direct selling enterprise ceases to engage in direct selling activities, it may withdraw the security deposit from the bank on the strength of the document issued by the State Council department in charge of commerce and the State Council administration for industry and commerce. Article 34 The State Council department in charge of commerce and the State Council administration for industry and commerce shall be jointly responsible for the daily supervision of security deposits. The specific administrative procedures on the making, payment and use of security deposits shall be formulated separately by the State Council department in charge of commerce and the State Council administration for industry and commerce in conjunction with other relevant authorities. PART SIX

SUPERVISION AND ADMINISTRATION

Article 35 The administration for industry and commerce is responsible for the daily supervision of direct selling enterprises and direct sellers and their direct selling activities. The administration for industry and commerce may adopt the following measures to carry out on-site inspection: 1. enter the relevant enterprise to conduct inspection; 2. require the relevant enterprise to provide the relevant documents, information and supporting materials; 3. inquire the relevant parties, interested parties and other relevant persons, and require them to provide the relevant materials; 4. inspect, reproduce, seal up or distain the materials and illegal property of the relevant enterprise that are related to direct selling activities; and 5. examine the direct seller trainer certificate and the direct seller certificate of the

relevant persons. When the administration for industry and commerce conducts on-site inspection pursuant to the provision of the preceding paragraph, there shall be at least two inspectors and they shall produce their legal identity documents. If sealing up or distrainment is to be implemented, it must be approved by the principal responsible person of the administration for industry and commerce at the county level or higher. Article 36 Where the administration for industry and commerce discovers that an enterprise has committed acts in violation of these Regulations during its implementation of daily supervision and administration, it may, upon the approval of the principal responsible person of the administration for industry and commerce at the county level or above, order the enterprise to suspend the relevant business activities. Article 37 The administration for industry and commerce shall set up and announce a reporting telephone number to receive reports and complaints about acts that violate these Regulations, and shall investigate and handle such reports and complaints in a timely manner. The administration for industry and commerce shall keep the identity of the informant confidential, and shall grant rewards to persons whose reports deserve credit in accordance with the relevant State provisions. PART SEVEN

LEGAL LIABILITY

Article 38 If a relevant authority and its working personnel that implement regulation on direct selling enterprises, direct sellers and their direct selling activities approve an application that does not meet the conditions stipulated herein, or fail to perform their regulatory duties in accordance with the provisions hereof, administrative penalty shall be imposed on the person in charge that is directly responsible and other directly responsible persons. If the case constitutes a criminal offence, criminal liability shall be pursued in accordance with the law. The approval granted to the application that does not meet the conditions stipulated herein shall be revoked by the relevant authority that has granted such approval. Article 39 If anyone, in violation of Articles 9 and 10 hereof, engages in direct selling activities

without approval, the administration for industry and commerce shall order rectification, confiscate the direct selling products and the illegal sales income, and impose a fine of not less than RMB 50,000 and not more than RMB 300,000. If the case is serious, a fine of not less than RMB 300,000 and not more than RMB 500,000 shall be imposed, and the business shall be banned in accordance with the law. If the case constitutes a criminal offence, criminal liability shall be pursued in accordance with the law. Article 40 If an applicant obtains the license set under Articles 9 and 10 hereof by deception or bribery, the administration for industry and commerce shall confiscate the direct selling products and the illegal sales income, and impose a fine of not less than RMB 50,000 and not more than RMB 300,000, and the license shall be revoked by the State Council department in charge of commerce and the applicant may not submit an application again. If the case is serious, a fine of not less than RMB 300,000 and not more than RMB 500,000 shall be imposed, and the business shall be banned in accordance with the law. If the case constitutes a criminal offence, criminal liability shall be pursued in accordance with the law. Article 41 If a direct selling enterprise violates Article 11 hereof, the administration for industry and commerce shall order rectification and impose a fine of not less than RMB 30,000 and not more than RMB 300,000. If it no longer meets the licensing conditions for direct selling business, its direct selling business license shall be revoked by the State Council department in charge of commerce. Article 42 If a direct selling enterprise, in violation of the provisions hereof, engages in direct selling business activities beyond the scope of direct selling products, the administration for industry and commerce shall order rectification, confiscate the direct selling products and the illegal sales income, and impose a fine of not less than RMB 50,000 and not more than RMB 300,000. If the case is serious, a fine of not less than RMB 300,000 and not more than RMB 500,000 shall be imposed, and the business license of the branch of the direct selling enterprise that has illegal business conduct shall be revoked by the administration for industry and commerce, or the direct selling business license of the direct selling enterprise shall be revoked by the State Council department in charge of commerce. Article 43 If a direct selling enterprise and its direct sellers, in violation of the provisions hereof, have fraudulent and misleading publicity and marketing conduct, the administration for

industry and commerce shall impose, on the direct selling enterprise, a fine of not less than RMB 30,000 and not more than RMB 100,000. If the case is serious, a fine of not less than RMB 100,000 and not more than RMB 300,000 shall be imposed, and the business license of the branch of the direct selling enterprise that has illegal business conduct shall be revoked by the administration for industry and commerce, or the direct selling business license of the direct selling enterprise shall be revoked by the State Council department in charge of commerce. The administration for industry and commerce shall impose, on the direct seller, a fine of not more than RMB 50,000. If the case is serious, the direct selling enterprise shall be ordered to revoke his qualification as a direct seller. Article 44 If a direct selling enterprise and its branches recruit direct sellers in violation of the provisions hereof, the administration for industry and commerce shall order rectification and impose a fine of not less than RMB 30,000 and not more than RMB 100,000. If the case is serious, a fine of not less than RMB 100,000 and not more than RMB 300,000 shall be imposed, and the business license of the branch of the direct selling enterprise that has illegal business conduct shall be revoked by the administration for industry and commerce, or the direct selling business license of the direct selling enterprise shall be revoked by the State Council department in charge of commerce. Article 45 If anyone, in violation of the provisions hereof, engages in direct selling activities without obtaining a direct seller certificate, the administration for industry and commerce shall order rectification and confiscate the direct selling products and the illegal sales income, and may impose a fine of not more than RMB 20,000. If the case is serious, a fine of not less than RMB 20,000 and not more than RMB 200,000 shall be imposed. Article 46 If a direct selling enterprise conducts the business training of direct sellers in violation of the provisions hereof, the administration for industry and commerce shall order rectification, confiscate the illegal income and impose a fine of not less than RMB 30,000 and not more than RMB 100,000. If the case is serious, a fine of not less than RMB 100,000 and not more than RMB 300,000 shall be imposed, and the business license of the branch of the direct selling enterprise that has illegal business conduct shall be revoked by the administration for industry and commerce, or the direct selling business license of the direct selling enterprise shall be revoked by the State Council department in charge of commerce. The administration for industry and commerce shall impose a fine of not more than RMB 50,000 on the instructor. If the instructor is a direct seller trainer, the direct selling enterprise shall be ordered to revoke his qualification as a direct seller trainer.

If any work unit or individual other than a direct selling enterprise organizes business training of direct sellers, the administration for industry and commerce shall order rectification, confiscate the illegal income and impose a fine of not less than RMB 20,000 and not more than RMB 200,000. Article 47 If a direct seller violates Article 22 hereof, the administration for industry and commerce shall confiscate the illegal sales income and may impose a fine of not more than RMB 50,000. If the case is serious, the direct selling enterprise shall be ordered to revoke his qualification as a direct seller, and a fine of not less than RMB 10,000 and not more than RMB 100,000 shall be imposed on the direct selling enterprise. Article 48 If a direct selling enterprise violates Article 23 hereof, the matter shall be handled in accordance with the relevant provisions of the Pricing Law. Article 49 If a direct selling enterprise violates Articles 24 and 25 hereof, the administration for industry and commerce shall order rectification and impose a fine of not less than RMB 50,000 and not more than RMB 300,000. If the case is serious, a fine of not less than RMB 300,000 and not more than RMB 500,000 shall be imposed, and the business license of the branch of the direct selling enterprise that has illegal business conduct shall be revoked by the administration for industry and commerce, or the direct selling business license of the direct selling enterprise is revoked by the State Council department in charge of commerce. Article 50 If a direct selling enterprise fails to carry out information filing and disclosure in accordance with the relevant provisions, the administration for industry and commerce shall order rectification within a stipulated time limit and impose a fine of not more than RMB 100,000. If the case is serious, a fine of not less than RMB 100,000 and not more than RMB 300,000 shall be imposed. If the enterprise refuses to carry out rectification, its direct selling business license shall be revoked by the State Council department in charge of commerce. Article 51 If a direct selling enterprise violates the relevant provisions of Part Five hereof, the administration for industry and commerce shall order rectification within a stipulated

time limit and impose a fine of not more than RMB 100,000. If the enterprise refuses to do so, a fine of not less than RMB 100,000 and not more than RMB 300,000 shall be imposed, and its direct selling business license shall be revoked by the State Council department in charge of commerce. Article 52 If any conduct in violation of these Regulations also violates the Prohibition of Pyramid Selling Regulations, it shall be handled in accordance with the relevant provisions of the Prohibition of Pyramid Selling Regulations. PART EIGHT

SUPPLEMENTARY PROVISIONS

Article 53 If a direct selling enterprise intends to establish a social organization such as an association of direct selling enterprises, such organization shall be subject to the approval of the State Council department in charge of commerce and shall apply for registration on the strength of the approval document in accordance with the law. Article 54 Investment in and establishment of direct selling enterprises and engagement in direct selling activities in China by investors from the Hong Kong Special Administrative Region, the Macao Special Administrative Region and the Taiwan region shall be handled with reference to the provisions on foreign investors hereof. Article 55 These Regulations shall be implemented as of 1 December 2005.