Legal bottlenecks and optimization considerations for the development of direct selling industry

Direct selling is a transaction method constructed by direct selling businesses, direct salespeople, and consumers, which is characterized by the absence of a fixed retail location
.
First, direct selling companies can use this business model to recommend and sell their products to consumers, thereby reducing costs
.
Second, direct sellers can not only consume products purchased from direct selling companies, but also promote the product to consumers based on their own experience, that is, they can also use it as a business choice
in addition to affordable consumption.
Third, consumers can obtain more product information through face-to-face communication, especially to understand and master the use of electronic products, in addition, in multi-level direct sales, direct sellers can develop consumers to the next level of sales, and get rewards
outside of sales.
At the same time, consumers will also gain employment and entrepreneurial opportunities
as a result of this role change.
From in-home sales to party sales to offline and online development, direct selling has always kept pace with the times and constantly explores products
suitable for direct sales.
Nowadays, more and more personalized consumption preferences also provide new opportunities
for product development and customized services for direct selling companies.

When direct selling also has consumer infringement problems such as inflated prices and inferior product quality caused by market failure, the structural characteristics of direct selling itself have also attracted attention
to the rights and interests of direct sellers and pyramid schemes.
From the perspective of regulating the development of direct selling and protecting the interests of multiple parties, the government's legislative intervention is also multi-pronged, such as strengthening the management of direct selling contracts in civil terms, cracking down on pyramid schemes in criminal terms, and strengthening the supervision
of direct selling access administratively.
Comparatively speaking, in view of the lessons of the times, China has adopted a strong intervention administrative supervision model for direct selling, and supporting criminal crackdowns to prevent economic and social problems
caused by pyramid schemes.
Time has changed
.
The boom in e-commerce has brought a new model of online community sales to direct selling, and has also made it face the challenges
of emerging formats such as social e-commerce.
When the government promotes the orderly development of e-commerce with prudent and inclusive supervision, its accumulated regulatory experience can also be extended to the direct selling model
.
At the same time, new concepts and practices that can make up for the lack of resources for government supervision, such as industry autonomy and social co-governance, can also be used in direct sales supervision, so that it can prevent and control economic or social risks
while retaining and innovating economic value.
Based on this, China's supervision can explore how to optimize prudent and inclusive supervision
for direct sales from the following three aspects.

I.
The "Basis of Model" and "The Death of the Model" of Direct Selling Development

As a business model, direct selling provides business opportunities that are not only direct-to-consumer door-to-door or party sales, but compared with the sales friendship built by early communication methods such as mail and telephone, face-to-face direct selling explores and exerts the commercial value
of interpersonal communication.
As a popular communication method, WeChat breaks through geographical restrictions for the interpersonal communication of direct sales, but the community model still retains the characteristics
of acquaintance transactions of direct sales.
This also makes direct selling different
from emerging social e-commerce and live streaming e-commerce.
When single-level direct selling is only a one-time construction and repeated friendship of interpersonal communication and communication, the foundation of direct sales based on interpersonal network lies in the formation of multi-level interpersonal communication and communication, that is, constantly expanding the offline line to increase product sales
.
In this model, product sales is the source of income for direct selling enterprises, and direct salesmen can not only get paid according to personal sales, but also get paid by absorbing the team formation and management of downline personnel, so the bonus system of team remuneration is regarded as an incentive mechanism
for direct sales development.
In other words, the root of the sustainable development of direct selling lies in the benign interaction
between "increasing production" and "increasing employees".
For example, good products gain consumer recognition, so the more products are bought, consumers also turn into direct sellers and expand the sales team
.
In addition to increasing revenue, direct selling companies are constantly innovating products and sales to drive new development
.

From a practical point of view, the organization of multi-level direct selling does not expand indefinitely, but controls
it according to the size of the market.
After all, for the management of direct sellers, the supporting product return system also tests the management ability
of direct selling enterprises.
Moreover, driven by external supervision, direct selling enterprises must also carry out self-regulation and do a good job in compliance management
.
However, the layered direct selling model is easy to be exploited
by "pyramid fraud".
Different from the product sales and improvement mechanism of direct sales, "pulling people's heads" and "collecting membership fees" have become the source of income for the latter, that is, the so-called pyramid scheme and unearned gain
.
Even though some pyramid schemes involve the sale of products or services, the purpose of buying and selling products is to obtain a head reward from those purchases rather than a sales fee
.
In order to achieve this goal, the organizers of pyramid fraud not only use brainwashing as a business strategy, but also involve personal control, which is also different from the return of products and personnel can be withdrawn from direct sales, so the following distinction
can be considered whether it is direct sales or fraud 。 The first is whether the goods or services are the main business content or the head, which means that there is no actual product sales and relies on membership fees and capitation fees; The second is whether the membership organization has set qualifications, which fraudsters will use to force the purchase of goods or services to collect fees; Third, it will continue to attract participants through so-called "brainwashing" means such as deception, coercion, and illegal detention, and it can be said that "increasing personnel" is the core means
of profit.

II.
"Stopgap Measures" and "Trade-offs" in Regulatory Responses

As far as the regulatory arrangements in response to the development of direct selling are concerned, the option of strict supervision is to require direct selling to meet the statutory requirements
through separate legislation from the qualification of the enterprise, the product range, and the specific regime associated with the direct seller and consumers.
Unlike this, the option of deregulation is not to regulate direct selling as a specific business model, but to legislate only to combat pyramid schemes
.
As one of the common business models, on the one hand, the single-line economic law can be used to solve the illegal problem of direct selling, such as the Advertising Law, the Anti-Unfair Competition Law, and the Consumer Rights Protection Law
.
On the other hand, industry autonomy is also an important regulatory channel, including the code of conduct of direct sellers and consumer protection requirements
.
As far as China is concerned, direct selling is an imported product, and its economic value and social risk have attracted regulatory attention
.
From supporting multi-level direct selling to prohibiting direct selling to opening up single-level direct selling, China's final choice of strict supervision has built a regulatory framework
to regulate direct selling and combat pyramid marketing with different definitions of "direct marketing" and "pyramid marketing".

Looking back at history, direct selling entered our country
in the late 80s and early 90s of the 20th century.
In the early stages of development of the market economy and its government regulation, the direct selling format is developing rapidly, and the problems caused by market failure are also extremely prominent
.
Although it is simple and easy to implement a ban, it is not in line with China's commitment
to opening up to the outside world.
At a time when prior regulation was the main way of supervision, market access also became the leading choice
for regulating direct selling.
In addition to multiple restrictions on direct selling enterprises, product scope, and practitioners, opening single-level direct selling and prohibiting multi-level direct selling have become the ultimate expedient choice
.
This is manifested both in the form of compensation restrictions for direct sellers and in the prohibited definition of MLM, i.
e.
direct selling incentives
that prohibit team remuneration.
According to this, direct selling is strictly limited to a single level of self-production and self-sale, products are also limited to several scopes, although the subsequent rule of law also through administrative rules refinement, criminal justice interpretation, etc.
to increase the regulation of direct marketing, combat pyramid schemes, but legislative lag still has become the bottleneck of industry development
.

First, the development of the market economy is becoming more and more mature, more and more circulation areas use direct sales to sell products or services, and with the development of online sales, the incentive effect of team remuneration is also favored by emerging formats such as social e-commerce, however, the direct selling norms that have laws to follow and strict law enforcement are still limited to the original legal scope, so that the legal situation of direct selling enterprises is not as good as that of non-direct selling enterprises
.
Second, in view of the strict requirements of direct selling regulations, direct selling enterprises have to adopt multi-channel combinations
such as direct sales and distribution in the sales process.
Under the opportunities of e-commerce, the prohibited multi-level direct selling also makes it difficult for direct selling enterprises to use the hierarchical incentives of direct selling to seize new opportunities
.
At the same time, in the face of the diversification of products and services and the increasingly common contract production, the strict restrictions on the production process also make it difficult for direct selling companies to seek innovation and change
.
Third, the improvement of the economic legal system has provided the choice of co-governance and single-law exclusive rule for the supervision of direct sales, such as the direct sale of health food can be subject to general laws such as the Advertising Law of the People's Republic of China, the Anti-Unfair Competition Law of the People's Republic of China, and the special law
of the Food Safety Law of the People's Republic of China 。 In view of this, the new method of direct selling management is to ensure fair competition among market entities and give play to the role of the market in resource allocation; Second, it is necessary to consider the complementary application of laws to save limited legislative resources and play the normative role of single-line legislation; Third, in view of the challenges and opportunities of the new era faced by direct selling, combined with new regulatory concepts such as "decentralization, management and service", "supervision during and after the event" and "optimization of the business environment", to weigh the risk prevention and control of prudential supervision and the innovative incentives
of inclusive supervision.

III.
"Local Innovation" and "Extraterritorial Reference" of Experience Enlightenment

The accumulation of experience over time provides enlightenment
for China's optimization of direct selling supervision.
On the one hand, China's administrative regulatory reform is constantly adjusted to meet the needs of
market development.
Specific to direct selling regulation, first, the balance of goals should be in line with the current new proposition
of combining effective markets and active governments.
This means that regulating direct selling is not only to protect the interests of direct sellers and consumers, but also to consider providing a friendly business environment for the excellence and innovation of direct selling enterprises, such as fair competition between market entities and the combination
of management and service between government and enterprises.
Second, the cooperation on the subject should take into account the self-regulation of market entities and the government's response supervision
.
Compared with government regulators, producers and operators are directly engaged in the supply of products and services, and have more information and technological advantages to ensure the safety of
products and services.
Legal rules further drive producers and operators to fulfill this safety obligation
in combination with their own management.
Whether it is direct sales of self-production and self-sales or direct sales combined with commissioned production or direct salesmen of independent contract workers, producers and operators must establish a management system in accordance with the law to fulfill safety obligations
.
Its willingness to comply, ability and effectiveness will trigger different regulatory responses, such as compliance incentives or non-compliance penalties
.
The third is the choice of tools, focusing on the combination
of supervision during and after the event and rigidity and softness.
Direct selling is a part of market supervision, and the market supervision reform in recent years has also supervised institutional innovation in this field, such as the application of digital real-time monitoring to realize the intelligence of direct selling supervision, combined with credit supervision to improve the pertinence
of direct selling supervision.

On the other hand, whether it is co-governance or separate legislation, the specific requirements for the supervision of foreign direct sales can also be learned
.
This points first and foremost to a crackdown
on pyramid fraud.
In addition to criminal legislation, the crackdown can also emphasize some key links in prevention and control
.
In the U.
S.
, for example, a key part of preventing multi-level direct selling from evolving into fraud is the requirement that business opportunity introductions for direct sellers be truthful and not misleading
.
The determination of whether a presentation is fraudulent is based on the facts obtained from the investigation
.
For example, for current or potential participants, a company's presentation of a business opportunity should be based on a reasonable basis
.
The so-called reasonable basis means that the explanation
is supported by objective evidence.
If the enterprise does not have such objective evidence, then the corresponding statement is
fraudulent.
Secondly, from prohibiting multi-level direct selling to lifting the ban on multi-level direct selling, Singapore has opted for the principle of prohibiting pyramid fraud and exceptionally opening up multi-level direct selling for the purpose of product sales, which includes the fact that the promoter of any project, the participant receives the benefit of selling, leasing, licensing or distributing goods to other people, and no one can benefit from introducing or recruiting one or more people to participate in the project
.
Finally, soft laws such as guidelines are also important tools
used by regulators or industry associations to regulate direct marketers and protect consumers.
For example, the European Code of Conduct for Direct Selling is published by the Union of European Direct Selling Associations for use by its members and aims to improve consumer satisfaction, protect consumer rights, promote fair competition in the free market framework, and enhance the good public image
of direct selling companies as "fair and fair and providing quality products".

(Sun Juanjuan, Associate Professor, Agricultural University of Hebei and Research Fellow, Collaborative Innovation Center for Food Safety Governance, Chinese Minmin University)

Preliminary review: Li Song Responsible editor: Zhao Yu Review: Wang Jinchen