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The Rise of Social Networking Technology and its Impact on MLM Companies, Distributors, and the Regulatory Authority

【Charlotte Wu, Partner, Zhong Yin Law Firm】

The rise of internet technology is not front page news anymore but with the notion of new social network technology such as Facebook and mobile applications (Apps) such as Line, WeChat, and WhatsApp continually taking modern life by storm, this technology is in fact truly shifting the ways in which we interact and communicate in the modern world. This is collectively called, “Social Network Technology,” making it possible to promptly communicate with close friends at the lowest cost possible cost wherever they may be located across the globe. The algorithmic technologies even make it possible to more conveniently be acquainted with surrounding strangers, further allowing the transfer and sharing of every kind of text communication, pictures, sounds and videos or other files between one another. The evolution of these technologies unconsciously affects our lives, with “Social Network Technology” also simultaneously brewing a revolution in an age-old industry, the multi-level marketing (“MLM”) (Direct Selling) industry.

Traditional MLM or Direct Selling industries emphasize the interpersonal connection between people, selling services or products to reduce company overhead such as renting building space or expenditures related to advertising and additionally forming another kind of independent sales outlet for products and services. Currently the advancement of Social Network Technology has made an impact upon the “interpersonal” relationships of the MLM industry infrastructure and also has created a significant transformation.

Impact on MLM Companies

Due to the development of “Social Network Technology”, when many MLM companies are developing products or services to introduce the element of “Social Network Technology”, this kind of rapid development forms the basis of service type products or member type products on the Internet. This kind of product is not restricted by regions, without any imports or exports, customs tariffs, availability of inventory issues, and is both sold and used via the Internet. As well, this model may be copied quite rapidly. Besides, many foreign companies utilize this model, as the Internet is extremely convenient both for member sponsorship and joining the organization. First and foremost, whether or not regulations in countries around the world permit this kind of method, this kind of evolution will truly impact the direct selling market, which is traditionally aimed at physical consumer products

Impact on MLM Distributors
The positive developments of the transformation of “Social Network Technology” are inclusive of the technological conveniences which allow distributors to more easily develop “Membership Sponsorship”, “Downline Management” and “International Sponsorship” of their respective MLM organization. Social network technology opens doors, making it several times easier to meet and establish connections with others. With the functionalities of apps like Line or WeChat available, it is possible to contact people in the vicinity of the used app and as well, the addition of group functionality makes managing downline much more convenient. Even if there are some MLM company distributors that do not use apps on the market, they can quickly establish a management group that shares product information, sales promotions, motivational seminars and also decrease the costs of communication. Even still with integrating the functionality of “Social Network Technology”, it’s only possible to fully realize global sponsorship until you board a flight to another country. Presently, implementing this kind of technology delivers an opportunity to more efficiently make global sponsorship a reality. Despite current developments, it is not possible to say the communication model of “Social Network Technology” has already replaced the promotional methods of MLM distributors, however, it is impossible to ignore the deeply felt impact.

The Integration of Social Networking in Sales – Legal Risks and the Impact of the Regulatory Authority on Every Country.

The above mentioned “Social Network Technology” has definitely made a practical impact on the operation of MLM companies and simultaneously delivers a challenge to government authorities across the globe to properly adapt regulations to be practically applied. For example, internet technology commonly enables people to become a member of MLM companies by joining via the internet and thus developing a model of international sponsorship. This kind of international model will surely increase the complexity and difficulty of the authorities to properly enforce the law in their country. Another example that commonly leads to issues of legal liability is, “Joining via online registration and international sponsorship.”

Please refer to the two following perspectives that we may analyze.

1. Liabilities for MLM Representatives
MLM Representative B resides in Country A and joins MLM Company D via the internet, which was established and has acquired its MLM license in Country C. As a longtime resident of Country A, MLM Representative B sponsors his/her closest friends to as well join MLM Company D, thusly expanding the organization. MLM Company D due to having the notion to develop its social network technology proceeds with transacting using an external debit card “e-wallet” type of model, therefore the organization rapidly develops causing MLM Representative B who resides in Country A to have a massive downline organization. However, MLM Company D has yet to apply for an MLM license according to the regulations of Country A or has yet to receive permission based on the regulations of other competent authorities of Country A. During this period of time, MLM Representative B and the behavior of the downlines at the primary events, depending on the legal regulations of each respective country, may constitute as an important factor in determining the responsibility for any offenses that go against the development of the MLM organization and it is even possible to result in civil or criminal implications.

2. Liabilities for MLM Companies
In continuation of the above example, in this case is MLM Company D liable for any legal responsibilities? The implications of an operation model that develops internationally brings about questions of the applicability of regulations and the jurisdiction in which they are applied. This aspect of the law is still not clear. I believe that if MLM Company D has already put effort into announcing and advising their own representatives to not develop the market (without legally applying for a license) then any resulting legal liabilities may only be borne by MLM Representative B. However, if MLM Company D puts effort into sponsoring and encouraging MLM Representative B to move forward in developing the organization in Country A, then depending on the respective legal regulations of the country, the situation may be different, making MLM Company D and its responsible person or MLM Representative B collectively responsible for any relevant legal responsibilities. This leads to the legal question of whether the competent authority of the MLM industry in Country A has jurisdiction over MLM Company D. In the future if MLM Company D and its responsible person would like to move forward in officially establishing a company and applying for a license in Country A, then they should directly face these obstacles. When MLM companies want to plan their business operation they should be mindful of having an international operation plan, which necessitates in dealing with the problem in advance.

Today there are too many MLM companies to name that are developing international operations and promoting every kind of social network technology to increase the responsiveness and flexibility of their business model, thus resulting in numerous legal issues. I would like to first share this preliminary opinion and in the future further discuss the relevant issues of this article in greater detail, which includes relevant tax issues of international business operation, working permit issues, and the impact of online financial technology on the MLM industry.



If you should have comments or further interest in the above article,
please kindly contact Charlotte Wu, Esq.
TEL +886 2 2377 1858 EXT 8888