Law Articles
2026-07-14
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Dual-Track Governance: The Regulatory Dilemma and Reform Outlook of China's Regulation on the Prohibition of Pyramid Selling — Implications for Taiwan's Regulatory Framework (Part I)
【Zhong Yin Law Firm Partner Charlotte Wu / Attorney Dan Yang / Legal Intern Sophy Yao】
charlotte.wu@zhongyinlawyer.com.tw
charlotte.wu@zhongyinlawyer.com.tw
In May 2026, China's State Administration for Market Regulation ("SAMR") released the Draft Amendments to the Regulation on the Prohibition of Pyramid Selling (Exposure Draft) (the "New Regulations"). At the same time, however, neither the Regulation on Direct Selling nor the Regulation on the Prohibition of Pyramid Selling was included in the State Council's 2026 Legislative Work Plan as a formal legislative project. This phenomenon—where draft amendments are released while formal legislation is deferred—reflects the regulator's cautious approach toward reform. This article examines this legislative initiative from the perspectives of the current regulatory framework, proposed reforms, and compliance implications for foreign-invested enterprises.
Background and Rationale for Reform of China's Direct Selling Regulations: Challenges Under the Existing Framework
The current regulatory framework governing direct selling in China is built upon two core pillars: the Regulations on Direct Selling Administration and the Regulations on Prohibition of Pyramid Selling (collectively, the “Former Regulations”), both promulgated and implemented in 2005. The legislative purpose set forth in Article 1 of the Former Regulations—“to prevent fraud, protect the legitimate rights and interests of citizens, legal persons, and other organizations, maintain the order of the socialist market economy, and preserve social stability”—clearly demonstrates that, from the outset of their drafting, these regulations were imbued with a strong emphasis on “social stability as the priority” and a policy orientation toward “comprehensive prohibition.
Nearly two decades later, however, this dual-track regulatory framework has struggled to keep pace with the evolution of modern business models and regulatory needs. In some respects, it has become both an obstacle to innovation and a breeding ground for regulatory risks. The principal deficiencies are reflected in the following aspects.
I. Rigid Legal Definitions and Expanding Grey Areas Fail to Address Emerging Online Pyramid Selling Models
Article 7 of the Former Regulations identifies three categories of prohibited pyramid selling activities1—recruitment-based compensation, entry-fee schemes, and team-based remuneration. While these provisions once established a seemingly clear regulatory boundary, technological and commercial developments have significantly blurred that line, creating substantial enforcement blind spots.
With the rapid rise of social media, short-video platforms, online group purchasing, and other digital business models, numerous marketing practices now operate within regulatory grey areas. Although Article 92 of the Former Regulations contains relevant provisions, its regulatory scope and specificity are no longer sufficient to address increasingly sophisticated online pyramid selling schemes. Consequently, many new forms of online pyramid selling fall outside clearly applicable legal provisions, resulting in uncertain enforcement standards and ambiguous legal boundaries that allow concealed online pyramid selling activities to evade effective supervision.
II. Limited Enforcement Powers Are Inadequate to Address the Complexity of Modern Pyramid Selling Operations
The Former Regulations provides only relatively basic enforcement tools, including on-site inspections, questioning of relevant persons, examination of documents, and seizure or detention of property. It does not authorize investigators to inspect transaction accounts, trace financial flows, or preserve and collect electronic evidence—powers that are increasingly indispensable in combating modern pyramid selling operations characterized3 by complex fund transfers, easily deleted online evidence, and cross-regional business activities.
Reform Direction: Balancing Targeted Enforcement with Graduated Regulation
The proposed amendments directly address many longstanding enforcement challenges. The major revisions are summarized below.
I. Introduction of Multiplicative Fines and a Dual Liability Regime for Individuals
Article 264 of the New Regulations replaces the existing fixed-amount administrative fines with fines of up to three times the illegal gains, thereby aligning financial penalties with the scale of the violation and significantly strengthening deterrence against large-scale pyramid selling organizations. In addition, newly added Article 335 introduces a dual liability regime, under which company representatives and senior management personnel may be held personally liable through administrative fines and may also be prohibited from serving as company representatives. This reform seeks to overcome the previous limitation whereby only the corporate entity was penalized while responsible individuals escaped accountability, thereby placing greater compliance responsibility on senior management.
II. Expansion of Regulatory Coverage to Expressly Include Online Pyramid Selling
While retaining the three fundamental elements for identifying pyramid selling, Article 96 of the New Regulations expressly defines online pyramid selling for the first time by bringing all pyramid selling activities conducted through telecommunications networks within the scope of regulation. The New Regulations further refines the legal standards for identifying prohibited conduct by clarifying the criteria relating to participant recruitment, compensation structures, and profit-generation mechanisms. These revisions unify the standards applicable to both online and offline pyramid selling and substantially reduce enforcement uncertainty. Online viral marketing, community-based recruitment, hierarchical rebate schemes, and similar business models will now be subject to clearly defined compliance boundaries7.
III. Establishing a Differentiated Penalty Framework and Introducing an Exemption Regime
Article 32 of the New Regulations8 introduces a “tiered penalty system”, under which third parties that “voluntarily eliminate or mitigate the harmful consequences,” “commit a first-time violation with minor harm and promptly rectify the violation,” or “have no subjective fault” may be subject to lighter administrative penalties, reduced penalties, or even exemption from administrative punishment. This design helps encourage enterprises to proactively implement compliance measures, rather than conceal violations out of fear of punishment.
IV. Strengthening Enforcement Powers and Regulatory Oversight
The New Regulations comprehensively expand enforcement powers, optimize investigation procedures, and extend regulatory control periods, thereby significantly enhancing the rigidity of enforcement and the efficiency of case handling. In terms of enforcement measures, the New Regulations introduce new investigative tools, including the authority to inquire into accounts involved in suspected cases and access electronic data. With respect to control periods, the previous single-term limitation has been refined by establishing a tiered system for the duration of asset seizure and preservation measures, thereby better addressing the investigative needs9 of major pyramid selling cases.
Compliance Issues for Foreign-Invested Enterprises
For foreign-invested direct selling companies intending to enter or expand within the Chinese market, the proposed amendments are of particular significance. Most notably, the dual liability regime introduced by Article 33 exposes senior executives responsible for China operations to direct personal legal liability. In addition, Article 1810 requires internet platforms and payment service providers to actively monitor and report suspected pyramid selling activities, meaning that corporate compensation and commission structures will likely be subject to considerably greater regulatory scrutiny.
Preliminary Assessment of the 2026 Legislative Timeline and the Compliance Transition Period for Foreign Enterprises
A noteworthy legal development is that the 2026 Legislative Work Plan of the State Council, promulgated by the State Council of the People's Republic of China on May 11, 2026, does not include either the Regulations on the Administration of Direct Selling or the Regulations on the Prohibition of Pyramid Selling among the regulations scheduled for formal amendment during the year11. The State Council's Annual Legislative Work Plan generally identifies the key legislative and regulatory initiatives expected to be reviewed, adopted, or brought into force with in the relevant year. By contrast, the Draft Amendments for Public Comment issued by the State Administration for Market Regulation (SAMR) are, by their nature, part of the consultation and drafting stage of the rulemaking process, rather than the formal legislative amendment stage.
Although this procedural discrepancy does not diminish the potential compliance risks arising from the proposed personal liability regime, dual-penalty system, and substantially increased administrative fines under the New Regulations, it may nevertheless have several practical implications for the compliance strategies of foreign-invested enterprises:
１．Providing a Longer Transition Period for Revising Internal Compensation Plans.
The omission of the Regulations on the Administration of Direct Selling and the Regulations on the Prohibition of Pyramid Selling from the State Council's 2026 Annual Legislative Work Plan suggests that the implementation of the stringent new measures contemplated by the proposed amendments—including personal liability, the dual-penalty system, and substantially increased administrative fines—may be delayed beyond earlier expectations. As a result, enterprises are likely to have additional time to review, adjust, and restructure their compliance programs and compensation plans before the new regulatory regime takes effect.
２．Actively Participating in the Public Consultation Process.
Although the State Administration for Market Regulation (SAMR) released the draft amendments at the end of May, the State Council has not yet included them among the legislative priorities scheduled for adoption during 2026. This indicates that the draft regulations may still be subject to further revision and policy discussion. Accordingly, the current public consultation period (May 29–June 28, 2026) represents a valuable opportunity for industry stakeholders to submit formal legal comments to SAMR, advocate for appropriate safeguards and defenses, and seek clarification of ambiguous provisions. Enterprises should therefore actively participate in the consultation process12.
Conclusion
Over the past two decades, China's Regulations on the Prohibition of Pyramid Selling and Regulations on the Administration of Direct Selling have evolved alongside the development of the direct selling industry, reflecting its transformation from a relatively unregulated sector into one governed by an increasingly sophisticated regulatory framework. At the same time, these regulations reveal a fundamental policy dilemma: how to strike an appropriate balance between the longstanding objective of prohibiting illegal pyramid selling and the legitimate need to facilitate the development of lawful direct selling in a manner consistent with China's unique legal and regulatory environment.
At first glance, the 2026 Draft Amendments to the Regulations on the Prohibition of Pyramid Selling appear to establish a considerably more stringent enforcement regime. Upon closer examination, however, the amendments do not depart from the existing regulatory framework; rather, they introduce targeted refinements and enhancements while preserving its core structure. This approach reflects the regulators' continuing effort to balance the dual objectives of combating illegal pyramid selling and protecting legitimate commercial activities. On the one hand, the draft strengthens enforcement through measures such as multiplier-based administrative fines, the dual-penalty system imposing liability on both business entities and responsible individuals, and expanded compliance obligations for online platform operators. On the other hand, it incorporates graduated enforcement mechanisms and exemption provisions to avoid imposing disproportionate regulatory burdens on legitimate business activities.
Nevertheless, the principal issues that the current reform seeks to address—including the ambiguous definition of online pyramid selling, enforcement tools that have failed to keep pace with increasingly sophisticated methods of fund transfers, the absence of clearly defined compliance obligations for online platforms, and penalties that are disproportionate to the scale of unlawful conduct—are by no means unique to China. Taiwan's Multi-Level Marketing Supervision Act, enacted in 2014, likewise faces the need to respond to evolving market conditions and emerging regulatory challenges.
Although Taiwan does not prohibit multi-level marketing, its adoption of a registration-based, rather than a licensing-based, regulatory regime places even greater emphasis on effective and precise ex post supervision. Several issues merit particular attention. First, as new business models—such as social-media viral distribution and livestream commission-based sales—continue to proliferate, does the current statutory definition of multi-level marketing still provide a sufficiently clear boundary for regulatory purposes? Second, the Fraud Crime Hazard Prevention Act, enacted in 2024, imposes anti-fraud cooperation obligations on seven major sectors13, including financial institutions, online advertising platforms, and e-commerce operators. However, multi-level marketing companies, despite serving as the organizational hub of distribution networks, have not been brought within a comparable statutory supervisory framework. Their responsibility for overseeing the conduct of distributors continues to rely primarily on contractual arrangements. Whether such a regulatory model remains adequate in addressing increasingly sophisticated fraud schemes warrants careful consideration. Third, does a regulatory gap exist between the severe criminal sanctions applicable to disguised (or degenerated) pyramid schemes and the relatively modest administrative penalties imposed for ordinary regulatory violations? If so, certain borderline business practices may escape effective regulation because they are insufficiently serious to trigger criminal prosecution, yet cannot be adequately deterred under the existing administrative enforcement framework.
The answers to these questions cannot simply be transplanted from China's reform experience, as the two jurisdictions differ fundamentally in their legal systems, industrial structures, and regulatory philosophies. Nevertheless, China's latest regulatory reform provides a valuable point of reference, prompting a re-examination of whether Taiwan's existing regulatory toolkit has kept pace with the rapid evolution of the direct selling industry. The next article in this series will explore how, within Taiwan's existing registration-based regulatory framework, policymakers may draw lessons from China's reform experience to further strengthen the supervision of multi-level marketing activities.
1 Article 7 of the Regulation on the Prohibition of Pyramid Selling provides:
“Any of the following acts shall constitute pyramid selling activities:
(1) Where an organizer or operator recruits participants and requires the recruited participants to further recruit other persons to join, and calculates and pays remuneration (including material rewards and other economic benefits, hereinafter the same) to the recruiters based on the number of persons directly or indirectly recruited by them, for the purpose of obtaining illegal benefits;
(2) Where an organizer or operator recruits participants and requires the recruited participants to pay fees or make disguised payments through methods such as purchasing commodities, in order to obtain the qualification to join or recruit other persons, for the purpose of obtaining illegal benefits; or
(3) Where an organizer or operator recruits participants and requires the recruited participants to recruit other persons to join, thereby forming hierarchical relationships between upstream and downstream participants, and calculates and pays remuneration to upstream participants based on the sales performance of downstream participants, for the purpose of obtaining illegal benefits.”
2 Article 9 of the Regulation on the Prohibition of Pyramid Selling provides:
“Where information containing pyramid selling activities as prescribed under Article 7 of this Regulation is published through media such as the Internet, the administrative departments for industry and commerce, in conjunction with relevant departments such as telecommunications authorities, shall investigate and handle such activities in accordance with this Regulation.”
3 Reference: “Major Revision of the Regulation on the Prohibition of Pyramid Selling: A Comprehensive Overview of the Key Changes,” available at http://www.cdsp.com.cn/exclusive/?type=detail&id=168 (last visited June 19, 2026).
4 Article 26 of the Draft Amendments to the Regulations on the Prohibition of Pyramid Selling (2026 Draft for Public Comment) provides as follows:
Where an individual or entity organizes or plans pyramid selling activities, the market regulation authorities shall confiscate the illegal property and unlawful gains, and impose a fine of up to three times the amount of unlawful gains. Where the amount of unlawful gains cannot be calculated, a fine ranging from RMB 1 million to RMB 5 million shall be imposed. Where the conduct constitutes a criminal offense, criminal liability shall be pursued in accordance with the law. Where an individual introduces, induces, or coerces others to participate in pyramid selling activities, the market regulation authorities shall order rectification, confiscate the illegal property and unlawful gains, and impose a fine of up to three times the amount of unlawful gains. Where the amount of unlawful gains cannot be calculated, a fine ranging from RMB 500,000 to RMB 1 million shall be imposed. Where the conduct constitutes a criminal offense, criminal liability shall be pursued in accordance with the law.
Where an individual participates in pyramid selling activities, the market regulation authorities shall order rectification and may impose a fine of up to RMB 5,000. Where an individual has received administrative penalties for participating in pyramid selling activities two or more times within one year, a fine ranging from RMB 5,000 to RMB 20,000 shall be imposed.
5 Article 33 of the Draft Amendment to the Regulation on the Prohibition of Pyramid Selling (2026 Draft for Comment) provides:
“The market supervision and administration departments shall establish and improve a credit-based disciplinary mechanism in the prevention and punishment of pyramid selling activities.
The legal representatives, responsible persons, directly responsible supervisors, and other directly responsible personnel of legal persons or unincorporated organizations that organize or plan pyramid selling activities shall, for a period of three years from the date on which the penalty decision is issued, be prohibited from serving as legal representatives, responsible persons, directors, supervisors, or senior management personnel of any business entity. Relevant information shall be disclosed to the public and updated promptly.”
6 Article 9 of the Draft Amendment to the Regulation on the Prohibition of Pyramid Selling (2026 Draft for Comment) provides:
“Any of the following circumstances shall constitute pyramid selling activities:
(1) Where a natural person, legal person, or unincorporated organization recruits participants and requires the recruited participants to recruit other persons to join, and calculates and pays remuneration (including material rewards and other economic benefits, hereinafter the same) based on the number of persons directly or indirectly recruited by such participants, for the purpose of obtaining illegal benefits;
(2) Where a natural person, legal person, or unincorporated organization recruits participants and requires the recruited participants to pay fees or make disguised payments through methods such as purchasing commodities, in order to obtain the qualification to join or recruit other persons, for the purpose of obtaining illegal benefits; or
(3) Where a natural person, legal person, or unincorporated organization recruits participants and requires the recruited participants to recruit other persons to join, thereby forming hierarchical relationships between upstream and downstream participants, and calculates and pays remuneration to upstream participants based on the sales performance of downstream participants, for the purpose of obtaining illegal benefits. Online pyramid selling refers to the implementation of the aforementioned activities by natural persons, legal persons, or unincorporated organizations through telecommunications network technologies.”
7 Reference: See Note 3 above.
8 Article 32 of the Draft Amendment to the Regulation on the Prohibition of Pyramid Selling (2026 Draft for Comment) provides:
“Where natural persons, legal persons, or unincorporated organizations commit violations prescribed under this Regulation and satisfy statutory circumstances such as voluntarily eliminating or mitigating the harmful consequences of such violations, administrative penalties shall be imposed with leniency or reduction in accordance with the law. Where the violation is minor, promptly corrected, and has not caused harmful consequences, no administrative penalty shall be imposed.”
9 Reference: See Note 3 above.
10 Article 18 of the Draft Amendment to the Regulation on the Prohibition of Pyramid Selling (2026 Draft for Comment) provides:
“Where market supervision and administration departments or public security authorities investigate suspected pyramid selling activities, the investigated operators, interested parties, and other relevant natural persons, legal persons, and unincorporated organizations shall cooperate and truthfully provide relevant information or materials, and shall not refuse or obstruct such investigation.
Where market supervision and administration departments or public security authorities obtain or preserve evidence in accordance with the law when handling pyramid selling cases, telecommunications operators, internet information service providers, banking financial institutions, and non-bank payment institutions shall cooperate and provide technical support and assistance.”
11 Reference: “The Regulation on Direct Selling and the Regulation on the Prohibition of Pyramid Selling Not Included in the State Council’s 2026 Legislative Work Plan,” available at http://www.cdsp.com.cn/industry/?type=detail&id=32794 (last visited June 19, 2026).
12 Reference: Jing Sheng Hsu, “Regulations for the Prohibition of Pyramid Selling in China: Key Amendments (2026 Draft for Comment) & Compliance Guide for Foreign Companies Entering the Chinese Direct Sales Market,” June 2026, p. 9 (last visited June 19, 2026).
13 Pursuant to Article 2 of the Fraud Crime Hazard Prevention Act, the relevant industries include financial institutions, virtual asset service providers, telecommunications operators, online advertising platforms, third-party payment service providers, e-commerce operators, and online game operators, among others.
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