Laws of the People's Republic of China

the Ministry of Commerce

Circular of the Ministry of Commerce on Enhancing the Administration of Franchise Businesses

All provinces, autonomous regions, municipalities directly under the Central Government, municipalities directly under state planning, and the competent authority of Xinjiang Production and Construction Corps:

Recently, franchising has experienced rapid development in our country as a new mode of circulation and is becoming an effective method for expanding enterprise scale. Reality shows that franchising has played an active role in increasing consumption, enhancing the development of small and medium-sized enterprises, absorbing non-governmental capitals, and boosting employment. But because of a lag in relevant legislation and supervision, a handful of unlawful people have cheated in their business and impaired the interest of investors under the veil of franchising. For the purposes of further enhancing the administration of franchising businesses, regulating franchising activities, and promoting healthy and orderly development of franchising activities, the Circular on the relevant matters is issued as follows:

I.

Earnestly implementing the Measures for the Administration of Commercial Franchising, and enhancing the level and capability to administrate the franchise businesses according to law.

The Measures for the Administration of Commercial Franchising (hereafter referred to as "these Measures") is an important regulation on current franchising activities. "These Measures" has specifically prescribed the qualifications of the parties concerned, the franchising contract, information disclosure, advertising and promotion, supervision and administration, as well as the foreign-invested enterprises' participation in franchising and the legal responsibilities they need to take while involved with franchising activities. The promulgation and implementation of "these Measures" is the basis and guarantee for regulating commercial franchising, protecting the legitimate rights and interests of the parties concerned, promoting the healthy and orderly development of commercial franchising, and realizing the regularization and legalization of commercial franchising. The administrative departments of commerce at all levels shall enhance their understanding of "these Measures" and effectively organize the study and training for "the Measures" to guarantee the implementation of "these Measures". In the meanwhile, they shall take local conditions into consideration in their research for feasible supporting policies and specific procedures, and increase their level and capability to administer franchising activities according to law.

II.

Adhering to classified guidance and enhancing the supervision and administration of franchising activities

Franchise is enjoying fast development. It involves in many industries, and is comparatively difficult to supervise and regulate. Due to these characteristics, the administrative department of commerce at all levels shall, in accordance with the law of modern circulation development and in light of the present situation of the enterprise, stick to the principle of classified guidance, and shall administrate and give guidance to the society's franchising activities. Investigation and research shall be strengthened for the development of franchising in selective areas and enterprises in order to get first hand materials on these developments. Early-warning mechanism shall be established to identify unhealthy trend in time, and to implement dynamic administration for those enterprises with illegal activities. Cooperation with the industry and commerce administration, tax administration and public securities administration shall be strengthened. Any enterprises suspected of committing commercial fraud or conducting multi-level marketing or disguised multi-level marketing under the veil of franchising can be reported to the relevant authorities in time. The administrative department of commerce at all levels shall also be responsible for guiding the enterprises to increase their levels of management, gather development potential, and boost their expanding capacity.

The franchise development situation at different areas and a "Franchising Activities Questionnaire for the Year 2004" (see the attachment) shall be sent to the Department of Commercial Reform and Development of the Ministry of Commerce by the end of March 2005.

III.

Regulating franchise expositions to prevent commercial fraud committed through such expositions

Currently, various expositions are an effective platform for the promotion of franchise. But some unlawful people use the expositions as a means to commit illegal activities such as fraud and money collection. The administrative departments of commerce at all levels shall reinforce their supervision and administration over all kinds of franchise expositions. The organizers of the expositions shall strictly control the qualifications of the attendees to guarantee the legality of the enterprise attendee and the authenticity of their promotion. The relevant administrative department of commerce shall reinforce their administration over foreign economic and technological expositions related to franchising. Once an enterprise attendee has been found committing commercial fraud through the exposition, the relevant administrative department of commerce, together with the administrations for industry and commercial, shall investigate and prosecute the enterprise for its illegal activities.

IV.

Increasing publicity to create an environment conducive to the development of franchising.

Franchise business is still a new development in our country. Much is unknown about franchising for all parties concerned of our society. The administrative department of commerce at all levels shall intensify the publicity of franchising. They shall, through various channels and by various means, publicize the positive role of franchising in promoting the development of small and medium-sized enterprises and in increasing employment. This will help the society to better realize the importance of developing and regulating franchising. Websites, newspapers, and magazines shall be utilized to run special features on franchising, which shall emphasis on introducing the basic knowledge of franchising, foreign franchise legislation and development, and the situation of franchising in China; emphases shall also include commending franchisees that run their business by law, and exposing the franchisees that operate illegally. By combining the intensive publicities in franchising with the regular ones, the franchisees will be more conscious of the legality of their operation, and a healthy social environment conducive to the development of franchise will be created consequently.

V.

Fully utilizing franchise industry associations and enhancing self-discipline in the industry

In combination with the transformation of function of the government, the administrative department of commerce at all levels shall fully utilize the functions of franchise associations as the bridge and link between the government and the franchisees. The administrative department of commerce at all levels shall promote education, training and examples of commercial credit to emphasize the concept and consciousness of it, and to gradually establish a credit evaluation system for the franchising industry. They shall reinforce training in the franchise industry by utilizing all forms and means to train the personnel in the franchise industry, and to guide the franchisees to realize standardized and scientific management of their enterprises in order to enhance their core competitive power. Regulations, restrictions, and moral standard for the franchising industry shall be formulated in accordance with relevant laws and regulations. The industry associations shall be given full play to coordinate, serve, and supervise the franchise activities and shall enhance self-discipline in the industry so as to promote healthy development of the franchising industry.

Attachment: Franchising Activities Questionnaire(Omitted)

Ministry of Commerce

March 10, 2005