Zhang Ting's 96 suites and other properties have all been unsealed, but whether the company is a pyramid scheme or not is still a mystery

Author/Xu Tan

The "Zhang Ting Dalwei Case", which has been boiling and controversial for more than two years, finally ended with the Market Supervision Bureau of Yuhua District, Shijiazhuang City, revoking the report of the case, returning 96 properties of Zhang Ting and his wife, and lifting the freeze of Dalwei's 300 million deposits. However, all the doubts and problems have not been resolved, but have been highlighted by the widespread impact of this case.

In fact, the Zhang Ting Dalwe case has brought great challenges to the current "Regulations on the Administration of Direct Selling". Dalwei company is not a licensed direct selling enterprise, but its underlying logic is a pyramid marketing model - multi-level dealer model, so the investigation and punishment of Dalwei is applicable to the current "direct selling management regulations"?

Direct selling companies naturally have the "original sin" - a pyramidal multi-level structure that cannot be abandoned, and Zhang Ting's Dalwei is a micro-business. Direct selling is a restricted format, while new retail formats such as micro-business and social e-commerce are encouraged by the state. Should Darwin, which is stepping on the two formats of direct selling and micro-business, be investigated or protected?

The "Zhang Ting case" is actually one of the most difficult cases to solve 18 years after the promulgation of the Direct Selling Law. It unveils the awkward situation of the current direct selling law and the urgency of reconstruction.

Tentative in the gray area of direct selling and MLM

If it weren't for a series of serious social security issues that demonized direct selling, direct selling is actually a very magical business model. It's just that there is a risk that it will get out of control, and the government is always wary of it.

Romance drama stars Zhang Ting and Lin Ruiyang founded the beauty brand "TST Court Secret" in 2013, and the operating company behind it is Shanghai Darwin Trading Co., Ltd., which became the tax champion in Qingpu District in 2018, with an annual tax payment of 1.26 billion yuan and a revenue of about 9.1 billion yuan from 2018 to 2021. There are more than 800 stores in the country, 7.66 million dealers, and the rapid development is eye-popping, in addition to Zhang Ting has leveraged a large number of film and television stars such as Tao Hong, Xu Zheng and his wife, Lin Chiling and other platforms to bring the brand effect, the important thing is that its underlying logic uses the model of multi-level dealers.

In 2021, some whistleblowers believed that the "TST Court Secret" had pyramid schemes such as pulling heads, paying entry fees, and team remuneration, and reported it to the Shijiazhuang Yuhua District Market Supervision and Administration Bureau. The Municipal Supervision Bureau of Yuhua District, Shijiazhuang City, replied with a verification letter: Shanghai Darwin Trading Co., Ltd. is suspected of using the Internet to engage in pyramid marketing activities, and in accordance with the "Regulations on the Prohibition of Pyramid Selling", the bureau opened a case for investigation on June 5, 2021 on suspicion of pyramid schemes. 96 properties owned by Darwin were also seized by the Yuhua District People's Court.

The first point that Zhang Tinglin Ruiyang and his wife can turn over depends on the fact that the current "Regulations on the Administration of Direct Selling" cannot crack the emerging business format.

This case is a huge shock to the current direct selling law.

On August 15, the State Administration for Market Regulation released a blockbuster news on its official WeChat: the State Administration for Market Regulation carried out a legislative survey on the revision of the "Regulations on the Administration of Direct Selling". This news made the entire direct selling industry ecstatic, as it meant the start of the re-revision of the Direct Selling Regulations.

It has been 18 years since the current Regulations on the Administration of Direct Selling came into force on December 1, 2005. For 18 years, the dropshipping industry has been in a state of dancing in shackles. Why?

In 2005, when the Regulations on the Administration of Direct Selling were promulgated, the differences and games between the government and enterprises finally failed to find a compromise point, and the commercial rules and essence of the world's direct selling industry, such as "team remuneration" (a system that distributes rewards based on the overall performance of the team) and "multi-level distribution", were finally not released. At the end of the day, businesses and governments have different demands. Enterprises pursue the maximization of economic interests, and the government's first consideration is social stability and no chaos.

The only thing that direct selling companies can do is to cut enough to fit the performance - transformation, such as turning dealers into employees, and turning dealers into employees at multiple levels. However, direct selling companies have never been able to abandon the core model of "multi-level" and "team compensation".

This has created a characteristic state of China's direct selling industry: widespread illegality and selective law enforcement.

If the promulgation of an industry law presents such a state, it not only damages the dignity of the law, but also damages the enthusiasm of the enterprise.

The typicality of Zhang's case lies in the fact that after 18 years of operation of the Regulations on the Administration of Direct Selling, one of the biggest challenges encountered is the rise of the Internet business format.

Under the wave of digital economy, a large number of micro-businesses, social e-commerce, and new retail formats have risen, and the underlying operating logic of many new formats is the logic of MLM - multi-level dealers, team remuneration, and more than 30% commission commission.

This has created a contradictory phenomenon, emerging e-commerce is a business format encouraged by the state, and direct selling is a restrictive business format because of the natural "original sin". Many micro-businesses are doing direct selling business with new retail vests, which makes many enterprises that have obtained legal direct selling licenses feel very unfair. In recent years, there has been a lot of demand in the industry for a reshuffle of the direct selling law.

What belongs to the category of innovation in the new retail model, which belongs to the category of transgression, how to define it, what kind of law applies, what kind of terms... All of these have become new issues.

"TST Court Secrets" is more like a loophole in the gray areas of direct selling and pyramid schemes, and these gray areas have undoubtedly become "reefs" and blind spots for future supervision. There is also an urgent need for the improvement of the direct selling law.

"Illegal Direct Selling" or "Illegal Direct Selling"?

In 2013, the government made a remedial move.

On November 20, 2013, the Supreme People's Court, the Supreme People's Procuratorate, and the Ministry of Public Security jointly issued the Opinions on Several Issues Concerning the Application of Law in Criminal Cases of Pyramid Selling Activities (hereinafter referred to as the "Opinions"), Article 5 of which stipulates that simple "team remuneration" pyramid marketing activities with the purpose of selling goods and based on sales performance shall not be treated as a crime; Pyramid marketing activities that formally adopt the method of "team remuneration", but are in essence "based on the number of recruited personnel as the basis for remuneration or rebates", shall be convicted and punished as the crime of organizing and leading pyramid marketing activities.

Hu Yuanjiang, executive director of the Direct Selling Committee of the China Health Care Association, believes that this actually divides pyramid schemes into two concepts: one is the multi-level fraud, which pulls people's heads, has high entry fees, harms the rights and interests of consumers, and harms the country's economic or financial order. One is the marketing type multi-level, product-oriented, with its own factory, the marketing model is designed at multiple levels, but it is not characterized by criminal cases, and violations are dealt with by the market supervision department. In fact, this has also loosened the restrictions on licensed enterprises and opened a window in the processing.

As early as 2005, the Avon model has become a model encouraged by the government, and the original intention of direct sales is to abandon stores, reduce intermediate links, and save advertising costs; Avon has done the opposite, adding stores and increasing operating costs, more like a retail business.

This conveys at least two of the government's intentions: to discourage "multi-layering" and to have shops and factories for businesses.

Later, leading companies in the direct selling industry, such as Amway, Nu Skin, Mary Kay, Perfect and Infinitus, all established their own physical factories and offline physical stores.

According to the 2013 Opinions, Zhang Ting and Lin Ruiyang's Dalwei Company was not found to be an illegal pyramid scheme and was not criminally filed, precisely because it had a physical factory, products, and stores.

Why did Shijiazhuang Yuhua District withdraw the case?

In the end, Zhang Tingdawei's case did not come out because the Shijiazhuang Yuhua District Market Supervision Bureau revoked the report.

In November 2022, the prosecution and defense held a fierce hearing, and the focus of the dispute between the two sides was: whether the Shijiazhuang Yuhua District Market Supervision Bureau had jurisdiction over Zhang Ting's case, the appraisal qualifications of the appraisal agency and appraiser involved in the electronic data report were questionable, and whether the report issued by it had evidentiary effect.

Zhang Tingfang's lawyer argued that Dalwei Company was an e-commerce operator relying on the "TST Court Secret" APP, website and other platforms, and should be under the jurisdiction of the Market Supervision Bureau of Qingpu District, Shanghai, where the company was domiciled, and the Market Supervision Bureau of Yuhua District, Shijiazhuang City, had no jurisdiction over the case.

"TST Court Secret" is a nationwide development format based on the Internet. In principle, the Shijiazhuang Yuhua District Market Supervision Bureau can investigate and deal with the violations in Yuhua District, but whether it should be filed with the State Administration for Market Regulation and approved and authorized by the State Administration for Market Regulation to investigate and deal with the issue of "TST court secrets" violating the law nationwide is a suspense in this case.

Zhang Tingfang's lawyer took the issue of jurisdiction as the core reason for appealing, and finally the Shijiazhuang Yuhua District Market Supervision Bureau withdrew the lawsuit.

According to the final verdict, the Yuhua District People's Court held that the "Notice of the State Administration for Industry and Commerce on Further Investigating and Dealing with Online Pyramid Schemes" stipulates that the investigation and handling of online pyramid marketing cases by the industrial and commercial and market supervision departments at the county and municipal levels should be reported to the provincial-level industrial and commercial and market supervision departments before or at the same time as the case is filed. Now that the report has been revoked, the Yuhua District People's Court no longer has the conditions to continue to implement preservation measures against the suspected online pyramid scheme funds in this case.

But in fact, it avoided whether Dalwei was a pyramid scheme or not.

Friendly business environment

The case dragged on for more than two years and was very controversial, and Zhang Ting and his wife caught up with a good time - the business environment was more friendly to individual industrial and commercial households and private enterprises.

In 2023, many local governments will continue to optimize the environment for the development of the private economy and expand the development of the private economy.

In the "improvement of the regulatory law enforcement system", more emphasis is placed on the development of compliance under effective supervision, rather than beating to death with a stick, reflecting the tolerance and progress of a society under the rule of law.

The introduction of some policies is a microcosm of the broader macroeconomic background. From the controversy to the final revocation of the Zhang Ting Darwei case, it was a result of the unperfected period of the Direct Selling Law and the implementation of macro policies.

"Tan Viewpoint" is a Sankei observation column produced by Tencent News and led by Xu Tan, a "media person + writer" - a more professional and interesting interpretation in the uproar.