The "Pyramid Selling" That Should Not Be Punished - An Analysis of the Current Situation of Direct Selling Models on Social E-commerce Platforms Allegedly Involved in Pyramid Selling and Recommendations for Compliance

Abstract

Social e-commerce is an emerging and booming industry, within which direct selling serves as a common marketing model. Owing to unclear legal definitions and standards, weak awareness of corporate compliance, and immature reforms of corporate compliance systems, the direct selling model is susceptible to being misused for pyramid selling activities and criminal behaviors. Compliance for direct selling social e-commerce platforms should therefore not be postponed. The most controversial form of direct selling is multi-level direct selling, which is deemed a typical manifestation of pyramid selling in Chinese law due to its hierarchical structure, the requirement to expanding the subordinates, and team-based remuneration. Multi-level direct selling is, however, essentially a legitimate marketing model, offering advantages such as reduced marketing costs and increased employment. The law needs to be refined to better identify pyramid selling, distinguishing between legitimate direct selling and pyramid selling, and providing guidance for platforms to ensure compliance both pre-incident and post-incident. Platforms themselves must enhance their awareness of compliance, establish compliance manuals that meets their own needs, forbid swindle, and effectively deliver quality products and operations.