24 Aug 2018 China legal update: GAS to Regulate Foreign NGOs’ Sports Activities in China
I. Legal News Review
GAS to Regulate Foreign NGOs’ Sports Activities in China
The General Administration of Sport (“GAS”), the government agency responsible for sports in China, has recently issues the Administrative Measures for Sports Activities Carried out by Foreign Non-governmental Organizations within the Territory of China (The “Measures”), which entered into force on the 20th of August 2018 and will be applied for 5 years.
According to the Measures, a foreign NGO that wishes to carry out sport activities in China shall establish a representative office in the country. If it is a temporary activity, then the NGO needs to file a record and obtain approval from the administration.
To apply for registering and setting up a sport representative office in China, a foreign NGO must meet the following requirements:
(1) Legally established abroad;
(2) Be able to independently bear civil liability;
(3) Carrying out public welfare activities in accordance with its purpose and business scope stipulated in its bylaws; and
(4) Established for more than two years overseas and carried out substantial activities.
If such an organization has not registered and set up a representative office in China, nor filed a record for temporary sports activities, it shall not carry out sports activities in China directly or in a disguised manner.
The MOJ Released the Implementing Regulations of the Law of the PRC on the Promotion of Private Education
On the 10th of August 2018, the Ministry of Justice (“MOJ”) published the revised draft of the Implementing Regulations of the Law of the People’s Republic of China on the Promotion of Private Education (“Draft for Review”), which is an update on the first draft for comments of the law released in April 2018 (“Draft for Comments”).
Draft for Review has been modified in 60 different places compared to the Draft for Comments, and there are now in total 68 articles in Draft for Review, whereas there were only 65 articles in Draft for Comments.
There are two important changes to notice between the two drafts:
(1) Article 5: Previously, in the Draft for Comments, enterprises with foreign investment established in China and social organizations with foreign parties as actual controllers are not allowed to sponsor privately-run schools providing compulsory education. However, in the updated Draft for Review, not only “Sponsor in privately-run schools providing compulsory education” is not allowed, “participate in the sponsoring of, or actually control privately-run schools providing compulsory education” are not allowed neither. This article triggers more concerns and results in a fall in stock price of overseas listed companies investing China education business1 as the Draft for Review closes the door for foreign investment in compulsory education business via contractual controls (Variable Interest Entities structures).
(2) Article 15: Special licenses are not requested for institutions engaged in non-academic qualifications, such as language training institution, art or sport training institution. However, there are areas (especially language training) where the distinction with compulsory education institution is to be further clarified in the future.
The SPC Distributed the Circular on Lawfully and Properly Adjudication of Private Lending Cases
The Supreme People’s Court (“SPC”) issued the Circular on Lawfully and Properly Adjudication of Private Lending cases (the “Circular”), a five pages document that was published on the 1st of August 2018. It comes as a complement to the Provisions of the Supreme People’s Court on Several Issues concerning the Application of Law in the Trial of Private Lending Cases (the “Application of the Law”).
The Circular states that even though private lending helps to satisfy diverse financing demands from the market, it has participated to the rise of new illegal activities, such as the crime of fraud by laying loan traps. Thus, when assessing the legality of private lending the court will not only look at the payment and loan receipts, but it will also assess the source of payments, trading practices, economic capability, asset variations, the relation between litigants, and statements of litigants, to comprehensively determine the truth of lending.
The Circular also reminds that private lending is strictly prohibited from exceeding the annual interest rate of 36% provided in the Application of the Law.
II. Hot Topic
Chinese E-Commerce Company, Pinduoduo, Under Investigation Over Reports of Fake Goods
Pinduoduo (拼多多) was founded in September 2015 and is today the third largest ecommerce platform in China, behind Alibaba’s Tmall and Jingdong. It enables users to receive steep discounts on products if they invite enough friends to join them in buying. This feature has made it popular among budget shoppers in China. According to its records, there would be 350 million people who shopped on the platform last year. The company is backed by Tencent (a fierce competitor of Alibaba) and was created by Collin Huang, a former Google employee.
A fantastic 3 years growth led to Pinduoduo’s registration on the NASDAQ stock market with an Initial Public Offering (IPO) that amounted to 1.63 billion USD, making it the second-biggest U.S. listing by a Chinese firm behind Xiaomi.
However, shortly after its listing, in August 2018, the Chinese State Administration for Market Regulation opened an investigation because of Pinduoduo’s illegal practices, such as the failure to remove listings featuring counterfeit goods. On the Chinese internet, online jokes spread on the Pinduoduo’s market place resembling products from firms such as Coca-Cola Co, Apple Inc or Samsung Electronics Co Ltd. These products being referred as “Shanzai”, a term used to refer to look-alike products featuring misspelled names of big brands.
Following the announcement of the investigation, Pinduoduo’s shares fell, while those were worth 27 USD on the first day of trading, shares were worth less than 19 USD on august 22nd. Because of this loss, 7 law firms, including Rosen Law Firm, Pomerantz LLP, Glancy Prongay & Murray LLP, Law Offices of Howard G. Smith, Faruqi & Faruqi LLP, The Schall Law Firm, and Bronstein and Gewirtz & Grossman LLC, announced they may fill a class-action law suit. The law firms argue that Pinduoduo’s withheld information and that its involvement in illegal activities have misled their clients into buying shares. On the 21st of August 2018 Pomerantz LLP officially filed a class action lawsuit against the Chinese company.
So far, Pinduoduo’s representatives have stated that “we did a lot of work but are still far from meeting society’s expectations”, but also that “this is an industry wide problem and it’s unrealistic to ask 3-year old Pinduoduo to solve it. We’re just not capable. We’ll take it a step at a time, starting with the TV and the baby formula complaints”. Pinduoduo’s situation isn’t without similarities with the problems experienced by Alibaba’s Taobao platform, which has long been accused of being a market place for fake products.
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