In recent years, China's large population and rapid economic growth have encouraged an increasing number of foreign franchisors to expand into China. In the early years, due to the absence of comprehensive franchise laws and regulations, the development of China's franchising industry was uneven; some franchisors provided low-quality goods/services to consumers, or even swindled money out of consumers and franchisees.
In order to better protect the legal rights and interests of franchisees and consumers, the Chinese government imposed registration and disclosure requirements on franchisors operating in the country.
According to the Regulation, a franchisor must, within 15 days after signing a franchise agreement for the first franchised location in China, file an application with the appropriate commercial authority in the MOC to register its franchise. The registration requirement is an administrative measure to regulate franchise activities, and also provides potential franchisees with public access to more information regarding the franchisor and its business.
Although the failure to register does not impact the effectiveness of the franchise agreement, a franchisor that fails to timely file the franchise registration could face a fine from the commercial authority ranging from 10,000 to 50,000 Chinese Yuan (CNY) (approximately US$1,600-8,000).
In connection with the franchise registration application, the following documents must be submitted:
· Business registration certificate of the franchisor.
· Registration certificate of the franchised IP right: Where the franchised trademark is not owned by, but instead is licensed to, the franchisor, the trademark license must first be recorded with the Chinese Trademark Office, and the franchisor must submit the certificate of trademark license issued by the Chinese Trademark Office with the franchise registration application.
· Franchise agreement: To comply with the requirements of the Regulation and relevant laws, the franchise agreement must include certain language regarding consumer protection, quality guarantee, and training, as well as several other matters. In addition, the agreement must also grant the franchisee a “cooling-off period” during which the franchisee can end the relationship without penalty. The term of the agreement must be at least three years; however, the franchisee can waive this requirement.
· Certification for the 2+1 Requirement: To meet this requirement, the franchisor must submit a certification from a competent commercial authority or franchising association (such as the International Franchise Association). The certification must contain information about the franchised brand; the opening date, address, and business scope of the two stores; and the relationship between the franchisor and the stores, all of which demonstrate that the franchisor (or, if applicable, its parent or subsidiary) has directly operated two stores operating the franchised concept under the franchise brand/marks for more than one year.
· Marketing plan for the franchised operation.
· Other documents required by the Regulation.
If there are any major changes to the original filing (e.g., changes concerning the business registration of the franchisor, business resource, and distribution of the Chinese franchisees), the franchisor must, within 30 days, file a notice and supporting documents with the MOC for modification of its franchise registration. An annual update regarding new franchise agreements and those terminated in the past year also must be filed with the MOC by March 31.
All certificates or documents generated outside of China must be notarized by a local notary public, legalized by a Chinese Embassy or Consulate and submitted to the MOC with a Chinese translation.
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