Betting on the Middle Kingdom

Macau recently overtook Las Vegas as the number one gambling economy in the world according to gambling industry insiders. Since the laws changed in 2002 to allow foreign casinos to enter Macau, their market has boomed. It doesn't take a Freakonomics guru to figure out Macau's simple strategy: growth. Slot machines are driving much of that increase.

Macau's secret formula has been to allow concessions to gaming providers which are carefully supervised by the Gaming Inspection and Coordination Bureau. In addition, Macau has developed a foreigner-friendly gaming statute. Since the concessions have been released from the sole control of Stanley Ho, the industry has exploded.

Macau's casino operators face a fairly steep tax rate of up to 40% to operate the gaming houses, but the volume has been sufficient to prevent the tax from being a toll booth to fast track.

Mainland China still forbids gambling and most recently cracked down on internet gambling similar to the US. Their gaming legislation seems to be at conflict with a cultural heritage that made gambling a sort of nation pastime.

While gambling is not available in most of Mainland China, it is possible that Hong Kong may be granted Macau-like casino rights. More importantly, hotel owners need to begin to consider creating new gaming properties as they expand to new Asian destinations. In addition, there are no international standards for either land-based casinos or I-casinos. Hotel owners and casino developers should retain competent gaming counsel before risking too much capital in an Asian gaming venture.

The Tao of Chinese Franchise Disclosure for Foreign Franchisors

Article 4 of the Commercial Franchise Information Disclosure Management Measures (“Disclosure Guidelines”) states that a franchisor must provide a written disclosure document to a prospective franchisee thirty (30) days before executing a franchise contract, unlike the current U.S. FTC Rule (“Rule”), the Chinese disclosure law provides a definite time frame of 30 days disclosure prior to executing the franchise contract. The disclosure must be in the written format covering the requisite components of Article 5 of the Disclosure Guidelines.

The elements required for Chinese disclosure purposes are similar to those franchisors already work with under the Rule. The biggest point of departure is that Section 8 of Article 5 requires Chinese franchisors to make mandatory earnings claims. The Chinese Disclosure Guidelines don’t mention whether a foreign franchisor’s earning results based on certain units in a given geographic area in the U.S. would be sufficient to satisfy the mandatory earnings claims requirement in China.

Local Beijing counsel seem to imply that earnings claims based on either company-owned units or franchised units will satisfy Section 8, as long as, an express disclosure is given that such data bears no market relevance to China and all earnings claims in formation was determined on a reasonable basis.

Hopefully, these new Chinese Disclosure Guidelines will offer a calming balance in what previously had been a chaotic regulatory system.

Gnomon and the circular paths of the Chinese “2+1” Rule

It is said by Chinese sources that as far back as 400 B.C. Chinese mathematicians had developed solution to many of mathematics most complicated problems by using physical rods called the “galley method.” One recent regulatory problem that needs to be solved by the Chinese government is the recently enacted “2 plus 1” disclosure rule under article 7 of the new Regulations of Commercial franchising of P.R. China (“Regulations”).

Under these Regulations, a franchisor is obligated to both register to franchise and provide disclosures to prospective franchises. Article 7 further requires that a franchisor must have two company-owned units in operations for more than one year before becoming eligible to franchise in China (commonly referred to as the “2 + 1” requirement).

The Regulations are painfully silent as to whether a foreign franchisor can satisfy the “2 + 1” requirement with units in operations in its home country. The ambiguous language of the Regulations could benefit the foreign franchisors unless the Chinese government establishes a clearly defined “within China” regulatory requirement.

Hopefully, this regulation can be properly clarified and it’s not back to the Chinese bamboo counting rods of the early Han Dynasty.

China Franchise Registration Procedures

Based on information provided by the Ministry of Commerce, a registering franchisor shall follow the following procedures sequentially to properly register.

Step 1
Obtain Username and Password to access the Ministry of Commerce official Website (获取登录号)

1. If franchising is to occur within the boundaries of provinces, autonomous regions, or municipalities, the franchisor or its agent may hand deliver relevant documents to appropriate registering agencies in the province, autonomous region or municipality to obtain username and password. Or, username and password may also be obtained if same documents are mailed to the appropriate registering agencies.

2. If franchising is to occur beyond the boundaries of provinces, autonomous regions, or municipalities, the franchisor or its agent may hand deliver relevant documents to the Department of Commercial Reform and Development located in Dongcheng District, Dong An Meng Dajie to obtain username and password. Or, username and password can be obtained if same documents are mailed to the same office.

Step 2
Sign In at the following URL http://txjy.syggs.mofcom.gov.cn/ (登录系统)

Step 3
Change Password (修改密码)

The initial password assigned to all franchisor are the identical numbers of 000000, so the system will automatically prompt a user to change its password.

Step 4
Fill in the forms and upload documents required under the Registration Guidelines (填报备案资料)

Upon completing the above 4 steps, click on “申报备案” to submit the data and files entered and uploaded.

It is that simple!