Workarounds for foreign investors in fast-growing advertising industry

By Nick Bai and Wang Ling, Concord & Partner
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Close on the heels of advertising powerhouses the US and Japan, China has now taken its place among the giants of the world’s advertising markets. To provide better policy support for the development of the domestic advertising industry, the Catalogue for Guiding the Adjustment of the Industrial Structure (2011 Edition) issued by the National Development and Reform Commission in June 2011 lists “advertising creativity, advertising planning, advertising design and advertising production” as an encouraged industry for the first time.

Pursuant to the Catalogue for Guiding Foreign Investment in Industry, revised in 2011, although advertising business still is not listed as an industry where investment is encouraged, it is no longer restricted or prohibited.

白念恩 Nick Bai 共和律师事务所 合伙人 Partner Concord & Partners
白念恩
Nick Bai
共和律师事务所
合伙人
Partner
Concord & Partners

Looking back at the evolution of the legislation governing foreign investment in the advertising industry, it must be acknowledged that, relative to other sectors with foreign investment, legislation and regulation seriously lags behind, and blank spots remain numerous. The work on revising the Advertising Law, promulgated in 1995, has not yet achieved a conclusive result.

The main legal basis for foreign-invested advertising enterprises is the Administrative Provisions for Foreign-Invested Advertising Enterprises, in addition to the basic regulations that generally apply to foreign investment. Foreign-invested advertising enterprises may take the form of Sino-foreign equity joint ventures, Sino-foreign co-operative joint ventures (advertising JVs) and wholly foreign-owned advertising enterprises.

The two main methods of foreign investment in advertising enterprises are direct investment and acquisition. Regardless of the method, investors should pay attention to satisfying the requirements of the administrative provisions with respect to the engagement in advertising business by, and the performance and term of operation of, advertising JVs and wholly foreign-owned advertising enterprises. There are no marked differences in the procedures for approving direct investment and acquisition.

A foreign investor may, to avoid difficult advance approvals, adopt the following workaround methods to achieve a foreign-invested advertising enterprise:

Domestic reinvestment

A foreign-invested enterprise may establish an advertising enterprise through domestic reinvestment, can directly carry out registration with the administration for industry and commerce of the place where the investee domestic advertising enterprise is located, and apply for the issuance of a business licence of a wholly Chinese-owned enterprise with legal personality, all without first being required to apply for the issuance of a permit to engage in advertising, or to secure the approval of the competent commerce authority.

Control by agreement

The term “control by agreement” refers to a series of contractual arrangements, e.g. management consulting and service contract, technical service agreement or loan and equity pledge agreement, established by a foreign investor through its wholly owned subsidiary in China and a domestic advertising industry business entity and/or its shareholders, where the contractual arrangements confer control over the operation and management of the advertising business entity and transfer its operating returns to the wholly owned subsidiary established by the foreign investor, and thence to the foreign investor.

Scope of business tips

In practice, the scope of business of certain foreign-invested consulting companies may be registered as “creative design and related consulting” (items requiring a design permit will be operated on the strength of the permit). Such a scope of business does not require securing advance approval for advertising operations from the administrative authority, but may to an extent satisfy a consulting company’s wish to engage in advertising design activities. However, the wording for ordinary design consulting operations is limited solely to the portion that involves providing advertising design creativity or concepts to clients. For entire advertising planning or design case work, it is still better to secure the required advance approval.

王凌 Wang Ling 共和律师事务所 律师 Associate Concord & Partners
王凌
Wang Ling
共和律师事务所
律师
Associate
Concord & Partners

Even though, in the course of the specific advertising business of an advertising enterprise, monitoring and examination from the communication authority, radio, television and film authority, or press and publication authority may be involved, the authorities mainly involved at the stage of acquisition by a foreign investor are the State Administration for Industry and Commerce (SAIC), or the provincial-level administration for industry and commerce authorised by it, and the competent commerce authority. The administration for industry and commerce is mainly responsible for examining the project proposal and feasibility study, and the competent commerce authority the contract for, and the articles of association of, the foreign-invested advertising enterprise.

For a foreign-invested advertising enterprise, additional attention may be focused on the following aspects:

An advertising enterprise wishing to engage in the commercial/ advertisement publishing activities of television stations, radio stations and newspaper/periodical publishers is required to first secure the appropriate administrative permission, or adopt some sort of workaround.

An advertising enterprise wishing to provide services from an advertisement publishing medium (location) such as the internet, internet protocol television, residential television or mobile television is required to secure the relevant value-added telecommunication service licence, or operating permit.

Based on its own requirements, a foreign-invested advertising enterprise may, with the administration for industry and commerce, add business wording related to the advertising industry to the model text for scope of business, for example, “provision of public relations consulting and business consulting services, and provision of planning services”, or “technology development, technical consulting and technical services in the multimedia sector”.

There is one more thing foreign investors should pay attention to, pursuant to the Provisions for the Review of Advertisements Published in the Mass Media issued by several ministerial-level authorities including the SAIC, in 2012.

All advertisement publishers bear a statutory obligation to examine advertisements. The enterprise is required to have advertisement examiners on staff, the person in charge of the advertising operation and management department is responsible for the re-examination of advertisements and the officer specifically in charge is responsible for the review of advertisements. Before an advertisement is published, the relevant supporting documentation for the advertisement needs to be checked and the content of the advertisement verified to ensure it is true and lawful.

Nick Bai is a partner and Wang Ling is an associate at Concord & Partners

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