Exposing New Scams in the LED Lighting Industry: Caution Advised When Becoming a Franchisee

According to incomplete statistics, more than 10,000 lighting and luminaire enterprises are currently operating in Guzhen. Faced with dazzling lighting stores and all kinds of lighting brands, how can newcomers who have neither experience nor resources distinguish legitimate franchise brands and avoid franchise scams?

Through interviews with industry experts and well-known entrepreneurs, the author learned that legitimate franchise brands and franchise scammers can be distinguished in the following ways.

The simplest way to distinguish legitimate franchise brands from franchise scammers is to check on the official website of the China National Trademark Office whether the brand's trademark is a legally registered trademark. Because if a franchise brand's trademark is not a legally registered trademark, the rights of the brand holder cannot be protected by law. If the brand holder's own rights are not protected by law, how can the holder protect the rights of its franchisees? How can there be any talk of exclusive operating rights? Simply put, even if the company is not a scammer, if you make this brand successful and a competitor across from your store copies the same storefront and brand name, then sells similar products at a lower price or through other vicious competitive methods, what can you do? There is absolutely nothing you can do. They can easily bring down this so-called brand without bearing any legal liability.

Therefore, legitimate franchise brands typically possess trademarks successfully registered in China; whereas the brands of franchise scammers are usually unregistered trademarks, or they present so-called international brand authorization certificates to deceive franchisees into believing that their brand is a trademark registered abroad that does not need to be registered in China. In fact, these so-called international brands have never obtained trademark registration in China, or do not exist at all; and any trademark that has not been successfully registered in China is not protected by Chinese law.

It should be noted here that the circled ® symbol indicates that the trademark has been applied for registration with the National Trademark Office and has passed review, has been successfully registered as a trademark, and is protected by Chinese law; the TM symbol only indicates that the brand holder has submitted an application to the National Trademark Office and obtained the "Acceptance Notice" from the National Trademark Office, entering the review stage and public notice period, and does not indicate that the brand has been successfully registered as a trademark, nor is it protected by Chinese law. Please do not treat the trademark application acceptance notice as certification of successful trademark registration — these are two completely different things.

2. Advertising Channels and Content

Legitimate franchise brands promote their franchise opportunities to distributors within the industry through legitimate industry media. The advertising content is reviewed by the media, is relatively pragmatic, makes cautious promises, and avoids exaggeration; whereas franchise scam companies rely entirely on mass media to promote their franchise opportunities to novice entrepreneurs outside the industry. Their advertising content vigorously promotes industry trends, exaggerates industry profits, makes numerous false promises, and claims that franchise operations carry zero risk.

Here, it is recommended that novice entrepreneurs first familiarize themselves with advertising law before choosing a franchise brand. If a franchise brand disregards advertising law, bragging wantonly and making exaggerated promotions, just imagine — how could a company that dares to violate advertising law possibly comply with contract law?

Legitimate franchise brands typically reach out by phone to lighting dealers who are already operating stores, through channels such as the Lighting Bible or the Lighting Dealer Directory, and usually do not actively invite novice entrepreneurs outside the industry. Franchise scammers, on the other hand, only make phone invitations to novice entrepreneurs outside the industry, eagerly promising to reimburse various expenses in order to lure entrepreneurs to visit for inspection.

Legitimate franchise brands may reimburse travel and accommodation expenses only when hosting large dealer conferences, and typically do not promise to reimburse travel expenses to individual franchisees who have not yet reached a cooperation agreement.

Legitimate franchise brands generally must own two to three direct-operated stores. In the local area or surrounding regions of the brand headquarters, there will be direct-operated stores or franchised stores that are already operating normally. The brand headquarters will also try its best to provide contact information of other franchised stores to facilitate on-site inspections by new franchisees. Franchise scams usually only have one headquarters store, with very few franchised stores in the local area or surrounding regions. When a franchisee requests to inspect franchised stores that are operating normally, the business development manager typically will not provide contact information of franchised stores in surrounding areas to facilitate the franchisee's inspection, nor will they provide any phone contact information of other franchised stores. Instead, they will give a contact address of a franchised store in a distant location to prevent the franchisee from going to inspect and learn the truth. Alternatively, they may provide pre-recorded and edited on-site videos and interviews of franchised stores for new franchisees to watch for reference. In fact, most of these pre-recorded and edited videos are shot by hiring "franchise shills."

Of course, with the upgrading of franchise scam tactics and the mixing of various interests, franchisees should also be cautious and beware of early franchisees who are eager to recover their losses and cooperate with scam companies to brainwash new franchisees who come to inspect, in order to lure them into joining.

V. Production Factory

Although more and more brand operating companies now implement production outsourcing models, with professional OEM manufacturers producing on their behalf, no longer building their own production factories, legitimate franchise brands, even if they don't have their own production factories, will have stable OEM manufacturers, and will have signed a series of agreements and written documents with the OEM manufacturers, such as OEM manufacturing agreements, exclusive mold design drawings, goods transportation documents, payment settlement documents, etc. Franchise scam companies, on the other hand, mostly do not have stable OEM manufacturers, and usually do not sign formal OEM manufacturing agreements with temporary partner manufacturers, nor do they have related written document exchanges.

If the franchise brand claims to have a production factory, then regardless of circumstances, you must visit the factory. When visiting the factory, pay attention to details such as whether the factory has a formal signboard hanging, whether there are corporate culture slogans with the corresponding brand logo hanging inside, whether workshop employees are wearing work uniforms with unified brand logos, whether there are exclusive molds for the brand, etc. You can also learn the true identity of the factory by privately chatting with frontline production workers in the workshop.

VI. Conditions and Restrictions

Legitimate franchise brands usually set conditions and restrictions for franchisees beyond financial thresholds, such as business philosophy, business experience, industry connections, store size, decoration level, etc., as well as whether the brand already has signed franchisees in the local area. If so, they will refuse new franchisees from opening additional stores in the same area. Franchise scammers, on the other hand, generally only try their best to lure you into joining, without caring whether your operational capabilities meet the standards, whether you have relevant industry experience, or whether you might damage the brand's local reputation. Apart from setting financial thresholds, franchise scammers will use false promises such as "zero-risk franchise," "free training," and "free on-site guidance" to strongly encourage you to join.

Legitimate franchise brands may also provide corresponding free training or on-site guidance, but they arrange dedicated training personnel to conduct targeted training. Franchise scammers, on the other hand, usually provide a generic training CD for franchisees to study on their own.

VII. Product Quotes

If the franchise brand cannot provide a written quotation, but tells you that you can only check the prices on its designated website, you can basically determine that the company is a franchise scammer. In addition to providing a quotation with detailed product model, specification, and size, legitimate franchise brands usually also indicate the price validity period and stamp it with the company seal.

8. Contract Content

Since the state has established specialized "Commercial Franchise Management Regulations" to regulate the chain franchise industry, and requires brand trademark holders to register through the Commercial Franchise Information Management System established by the Ministry of Commerce before they can engage in chain franchise business. Therefore, in the use of contract names and contract terms, franchise fraud companies, in order to evade regulatory supervision under these franchise management regulations, typically replace key terms such as "franchise," "franchisor," "join franchise," and "franchisee" with other synonymous terms, such as changing "joining the XX brand franchise" to "joining the XX brand," "franchise rights" to "exclusive distribution rights," and so on.

At the same time, franchise fraud companies will use a large number of ambiguous and controversial terms in contracts, without providing written explanations for these terms. Examples include: national unified price, market price, value, etc., which are only verbally explained by the investment promotion manager.

9. Ordering

Although legitimate franchise brands set certain quota requirements for the first order, for blank market areas, if the franchisee applies to temporarily not sign a franchise contract and to place a small order for trial sales first, they will usually consider accepting ordinary distribution cooperation. However, since franchise fraud companies have no guarantees regarding product supply, quality, delivery time, etc., and have no cost advantage in pricing, they typically reject the franchisee's trial sales request and strongly entice the franchisee to invest in the franchise in one go.

After the order is completed, a legitimate franchise brand will issue a written order form on the spot and hand it to the franchisee, clearly specifying the product model, specifications, price, and delivery date. When the goods are shipped, a separate delivery note will be sent along with the shipment. In contrast, a fraudulent franchise company, to avoid leaving evidence, will falsely claim that the order form will be shipped together with the goods. In fact, an order form and a delivery note are two entirely different things.

10. Other

Although meeting all the characteristics of a legitimate franchise brand does not necessarily mean it is not a scam, if multiple characteristics matching those of a fraudulent franchise are present, one should immediately raise vigilance and proceed with caution. For novice entrepreneurs, in addition to using the methods above to identify legitimate franchise brands and franchise scams, they should also possess some basic business qualities and adhere to their principles in business activities, and must not become complacent and overlook key requirements due to the temptation of small benefits.

1. Reject the mentality of getting rich overnight or seeking to become wealthy quickly, and firmly resist the temptation of small bargains. While seeing a pie falling from the sky, one should also see the trap dug on the ground.

2. Do not overly trust advertising promotion and one-sided introductions from the parties involved; large investments should undergo careful consideration and comparison, and one should consult industry insiders, government industrial and commercial departments, industry associations, or seek advice from familiar and reliable friends with industry experience.

3. Before joining a franchise brand, you should search the internet using the keywords "brand name/project name + scam/fraud." As the saying goes, flies don't bother with seamless eggs—you should be highly vigilant about brands and companies with numerous negative reviews, and should not easily believe excuses like "those posts are competitors deliberately spreading rumors and slandering us online." With current internet technology, any false rumors and defamation can be traced back to the poster through their IP address and result in lawsuits. No legitimate company would tolerate competitors posting large amounts of false rumors and defamation online without initiating legal action to defend their rights and seek compensation.

4. For quotations from franchise brand companies, you must request written quotations with detailed notes on product models, dimensions and specifications, and request the official company seal whenever possible. Do not trust verbal quotations or online quotations.

5. When signing a contract, you should carefully read all contract terms. For any ambiguous wording, you should request sufficient written explanations in the contract. When signing, you should require the other party to bring their official company seal to the signing site to prevent them from taking away the confirmed contract and substituting a different one. At the same time, you should require the other company's legal representative and signing representative to provide the originals and copies of their personal ID documents. As for the signing representative (typically a business development manager), since they obtain limited benefits from franchise scams and to avoid being held legally accountable after the scam is exposed, they usually are unwilling and也不敢 (do not dare) to reveal their true personal identity.