The FTC and MLMs: How the Digital Age Exposes Regulatory Gaps

As social media has rapidly developed over the past two decades, so has its effect on multi-level marketing (MLM) companies. While MLM recruiters were once constrained to in-person pitches at living-room parties, today's age of viral, short-form content means that videos making extravagant earnings claims and promises of lavish lifestyles may be shown to millions of unsuspecting users by the algorithm on a whim. [1] This reach has not gone unnoticed, with reports of social media-initiated fraud and deception increasing 18-fold in recent years while the number of Americans participating in MLMs has officially overtaken the number of Uber and Lyft drivers combined. [2]

In January 2025, the Federal Trade Commission voted 3-2 to publish three new proposals designed to target deceptive practices in the MLM industry. [3] These proposals face significant challenges, though, as The MLM industry of today has been fundamentally transformed since existing regulations were first established in the 1970s. [4] Social media, though not the genesis of predatory MLMs, has accelerated the scale and speed of recruitment, invalidating many of the assumptions underlying old regulations and new proposals alike. [5] Without reforms that directly confront the realities of digital recruitment, the 2025 proposals risk becoming a set of guideposts for MLMs to work around rather than meaningful constraints on their practices. [6]

I. The FTC’s Existing Regulatory Framework

Implementing and enforcing regulations on MLMs is primarily the responsibility of the Federal Trade Commission (FTC), which is mandated to “protect the public from deceptive or unfair business practices” under Section 5 of the Federal Trade Commission Act (FTCA). [7] In the context of MLMs, companies are challenged when they are suspected of misrepresenting earning potential, member success rates, or the structure by which compensation occurs. [8] Importantly, if compensation occurs primarily through recruitment rather than retail sales, this is a tell-tale sign that an MLM may actually be an illegal pyramid scheme. [9]

This distinction was first outlined in FTC v. Koscot Interplanetary, which found that Koscot profited by requiring participants to pay for the right to recruit new members, rather than by selling the product to a final consumer. [10] Four years later, in FTC v. Amway Corp., the Commission articulated safeguards for consumers, including buyback policies and retail sale requirements. [11] In practice, however, the FTC’s defeat in this case effectively created guideposts that made it easy for companies to satisfy formal criteria while still fundamentally relying on recruitment-driven incentives. [12] The resulting regulatory framework thereby functioned less as a constraint on dubious MLM practices than as a blueprint on how to remain legally compliant.

The FTC’s 2012 Business Opportunity Rule illustrates this pattern further. In theory, this rule requires that, before investing in an MLM, prospective buyers be provided with formal documents including income and earnings disclosures, litigation history, and refund policies. [13] However, because there is a $500 prerequisite for this rule, many MLMs simply keep their starter kits under this threshold. For example, prominent MLM, LuLaRoe, charges exactly $499 for its starter pack. [14] This regulatory oversight leaves prospective members without the disclosures the rule was meant to guarantee, and demonstrates that the framework for regulating MLMs was compromised even before social media arrived. [15]

II. The 2025 Proposed Reforms

The FTC’s 2025 Notices of Proposed Rule Making (NPRMs) recognize these structural gaps and aim to address them with three main proposals. [16] The first would expand the Business Opportunity Rule to bar unsubstantiated material representations about earnings. [17] Under the revised rule, sellers would be required to provide evidence supporting their claims to consumers upon request. [18] The second proposal would establish an MLM-specific earnings claim rule, prohibiting misleading earnings claims in promotional materials, and would bar recruiters from referring to MLM business opportunities as “employment.” [19] The third, not yet out of its public comment phase, would require a waiting period before formally paying to join an MLM. [20]

Critics, including the Direct Selling Association, have spoken out in response to these proposals, arguing that they undermine the First Amendment rights of distributors and risk harming legitimate direct sellers. [21] However, as established in the fallout of the landmark Supreme Court case, Central Hudson Gas & Electric Corp v. Public ServiceCommission, the First Amendment does not extend to commercial speech that misleads the public. [22] Therefore, the question is not whether MLM distributors have a right to promote their business, but whether the claims made in pursuit of this cross over into deceptive territory. Given the FTC’s well-documented evidentiary record of misleading income claims made across the MLM industry, the constitutional case against these proposals may be weaker than some critics suggest. [23]

III. Structural Gaps Persist

While these proposals are the most substantive updates to MLM regulation in decades, they still fundamentally assume a world of in-person product pitches and ignore the unique challenges that the age of social media imposes. [24] Each proposal broadly regulates the act of sellers making misleading representations to prospective participants. However, in a world where distributors may be located across the globe and across a variety of social media platforms, companies are able to create legal distance between themselves and their sellers, thereby avoiding legal repercussions. In FTC v. Neora, LLC, the court found Neora not liable for misleading earnings claims made by its Brand Partners across Instagram and Facebook. [25] Most of Neora’s distributors were laypeople who had received no guidance from the company regarding the dubious legality of their claims. [26] The proposals do not resolve this issue and instead assume that there is a distinct moment at which a seller’s claims can be identified and documented. [27] As long as companies can push responsibility onto their distributors and distributors can then claim ignorance, MLMs will continue to benefit from such claims while bearing no legal responsibility for them. [28]

Second to the problem of attribution and legal distancing between companies and their sellers is the issue of promotional materials. While the Earnings Claim Rule would prohibit misleading or unsubstantiated claims from being included in such materials, the rule assumes that promotion is occurring through straightforward channels like pamphlets on company websites or paid advertisements. [29] Today, where lifestyle content creators and micro-influencers document their daily lives, it can be hard to decipher whether an MLM distributor thanking her company for giving her financial freedom is organic and genuine, or whether it is a purposefully deceptive attempt at promotion. Furthermore, while the rule would require companies to list income disclosure statements on their website, this does little to combat misinformation in real time. [30] The FTC’s Operation Income Illusion campaign confirmed this. [31] By the time the FTC had sent warning letters to distributors for their deceptive advertising, the content had long reached and affected its intended audience. [32]

Lastly, even if the FTC’s proposed regulatory updates were sufficient, the Commission’s ability to enforce such regulations has been increasingly hamstrung in recent years. In the 2021 case, AMG Capital Management v. FTC, the Supreme Court ruled that the FTC does not have the authority under §13(b) of the FTC Act to seek equitable monetary relief. [33] This significantly limits the Commission’s ability to impose meaningful monetary fines on companies found in violation of the law. Without financial consequences in place to deter MLMs, the FTC’s 2025 proposals risk repeating the fallout of their Amway case back in 1979: at best, lukewarm consequences become the cost of doing business, and at worst, rules become a guide on how to satisfy legal minutiae while undermining their intended purpose. [34]

Conclusion

The FTC’s 2025 proposals are the most significant regulatory update to MLM oversight in decades. Yet  they still operate within a framework originally drafted for a world of in-person recruitment where claims and promotional materials were more easily identifiable, not for today’s algorithmically-powered industry with its vast networks of semi-autonomous distributors. Legal scholars and consumer advocates have proposed reforms that go beyond the current proposals, such as restoring the FTC’s equitable monetary relief authority under §13(b), requiring companies to bear greater responsibility for the claims made by their distributors, and prohibiting the use of gag clauses in MLM contracts to enable participants to speak up about their experiences. [35]

However, not all agree that this kind of structural reform is necessary. Industry representatives and some legal commentators argue that the 2025 proposals, in tandem with enforcement by individual states, is sufficient to address the harmful practices of the industry’s bad actors without imposing undue burdens on legitimate companies and their sellers. [36]

Whether the 2025 proposals will be adopted remains an open question. Should they be implemented, their adequacy will depend on whether the FTC can meaningfully enforce rules in a digital environment that has fundamentally changed the MLM industry. Proponents of stronger regulation argue that without more fundamental legislative intervention, MLMs will continue to outpace the mechanisms designed to constrain them. Critics counter that overly restrictive rules could harm legitimate businesses and stifle entrepreneurial opportunity. Either way, the outcome will test whether incremental regulatory updates can effectively govern an industry transformed by digital technology, or whether more fundamental reforms will ultimately be required. 

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Sources

1. Abramson, Corey, Erin E. Leahey, and Krista Marie Frederico. “She Works Hard for No Money: Understanding Women’s Participation in Multi-Level Marketing Organizations.” Dissertation, University of Arizona, 2020. https://repository.arizona.edu/bitstream/handle/10150/642205/azu_etd_18167_sip1_m.pdf?sequence=1&isAllowed=y.

2. Federal Trade Commission. “Social Media a Gold Mine for Scammers in 2021.” Federal Trade Commission, March 12, 2025. https://www.ftc.gov/news-events/data-visualizations/data-spotlight/2022/01/social-media-gold-mine-scammers-2021.

3. Federal Trade Commission. “FTC Proposes Rule Changes and New Rule to Deter Deceptive Earnings Claims by Multilevel Marketers and Money-Making Opportunity Sellers.” March 12, 2025. https://www.ftc.gov/news-events/news/press-releases/2025/01/ftc-proposes-rule-changes-new-rule-deter-deceptive-earnings-claims-multilevel-marketers-money-making.

4. Roberts, Alexandra J. “Multi-Level Lies.” SSRN Electronic Journal, January 2024. https://doi.org/10.2139/ssrn.4686468.

5. Ibid.

6. Kelley, Theresa J. “Girl-Bossing Too Close to the FTC Regulations: How MLMs Avoid FTC Enforcement Actions and the Need for More Stringent Regulation.” Hofstra Law Review 51, no. 1 (2022): 16.

7. Federal Trade Commission Act, 15 U.S.C. § 45(a)(1) (2022).

8. Ibid.

9. Federal Trade Commission. “Business Guidance Concerning Multi-Level Marketing.” April 30, 2024. https://www.ftc.gov/business-guidance/resources/business-guidance-concerning-multi-level-marketing.

10. In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1180 (1975).

11. In re Amway Corp., 93 F.T.C. 618 (1979).

12. Ibid.

13. 16 C.F.R. § 437.2 (2025).

14. LuLaRoe. “Onboarding Packages.” Accessed February 17, 2026. https://join.lularoe.com/onboarding-packages.

15. Roberts, Alexandra Jane. “Multi-Level Lies.” SSRN Electronic Journal, 2024: 2350, https://doi.org/10.2139/ssrn.4686468.

16. Marcus, Phyllis H. “FTC Issues Three Notices for Changes to the Business Opportunity Rule and a New Rule on Multi-Level Marketing (MLM) Practices; Proposed Rules Face Uncertainty under New FTC Chair.” The National Law Review, January 22, 2025. https://natlawreview.com/article/ftc-issues-three-notices-changes-business-opportunity-rule-and-new-rule-multi-level.

17. Ibid.

18. Ibid.

19. Ibid.

20. Ibid.

21. Direct Selling Association. “Letter to Federal Trade Commission: Business Opportunity Rule ANPR, Project No. R511993.” January 31, 2023. https://www.dsa.org/docs/default-source/advocacy-resource-page/final-dsa-business-opportunity-comments-01-31-23.pdf.

22. Central Hudson Gas & Electric Corp. v. Public Service Commission, 447 U.S. 557 (1980).

23. Federal Trade Commission. “FTC Staff Issue Report on Multi-Level Marketing Income Disclosures.” July 31, 2025. https://www.ftc.gov/news-events/news/press-releases/2024/09/ftc-staff-issue-report-multi-level-marketing-income-disclosures.

24. Fanning, Siobhan. “Pyramid Schemes and Pipe Dreams.” Northeastern Law Magazine, July 31, 2025. https://magazine.law.northeastern.edu/summer-2025/pyramid-schemes-and-pipe-dreams/.

25. Roberts, “Multi-Level Lies,” 2.

26. Ibid.

27. Fluegel, Sabrina, and Kendall King. “#workfromhome: How Multi-Level Marketers Enact and Subvert Federal Language Policy for Profit.” Language Policy 21, no. 1 (July 3, 2021): 121–54. https://doi.org/10.1007/s10993-021-09589-x.

28. Ibid.

29. Ibid.

30. Ibid.

31. Practical Law Commercial Transactions. “FTC Announces New ‘Operation Income Illusion’ Actions Against Companies Offering Deceptive Income Opportunities.” Thomson Reuters. Accessed March 16, 2026. https://content.next.westlaw.com/practical-law/document/I34670f55414511ebbea4f0dc9fb69570.

32. Ibid.

33. AMG Capital Management, LLC v. Federal Trade Commission, 593 U.S. 67 (2021).

34. Roberts, “Multi-Level Lies,” 16.

35. Levine, Samuel. “Freedom to Earn, Freedom to Speak, and Freedom to Compete: Protecting MLM Workers in a Perilous Economy.” Yale Journal on Regulation, June 21, 2025. https://www.yalejreg.com/nc/freedom-to-earn-freedom-to-speak-and-freedom-to-compete-protecting-mlm-workers-in-a-perilous-economy-by-samuel-levine/.

36. Direct Selling Association, Letter to Federal Trade Commission, “Business Opportunity Rule ANPR.”