Three key legal and regulatory threats facing the channel.
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Direct sales and MLM companies face an evolving landscape of legal and regulatory challenges that impact how they operate, recruit and promote their businesses. Notably, the Federal Trade Commission (FTC) continues to modify its playbook in the aftermath of AMG Capital Mgmt., where the Supreme Court limited the commission’s enforcement resources. Below are three external threats companies may face in 2026.
Online Enrollment Practices
One of the new FTC methods of attack is targeting MLM online enrollment processes. In FTC v. International Markets Live, et al (filed May 1, 2025), the FTC alleged that the company’s enrollment screen did not include all terms of the agreement or any mention of the contract term, auto-renewal provision or provisions advising consumers on the actions required to cancel the agreement.
The FTC alleged that material terms of the transaction were disclosed in an “easily overlooked” page on the company’s website. According to the FTC, the company’s failure to “clearly and conspicuously” disclose all material terms before obtaining the consumer’s billing information is an unfair and deceptive practice in violation of Section 5(a) of the FTC Act as well as a violation of the Restore Online Shoppers’ Confidence Act (“ROSCA”).
It’s critical that all contract terms be provided for review to a prospective participant and that the participant expressly consents to those terms prior to payment. If a company utilizes a separate Policies and Procedures (P&P) document, it is not sufficient to incorporate it by reference in the online terms and conditions. You must provide the complete document for review during the enrollment process. Similarly, if companies use hyperlinks to reference other documents during the online enrollment process (including P&P), the enrollment platform should be programmed to require the applicant to review and agree to the terms of the other documents before processing the enrollment.
Increased Scrutiny of MLM Earnings Claims
The FTC’s proposed Earnings Claim Rule seeks to impose a higher standard on direct sales/MLM companies than other industries. Most businesses are permitted to discuss potential earnings if such claims are truthful and not misleading. The FTC’s proposed rule goes further by requiring MLM companies to have written substantiation to back up any earnings claim and make that substantiation available to consumers upon request.
In addition, FTC has sought public comments on whether additional requirements should be included with the new rule, such as whether there should be a waiting period before a recruit pays any money to join a company.
The status of the new Earnings Claim Rule is uncertain, but the FTC’s view of MLM earnings claims is not. The FTC’s 2024 Staff Report on MLM Income Disclosure Statements encompassed a review of 70 Income Disclosure Statements (IDS) published by MLM companies. It did not find even one IDS to be compliant.
In recent enforcement actions, the FTC has expanded investigation of earnings claims to include how companies monitor and enforce policies against deceptive earnings claims. In FTC v. International Markets Live, the FTC characterized an internal compliance program as “a façade” because the company did not follow its own “Three Strikes” compliance policy. Further, the FTC alleged that the defendant company “continued to violate the law despite FTC warnings” because the company was one of hundreds that received the FTC’s Notice of Penalty Offenses Concerning Money-Making Opportunities in October 2021.
To reduce risk of regulatory exposure, companies should regularly publish an IDS that—at a minimum—discloses the median earnings of all participants, including those that earned no income in the reporting period. Even though participant expenses are not maintained or recorded by companies, the IDS should provide information about known or quantifiable participant expenses. Further, companies should survey participants to obtain expense information and include that information in the IDS. The IDS should be published at least annually and be easily accessible to the public. Companies must also be able to demonstrate a robust compliance program. A written compliance policy is not sufficient. Companies should be able to demonstrate that they enforce their compliance policies and terminate repeat offenders who make improper earnings claims.
Evolving Definition of Pyramid Schemes
The FTC’s updated Business Guidance Concerning Multi-Level Marketing sets forth a new subjective definition of pyramid scheme that varies markedly from the Koscot definition of a plan that awards compensation to participants “primarily based on recruitment.”
Now, the FTC attempts to distinguish a lawful MLM compensation structure from a pyramid scheme based on how the compensation plan “incentivizes participants, including the rights the compensation plan offers to participants.” This subjective interpretation seeks to expand the definition of pyramid scheme to cover compensation structures where earnings are generated based on recruitment of sellers that make sales to non-participant consumers.
This new interpretation was advanced by the FTC in its recent enforcement action against Neora. In FTC v. Neora, the FTC argued that the focus in a pyramid scheme analysis should not be on rewards (or payments) that program participants actually receive—the focus should be on the rewards/payments that participants have a right to receive.
The FTC argued that the court should ignore what is happening in the operation of a company’s compensation plan—which could be perfectly legal—and instead focus on abstract evidence of what could theoretically happen based upon the FTC’s subjective interpretation of how a particular company’s MLM compensation plan might work.
The FTC’s new position is that the amount of money paid to the company by program participants is irrelevant under Koscot, whereas the money the company pays out to participants is the only relevant consideration.
This position is at odds with the position the agency has taken in prior enforcement actions. In FTC v. AdvoCare International, LP, the crux of the FTC’s pyramid scheme allegations was the fact that AdvoCare encouraged its participants to purchase large volumes of products regardless of retail demand. A primary focus of the FTC’s complaint about AdvoCare’s compensation structure was the fact that a high percentage of the company’s revenues were generated from purchases by AdvoCare distributors rather than from purchases by non-participant consumers.
The FTC’s new emphasis on rewards that participants might receive rather than the amount of money paid to the company by participants is an almost complete reversal from its prior position. The FTC, through its updated Business Guidance and recent enforcement actions, continues to retreat from the legal underpinnings of Koscot to promote an amorphic definition of illegal pyramid schemes based upon subjective, conclusory and often conflicting criteria that enables the FTC to characterize almost any company’s compensation structure as an illegal pyramid scheme.
The best way for a company to avoid FTC scrutiny of its compensation structure remains the ability to demonstrate that a majority of revenue is generated from retail sales to non-participant retail customers. Companies should also have transparent, easy-to-understand compensation plans that clearly outline how participants earn money and avoid language emphasizing incentives for recruitment or internal consumption.
Brent Kugler, partner at Scheef & Stone, is a prominent attorney in the direct selling industry with over 23 years of experience. Formerly the General Counsel for a large MLM company, Brent provides comprehensive legal representation to direct selling companies including advice on regulatory issues, distributor policies and procedures, compensation plans, independent contractor classification, governmental affairs and risk management.
From the September/October 2025 issue of Direct Selling News magazine.
