By Oleksandr Honcharov, CEO at Flawless MLM
Last updated: October 2026
Quick Summary
- Under MLM regulations in the USA, multi-level marketing stays legal until its pay plan turns into a pyramid scheme.
- The FTC is the main federal regulator, with state attorneys general and the SEC enforcing alongside it.
- Every rule and case status below was checked in October 2026.
Is MLM Legal in the USA?
Yes, MLM is legal in the USA when participants earn their money by selling products to real customers. No federal law bans paying distributors on their team's sales. Trouble starts when the pay plan rewards recruiting more than retail selling. The FTC and state attorneys general treat that structure as a pyramid scheme, and state statutes add tests of their own, covered below.
The FTC says no percentage-based test separates the two. Its April 2024 guidance asks how the compensation plan works and how the business runs day to day. Our MLM vs pyramid scheme guide covers the warning signs, so this page stays on rules and compliance.
How MLM Is Regulated at the Federal Level
Federal MLM laws in the USA come from general consumer protection law, because Congress has not passed a statute written for network marketing. The FTC applies Section 5 of the FTC Act, which bans unfair or deceptive acts or practices in commerce. That single provision reaches pyramid schemes, and it equally covers deceptive income and product claims. The SEC joins when a program looks like an investment contract under the 1946 Howey test, as in its 2024 actions against HyperFund and NovaTech. As a result, MLM regulations in the USA read more like a body of case law and guidance than a rulebook.
According to the Direct Selling Association, US direct selling retail sales reached $34.7 billion in 2024, with 5.4 million business builders.
The test that still anchors the analysis comes from Koscot Interplanetary. A program is a pyramid scheme when participants pay for two rights. One is the right to sell a product. The other is the right to earn rewards for recruiting others, and those rewards have no tie to sales to end users. Both elements have to be present.
Four years later, the FTC's Amway decision found that Amway was not a pyramid scheme. The agency pointed to three safeguards:
- Distributors had to resell 70% of what they bought before reordering.
- Each distributor had to serve ten retail customers.
- The company offered to buy back unsold inventory.
Many founders still copy that checklist. We advise against using it as a compliance plan. An MLM compliance consulting service can help review the compensation structure and identify regulatory risks before they become a problem. The 2024 guidance says no percentage-based test exists and a refund policy is not a defense. It adds that having retail customers, even many, is not a safe harbor. In BurnLounge, the court distinguished Amway and upheld a pyramid finding.
Two FTC trade rules also touch MLM sales. The FTC Cooling-Off Rule gives buyers three business days to cancel a sale of $25 or more made at their home. For sales made elsewhere away from the seller's place of business, the threshold is $130. The Business Opportunity Rule is not written for MLM. It applies to an MLM that makes the representations listed in section 437.1(c). Any company running home parties or hotel events should treat the first rule as live exposure.
FTC Rulemaking in 2026: Where Things Stand
Pending FTC rules for MLM remain proposals. On January 13, 2025, the Commission voted 3 to 2 to issue three documents on earnings claims and money-making opportunities. Two commissioners dissented, citing the timing. As of October 2026, we found no final rule and no withdrawal. All three documents appear in the FTC's regulatory agenda notice of August 14, 2026.
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A proposal does not bind any company. Until the FTC publishes a final rule in the Federal Register, enforcement runs on Section 5 and existing orders, read through the 2024 guidance. The proposed text still shows the direction: written proof behind income claims and records kept to support them.
The 2021 Notice of Penalty Offenses matters more than the proposals for any company that received one. A recipient that later engages in the described conduct can face civil penalties if it had actual knowledge that the conduct was unfair or deceptive. Check whether your company or your legal counsel ever received such a notice. If you need help reviewing your MLM compliance setup, you can contact our team for practical guidance.
Founders often ask us whether to pause compliance work until the rule settles. Our answer is no, because the 2024 guidance already states what the FTC expects today.
Earnings Claims and Income Disclosure Statements: What the FTC Expects
An earnings claim is any statement about what participants make, and lifestyle claims count too. A distributor's photo of a new car with a caption about quitting a job fits that description. The FTC guidance requires a reasonable basis for every claim, which it defines as reliable, empirical evidence that supports the claim.
The claim must also match the typical outcome. According to the guidance, any earnings claim should reflect what the typical person to whom it is directed is likely to achieve. A story about a top earner does not describe that person.
According to the FTC staff report, most of the 70 reviewed income disclosure statements counted only paid or "active" participants, systematically excluding those who earned nothing — without clearly disclosing this omission.
The FTC's own figure is that the vast majority of participants in the statements it reviewed made $1,000 or less a year.
No federal rule currently requires an MLM company to publish an income disclosure statement. A company that publishes one takes on the duty to make it accurate, and the staff report shows how often statements fall short. Across client reviews, the error we meet most often is an average calculated only on active distributors. A reliable MLM financial reporting system can help companies generate disclosure figures directly from transactional data instead of relying on selective or manual calculations. It makes the number look healthy and repeats exactly what the 2024 findings criticize.
Each finding maps to one fix. Count everyone who joined during the period, including the participants who earned nothing. Then deduct the purchases and fees they paid. For a company that publishes numbers, that is a statement that survives a regulator's recalculation.
Enforcement Cases: Herbalife, AdvoCare and Recent Actions
FTC cases show how the guidance gets applied, and the outcomes are not one-sided. Some ended in settlements of hundreds of millions of dollars. One ended in a court ruling against the agency.
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In January 2017, roughly 350,000 consumers received checks from the $200 million Herbalife settlement. The company also had to restructure its pay so rewards followed verified retail sales. An independent auditor reviews its compliance for seven years.
According to the FTC, 72.3% of AdvoCare participants earned nothing in 2016. The agency later reported returning more than $149 million to AdvoCare participants in May 2022.
The Neora case shows the other side. The court held that the FTC had not proved the second Koscot element. That outcome turned on the evidence in that case, and it set no percentage that other companies can copy.
In April 2026, the FTC turned to individual promoters. It announced orders involving participants tied to Farmasi and Forever Living, then a third order tied to LifeWave. The Forever Living complaint cited 77% of participants earning nothing. The Amway order is the newest, and we read it as a proposal until the court approves it.
State-Level Rules
State network marketing laws add a second layer, and the details vary more than founders expect. A plan that passes in one state can need a notice filing or a bond in another. Washington joined the FTC in the 2026 Amway action, so state enforcers act alongside federal ones. The table below covers seven states where requirements differ clearly. It is a starting point, not a 50-state survey.
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Three patterns matter when you plan filings. Notice filings in Wyoming and Montana are mandatory, and Montana's carries an exemption that depends on trade association membership. Wyoming and Louisiana set the only numeric repurchase standards we could verify in statute text, so an "industry-standard 90% buyback" is not a federal rule. Business opportunity statutes in Florida and Texas can reach an MLM depending on how the program is built.
We do not give a count of states that require registration, because we could not verify one against statute text. Qualified counsel should confirm each state before you enroll participants there. For other markets, see our guide to MLM regulations in the EU.
Company Liability for Distributor Claims
A company answers for what its distributors say. The FTC guidance states that companies and individuals are liable for the FTC Act violations of their agents. It applies that principle to MLM companies and the participants who sell for them.
Picture a compliance manager who opens the company's brand hashtag on a Monday morning. A distributor's story reads "replaced my salary in 60 days." The post sits on a personal account, not a company channel. The company can still be the one explaining it to the FTC.
The question founders raise with us is predictable: the distributor agreement says independent contractor, so aren't those posts the distributor's problem? An independent contractor clause does not settle the point on its own. The guidance ties liability to agents, and who counts as an agent depends on the facts. That is a question for your lawyer.
Reviewing posts one by one does not scale. Build a written claims policy and train distributors on it before they can recruit. Keep a log of the posts you reviewed and removed. No program removes the exposure, but companies with training records and removal logs have a stronger file to show when the FTC asks questions. Our MLM advertising compliance guide walks through the review process in full.
MLM Compliance Checklist for US Companies
Strong MLM compliance in the USA comes down to documents that exist before a regulator asks for them. This MLM compliance checklist turns the sections above into ten tasks, each tied to the source that sets the expectation. Assign one owner to each row and keep the evidence in a single folder. Run the table before launch and again after any pay plan change or new FTC action on MLM.
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In our experience, teams stumble on rows two and seven first. Retail proof is hard to produce when orders were not tagged by buyer type, and distributor posts live outside company systems. Fixing both early gives a lawyer something concrete to review.
What this means in practice: when a regulator or a lawyer asks, you hand over a folder instead of rebuilding history from old exports.
For a specific situation, consult a lawyer who handles multi-level marketing law.
Penalties for Violations
A plain Section 5 violation does not carry a civil penalty by itself. Penalties attach when a company breaks an FTC rule or order, or repeats conduct covered by a Notice of Penalty Offenses. The most recent adjustment we found sets the amount at $53,088 per violation, effective January 17, 2025. A properly built MLM compliance system can help companies monitor regulatory requirements and maintain the records needed to reduce operational and reporting risks.
Money for participants follows other routes. Since AMG Capital Management v. FTC, the FTC cannot obtain equitable monetary relief under Section 13(b). It relies on other provisions, including Section 19 and the civil penalty provisions.
States add their own penalties on top. Wyoming allows a fine of up to $500 and up to one year in county jail. Louisiana allows up to $10,000 and up to 10 years for promoting a pyramid scheme.
How Software Supports Compliance
Software does not make a company compliant. It makes the compliance steps visible and repeatable. A good MLM platform tags each order by buyer type, which a verified retail sales test needs. It stores each distributor's acknowledgment of the claims policy and logs which income statements were approved. It also calculates an income disclosure from the full participant base, zero earners included.
A platform cannot judge whether a post is deceptive. It can show which distributors accepted the policy and when, so a gap is visible before a regulator finds it.
Ask any vendor to show these reports before you sign. FlawlessMLM has delivered more than 400 MLM projects on FlawlessMLM Core, which ships with 40+ configurable modules. Our engineers scope reporting like this during planning, and your counsel still decides what the reports must prove.
Fixing a pay plan before launch is easier than explaining it to a regulator later. Our MLM consulting team offers a free 30-minute consultation, no obligation, to check your plan and reporting against the checklist above.