Franchise vs Business Opportunity vs MLM: Legal Differences

A franchise and a business opportunity have separate federal definitions and disclosure rules. Multi-level marketing (MLM) has no dedicated federal disclosure rule; whether an arrangement meets the franchise or business-opportunity definition depends on its terms and representations, subject to exemptions. Courts also apply a pyramid-scheme test to how an MLM program operates in practice.

This is general information, not legal advice.

	Franchise	Business opportunity	MLM
Governing rule	16 CFR Part 436	16 CFR Part 437	No dedicated federal disclosure rule; pyramid test from case law, including BurnLounge, slip op. at 11-12.
Trademark element	Yes, under 436.1(h).	Not in the 437.1(c) definition.	Not a defining element of the pyramid test (BurnLounge, slip op. at 11).
Required disclosure document	FDD, 23 items under 436.5, subject to exemptions.	Single document, six items under 437.3, subject to exemptions.	None specific to MLM; franchise or business-opportunity disclosure depends on meeting the applicable definition and exemptions.
Payment element	Required payment under 436.1(h).	Required payment under 437.1(c).	Pyramid test: payment for the right to sell a product plus the right to recruiting rewards unrelated to sales to ultimate users (BurnLounge, slip op. at 11).
Who enforces	FTC under Part 436.	FTC under Part 437.	Courts apply the pyramid test; BurnLounge was an FTC action.

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Two different things, two different rules

The franchise definition in 16 CFR 436.1(h) has three elements: trademark association, significant control or assistance in the method of operation, and a required payment. The definition covers a continuing commercial relationship or arrangement regardless of its label.

Under 16 CFR 437.1(c), a business opportunity has three elements:

1. A seller solicits a prospective purchaser to enter into a new business.
2. The prospective purchaser makes a required payment.
3. The seller represents that it or designated persons will provide specified locations for equipment or similar devices; provide outlets, accounts or customers for the purchaser’s goods or services; or buy back goods or services the purchaser makes, produces, fabricates, grows, breeds, modifies or provides, including specified paid-for services.

Read the full definition with an attorney. Trademark association is not one of its elements.

The one element a business opportunity doesn’t have

When the FTC split business opportunities into a separate, interim Part 437 in 2007, it removed the franchise elements from the carried-over definition and retained the business-opportunity elements (72 FR, March 30, 2007). The current rule text dates from the FTC’s December 8, 2011 final rule, 76 FR 76860; its definition in 437.1(c) still has no trademark element.

What you actually get instead of an FDD

For an arrangement covered by Part 437, section 437.3(a) requires a single written disclosure document using the form and language in Appendix A, or Appendix B for Spanish. It also addresses translations for other languages. The six items are:

1. Identifying information: the seller’s name, business address and telephone number, the salesperson’s name and the disclosure date.
2. Earnings claims: indicate whether the seller makes an earnings claim. If yes, attach the earnings statement required by 437.4; if not, check the no box.
3. Legal actions: disclose the specified civil or criminal actions involving the seller and specified related businesses or individuals within the preceding 10 years, or indicate none.
4. Cancellation or refund policy: indicate whether a refund or cancellation right is offered; if so, attach all material terms and conditions.
5. References: purchasers within the last three years. If there are more than 10, the seller may list at least the 10 nearest to the prospective purchaser, or provide a nationwide list of all purchasers within that period.
6. Receipt: a duplicate disclosure document for the purchaser to sign and date.

This is narrower than the 23-item FDD specified in 436.5. The difference describes required disclosures, not the safety of a particular purchase.

The franchise exemption in 437.8

Section 437.8 states: “The provisions of this Rule shall not apply to any business opportunity that constitutes a “franchise,” as defined in the Franchise Rule, 16 CFR part 436; provided, however, that the provisions of this Rule shall apply to any such franchise if it is exempted from the provisions of part 436 because, either: …”. Its exceptions concern the payment exemption in 436.8(a)(1) and the absence of a written document describing a material term or aspect under 436.8(a)(7). Section 437.8(a) states “less than $500,” while 436.8(a)(1) states “less than $735” (as adjusted effective July 12, 2024, 89 FR 57077). The two sections state different figures; ask a franchise attorney how the provisions apply to the arrangement.

Where MLM fits, and the test courts actually use

MLM has no dedicated federal disclosure rule. Whether a program is a franchise or business opportunity depends on whether it meets those definitions, subject to exemptions. The pyramid-scheme test is a separate inquiry into how the program operates.

The Koscot test as applied in FTC v. BurnLounge (9th Cir. 2014)

In FTC v. BurnLounge, Inc., 753 F.3d 878 (9th Cir. 2014), the Ninth Circuit applied the Koscot test quoted through Omnitrition: a pyramid scheme is “characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users.” (slip op. at 11). The court emphasized the second prong as “the sine qua non of a pyramid scheme” and described it as “recruitment with rewards unrelated to product sales.” (slip op. at 12). The inquiry examines how the business operates in practice, rather than treating the MLM label alone as determinative (slip op. at 11).

State business-opportunity laws

Some states have their own business-opportunity statutes. One example is the Texas Business Opportunity Act, Tex. Bus. & Com. Code ch. 51 (checked 2026-10-14): section 51.003(a) includes “a sale or lease for an initial consideration of more than $500 of products, equipment, supplies, or services that will be used by or for the purchaser to begin a business in which the seller represents that: …”. The definition continues with additional conditions; the amount alone does not describe its full scope. Section 51.051 states: “Before a sale or offer for sale, including advertising, of a business opportunity, the principal seller must register the business opportunity with the secretary of state by filing: …”. Have an attorney review the full definitions, exclusions and filing provisions for the arrangement.

Related reading

For the roles within a franchise relationship, read franchisee vs. franchisor. For the people helping you evaluate a purchase, see franchise broker vs. consultant.

For a separate comparison of who owns and controls a location, read franchise vs. chain store vs. joint venture. For the federal test applied to other seller labels, see franchise vs. dealership vs. distributorship.

Continue with state franchise registration and filing requirements and the guide to reading an FDD.