You’ve got the perfect idea for a social media site, but how do you attract a critical mass of members to launch it? Your credit cards are maxed out and your friends and family are tapped too. Can you attract members by offering to pay cash incentives for recruiting other members, who in turn recruit other members and then others (known as “downline recruits”)?

The Federal Trade Commission and Ninth Circuit Court of Appeals have answered that question with a no, if the primary incentive is cash from the recruitment program. (Federal Trade Commission v. BurnLounge, Inc., et al., Nos. 12-55926, 12-56197, & 12-56228 (Ninth Circuit Ct. of Appeals) June 2, 2014). The BurnLounge defendants were enjoined from operating an illegal pyramid scheme in violation of Section 5(a) of the Federal Trade Commission Act...