New York-based BurnLounge charges users between $30 and over $400 a year for subscriptions to its service, which allows them to create their own digital music stores.
But the FTC said the company provides payments mainly for recruiting new participants, rather than on the retail sale of products — which the FTC alleges would result in most participants losing money.
In addition to BurnLounge, the FTC complaint also names CEO Alex Arnold and former USC football player Rob DeBoer, who claims to have made $300,000 using BurnLounge.
The U.S. District Court for the Central District of California has refused the FTC's request for a temporary restraining order; a full hearing on the FTC's demands for a preliminary injunction against BurnLounge and freeze on its assets is scheduled for June 19.
BurnLounge called the judge's denial of a restraining order a "significant victory," adding that it believes it has "conducted its business lawfully."
"Through its unique and revolutionary business model, BurnLounge will continue to afford its customers the opportunity to enjoy sharing their tastes in music and films, while providing an avenue for them to express their entrepreneurial talents," BurnLounge attorney Sheldon H. Sloan said in a statement.