I am a private pilot and the only tortured thing here is how the service tried to get around "holding out" and "compensation". Obviously the FAA doesn't see it this way. If you are a private pilot you're held to a lower standard - of training, medically, during the examination, and for the aircraft - than a commercial pilot. Which is held to a much lower standard than an airline pilot. It's not really that safe, either - the GA fatal accident rate is comparable to motorcycles, and that doesn't include a bunch of PPL cowboys feeling pressured to go in marginal conditions, which this service would surely promote. Would you jump on the back of a random motorcycle with an unknown driver?
A bunch of people have said that you can't be paid to fly. It's worse than that - you can't receive any benefit in exchange for your flying. All you can do is offset your losses. The safest thing is to pay your own way, then everything's legal. If you split costs with your buddy and he buys you a steak dinner, the FAA will kick your ass. Yes, this has happened. So too did they punish the guy who ferried his bar-owning friend's customers to the bar "as a favor" when the charter flight fell through. Even though they couldn't find any direct compensation, they still won on the theory that "there's no way someone is out $2k without at least a quid pro quo, and in any case think of the passengers who were expecting a charter flight to commercial standards"
Most people are used to licenses - rights - that can't be easily taken away. Like your drivers' license - that's a court case if they want it. Being a pilot means you have a certificate and it can be taken away much more easily (i.e., no courts involved) if the FAA feels it is appropriate. And they have no trouble convincing the oversight (the NTSB administrative law judges are the highest you can go) that their interpretation of the "holding out" rules is the correct one.
Flytenow didn't shut down because the FAA said "no", at least not directly. They shut down because once the FAA publishes an opinion of how they see the regulations and intend to enforce them, you'd be stupid as hell to fly if they said "we think this is against the rules and will prosecute people for doing it". It'll stick, too, barring "arbitrary and capricious".
If you can find an example of people "lawyering" with the FAA and succeeding, I'd like to see it. There's plenty of examples of people thinking they've found a loophole and are smarter than the FAA lawyers - but they all forget that the FAA isn't bound by the letter of the regulations (they're not laws!) and that they're allowed to punish people for what they meant to say so long as it's reasonable regardless of whether it's explicitly written down. The FAA's intent is very clear - you can go camping with your buddy and split the costs, but you can't be a charter service. If they think you're basically being a charter service, they'll burn you regardless of how you try to wiggle out of it.