There are certain words and phrases that set the antennae of promotions lawyers – and law enforcers – buzzing. “Everybody wins” comes to mind right away – but there is one little word that can pay out tremendous legal problems and should concern anyone involved in executing sweepstakes and promotions. That word is “raffle.”
While many people use “raffle” interchangeably with “sweepstakes” or “drawing” to designate a legal game of chance that any entity can run, most raffles are illegal under federal and state gambling laws. Narrow exceptions exist for certain activities involving nonprofit organizations, such as charities, but those carve-outs and their accompanying requirements vary from state to state.
The chief problem with raffles is that they, by their nature, contain all three elements of an illegal lottery: (1) the award of a prize; (2) that is determined by chance; and (3) participants must submit consideration to enter.
To comply with the law, either the raffle must fit into one of the specific state law exception(s) in order to be run legally, or one of the three elements must be eliminated to create a legal sweepstakes.
The laws regulating raffles are usually quite specific and vary state by state; moreover, there are often additional regulations on raffles at the local level. These requirements may include:
- continuous existence requirements, which require a charity to continuously exist in the state for some period of time;
- registration, reporting, accounting, and recordkeeping requirements;
- limits on what can be offered for prizing;
- proceeds spending restrictions; and
- limitations on whether people outside the organization can help administer the raffle.
For example, California requires that 90 percent of the gross receipts generated from the raffle be used in-state to benefit or provide support for beneficial or charitable purposes. The practical implication of such rules is that they prohibit the popular 50/50 raffle, whereby 50 percent of the proceeds provides support for the charitable purpose, and 50 percent goes toward the administration of the raffle. The variety and specificity of state laws make it difficult, if not impossible, to run a national online raffle.
Without competent legal counsel, charities can unwittingly find themselves outside the scope of the raffle exception and on the wrong side of the law. Brands seeking to run a raffle should reconsider, lest they trigger the criminal lottery and consumer protection laws.
At the end of the day, the common goal of all sweepstakes and promotions is to increase the awareness of and goodwill toward a for-profit or nonprofit brand. No one wants to see an “opportunity to win” turn into a black mark with the potential for criminal liability. Legal counsel experienced in the many aspects of promotions law can help avoid those issues.