Ensure your sweepstakes cannot be classified as an illegal lottery. A lottery has three elements: a) Prize; b) Consideration; c) Chance. Those elements are interpreted broadly: Consideration can be anything of value, such as liking your Facebook page, writing a comment on your blog, rating a product, subscribing to newsletter or Twitter feed. Chance element is present if winners are chosen predominantly by luck: for example Bingo is a game of chance while Solitaire is a game of skill, even though an element of luck is present in the latter. Using services like random.org or rafflecopter.com clearly establishes the Chance element present.As you can see, many sweepstakes out there today do not strictly comply with all of these requirements. Violation of the provisions on operation of contests or sweepstakes is a misdemeanor in California (Bus. & Prof. Code §17534) and other states. While the prosecution for a small time website giveaway is not very likely, to ensure compliance, at least one of the three above elements must me missing. Entrants should not be required to do anything of value, or winners have to be chosen by showing some merit or skill such as winning a game or contest.
There are also state-specific rules. For example, in New York a sponsor must bond prizes valued above $5,000 or establish and maintain a special trust account with a balance sufficient to cover the total value of prizes offered. Florida also requires a surety bond for any sweepstakes with a prize value of more than $5,000.
The following will help ensure compliance and prevent misunderstandings:
a. Post sweepstakes official rules and link to them in announcements.
b. Promotion Period – start and end date.
c. “No purchase necessary.”
d. “Odds of winning depend on number of entries.”
e. “Entries that are not accompanied by orders are treated the same as entries that are accompanied by orders.”
f. Eligibility for entry (“Open to legal US residents 18 years of age or older.”)
g. How to enter and what is the maximum number of entries per person.
h. Dollar value of the Prize.
i. The maximum amount of money, including postage and handling fees, which a participant may be asked to pay to win each of the prizes offered.
j. Avoid prizes involving tobacco, alcohol, gasoline, insurance or financial services.
k. How are ties and unclaimed prizes handled?
l. Prize to any one person worth $600 or more requires you to file Form 1099 with the IRS.
