Your startup may run a contest or a sweepstakes in order to generate buzz and brand awareness for your company. But there are a couple of issues to be cognizant of when designing your contest or sweepstakes in order to comply with rules and regulations and ensure that it is not actually an illegal lottery. A lottery essentially has three basic characteristics:
1. A prize
2. Winner(s) chosen solely by chance
3. Paid consideration for entry
First, the best way to avoid a designation as an illegal lottery is to add an element of skill to the contest, thereby removing the element of chance of lotteries and sweepstakes (even though sweepstakes are generally permissible). This can be accomplished by, for example, adding trivia questions to the entry form. However, if you intend to run a sweepstakes (i.e., simply a game of chance), you must ensure that there is no consideration paid to enter. Purchases cannot increase the odds of winning. Even requiring entrants to provide a Facebook “like” is construed in some states as consideration. You can have consideration to enter a game of skill contest; however, it may be better to avoid consideration altogether to avoid a situation where your game of skill is judged not to require any skill at all, and therefore is an illegal lottery.
On the issue of state requirements, you should also be aware that New York, Rhode Island, and Florida require registration (which may carry a fee) of any sweepstakes with a prize value over $5,000, and in certain circumstances may require you to post a bond for the value of the prize. Other states have other rules and limitations related to operation of specific kinds of sweepstakes and prizes, so it is important to check. In order to protect yourself from inadvertently violating a state’s regulations, your sweepstakes terms should specifically acknowledge states where the sweepstakes is void (such as NY, FL, or RI if you have not registered your sweepstakes), and as a fallback, further state that the sweepstakes is void where prohibited by law.
Additional technical matters that your terms should address include:
– Acceptance of the rules — entrants can sign an acceptance clause on entry forms, otherwise your terms should state that entry is conditioned on acceptance of the rules
– Alternative methods of entry (which should be free or as close to free as possible to avoid the appearance of consideration for entry)
– Entrant eligibility requirements — it is best to limit sweepstakes to 18+, and also preclude residents of states where your sweepstakes does not comply with law or is otherwise prohibited
– Cash value of the prize (and whether there will be a cash option for the prize)
– Contingencies for technical issues, such as loss of electronic entries, or if the winner(s) is/are disqualified
– Your contact information, for questions, complaints, and winners’ lists