Sweepstakes have traditionally been widely used by marketers in the U.S., as they can be good at generating publicity and driving consumers to a company’s product (think Publisher’s Clearing House). After all, who doesn’t love something for free? In this digital age, sweepstakes are becoming even more popular as companies can better reach their consumers through social media. While sweepstakes are generally valid promotional schemes in the U.S., sponsors must take care to comply with a myriad of rules and regulations in the jurisdictions in which their sweepstakes are conducted.
First and foremost, sponsors must structure the sweepstakes to avoid it being considered a lottery, which is generally illegal unless state-run. Generally, in order to avoid creating a lottery, a sponsor must eliminate one of the following elements:
- offering a prize;
- requiring consideration to receive the prize, or
- distributing the prize by chance.
Because a sweepstakes awards a prize to a winner selected by chance, sponsors must make sure that no consideration is required, in order to prevent it from being a lottery. Adding an additional layer of complexity, consideration does not necessarily have to be monetary – it can also be nonmonetary, including requiring participants to engage in activities that require substantial time or effort.
All sweepstakes must have a set of “official rules”. Official rules should contain the obligatory “NO PURCHASE NECESSARY”, as well as an alternative method of free participation if one mode of entry requires a product purchase. Such details as identity of the sponsor, eligibility, period of entry, prize value, odds of winning, manner of selecting the winner(s), and how to obtain a list of winners must also be included. There may be additional requirements depending on the jurisdiction in which the sweepstakes is conducted.
Sponsors must also comply with certain U.S. state requirements for registration and the posting of bonds, depending on the value of the prize. Florida, New York and Rhode Island are examples of states that have such requirements. An important distinction here is that some of these statutes only apply to “games of chance” as opposed to “games of skill.” Games of skill (also known as contests), in which the winner is selected by judges based on a skill criteria, are not considered lotteries because although consideration may be present, the “chance” element is not.
Besides complying with U.S. state law, sponsors should also determine if any third party rules apply. This could be the case if a sweepstakes is administered using the sponsor’s presence on third party social media platforms, such as Facebook or Twitter. For example, according to Facebook Pages Terms, promotions on Facebook may only be administered on Page Timelines or within apps, but not on personal Timelines (ex: “share on your Timeline to enter” is not permitted). Both Facebook and Twitter require sponsors to include certain requirements in their official rules.
Finally, it is not uncommon to see sweepstakes limited to U.S. residents, with the prominent disclaimer “VOID WHERE PROHIBITED OR RESTRICTED BY LAW.” This is because when sweepstakes are opened up internationally, sponsors must also comply with the laws of each applicable country. For example, in some countries sweepstakes are strictly prohibited by law, or are allowed only when the winner that is chosen by chance is also required to demonstrate a skill, such as correctly answering a math question. Other countries require that sweepstakes be conducted in the local language, which can require an unexpected expenditure of resources. Sponsors should also consider tax issues and whether the official rules need to be tailored to meet the requirements of a particular jurisdiction. The bottom line is, companies that are considering opening their sweepstakes up to the international arena must carefully take into consideration the legal and tax requirements that may be implicated.