There is no debate: legal is better than illegal when it comes to sweepstakes.
You might think that this is an obvious statement, but it’s actually not that uncommon to run an illegal sweepstakes. Typically, this is not because companies have any desire to ‘scam’ customers, but because many companies are not familiar with the legal nuances surrounding sweepstakes.
Take this example: Beloved local baker Mrs. Jones decides to run a giveaway to draw in new clients. Every customer that purchases a dozen donuts is entered to win a weekend trip to Vegas. What seems like a harmless contest by your town’s favorite baked good distributor is actually an illegal lottery. Mrs. Jones had no malicious intent but, if found out, she could actually face civil or even federal and state legal repercussions.
In order to avoid those potential pitfalls, we want to take this article to familiarize you with the reasons why it is important to have legal compliance when running a sweepstakes.
So…what IS a sweepstakes?
There is no shame in not knowing the particulars of running a sweepstakes if this is your first time conducting one. Let’s start off with the basics. What is a sweepstakes? People often confuse sweepstakes, lotteries and contests. In order to be legally compliant as a sweepstakes, it is imperative that you are aware of the differences.
A contest is based on skill. Winning is not random and contestants enter with a particular skill in an area hoping to win a prize, which can either be monetary or non-monetary. Examples of this would be essay contests, song contests, photo contests, etc.
A lottery is a game of chance with the caveat that you must purchase in order to enter. Basically, it’s pay-to-play. In the United States, with very few exceptions, lotteries must be state or federally sanctioned. Think state lottos, powerball, etc.
A sweepstakes, also known as a “giveaway”, is a game of chance as well, but it can be run by individual corporations without profiting the state. It is largely used for promotional purposes and can be a wonderful way to draw attention to your business and products. However, it is illegal to require purchase in order to participate.
At this point, you might be wondering how corporations such as large fast food restaurants can get away with their games where customers purchase products with game pieces attached for a chance to win. The answer to that is that these companies also offer an Alternative Means of Entry (or AMOE for people in the know). Within sweepstakes, you are permitted to offer purchases in exchange for entry if, and only if, you offer another way to enter that is FREE and has an equal chance of winning.
What are common ‘Illegal’ Mistakes people make?
Now that you’ve got a general idea of what a sweepstakes is, we’re going to give you a short list of 7 common illegal oversights that companies make when conducting a sweepstakes:
- They offer consideration for entry without an AMOE. By ‘consideration’, we mean something of value that is given by the customer to the company running the sweepstakes. This can be monetary, but it can also be something such as reviewing a sales presentation or completing a survey.
- They offer AMOE, but they give more weight to entries that come with consideration, thus defeating the ‘chance’ element.
- They don’t make the official rules clear, accessible, and fixed. I.E. Make the rules easy to see and don’t go changing them halfway through the promotion.
- They make the sweepstakes open to anyone. Many states have age and residency restrictions. Twelve year old Lacey might LOVE donuts, but she cannot check into a hotel in Vegas by herself.
- They offer a big prize pool without checking with their state guidelines to see if it needs to be registered or bonded. Some states require these actions prior to the start of a sweepstakes, so it’s important to do your research.
- They use customer’s sensitive private data, such as name and photo, without express permission. If you want to know how poorly that can turn out, just read here.
- They forget about taxes. If your prize is valued over $600, you must issue an IRS 1099-Misc. Also, take into consideration the taxes that your unsuspecting recipient might have to pay.
As we said before, there are several little nuances to take into account to ensure your sweepstakes is legally compliant. To make matters more complicated, there are differing laws between states. We explore these varying rules and regulations between states in this article. However, we highly recommend that you work with a sweepstakes management company because failing to comply with these laws can result in serious lawsuits.
What are THREE BIG REASONS why you want to make sure your sweepstakes is legal?
Now we get into the meat and potatoes of the issue. Why do you want to be legally compliant?
- BECAUSE YOU DON’T WANT TO FACE A LAWSUIT. Not only could your business face a substantial lawsuit if you run an illegal sweepstakes, but if, for example, you ran an illegal lottery thinking it was a sweepstakes like Mrs. Jones, you could actually face criminal charges. Want to hear a few horror stories of companies that did not follow the law to-the-T? Read here and here.
- BECAUSE YOU DON’T WANT TO PUT YOUR COMPANY’S REPUTATION AT RISK. Building any brand relies on trust. If the word gets around that you ran an illegal sweepstakes, you are betraying that trust. Your customers, collaborators, and employees will remember and you risk serious damage to your business. If, however, you conduct a safe, legal sweepstakes, you could draw in many new clients and forge stronger relationships with your existing clientele.
- BECAUSE YOU VALUE YOUR CUSTOMERS. When people enter your sweepstakes, they are entrusting you and your business to make their fun, positive, and safe experience your #1 priority. This means that you are upfront about the rules and regulations, you protect them from unforeseen and unwelcomed taxes, and you safeguard their personal information. It is critical to be transparent both within your company as well as with your audience how you will securely store and use that information during and after the sweepstakes.
Hopefully, we’ve impressed upon you the importance of running your sweepstakes legally. As we said before though, there are several laws that make running a sweepstakes legally a challenge. That is why, at US Sweeps, we are currently offering a free 30 minute consultation on your sweepstakes where we’ll give you recommendations for planning, legal advice, and an attainable timeline to execute your sweepstakes. If you are interested, simply fill out this form and we’ll get back to you ASAP.
We’re here to help you build a fun, safe, legal and rewarding sweepstakes for your customers and you.