Contests, giveaways, sweepstakes or similar promotions, which give participants the chance to win an award or a prize in exchange for completing certain tasks or actions, are effective strategies for achieving your marketing goals. These may include boosting brand awareness, increasing consumer engagement and generating leads. However, before you run a promotion, it’s essential that you comply with all relevant laws, rules and regulations.
Consider these tips as you peruse our comprehensive guide on how to effectively operate a contest or giveaway at your company.
Types of contests
The first thing to understand is that there are three basic types of contests: games of skill (contests), games of chance (sweepstakes) and lotteries.
Contest:
Also known as a game of skill, a contest is a promotional campaign wherein participants typically try to win by doing something better than others. Winners are chosen or judged based on merit or an element of skill, such as their performance or their submission as part of the contest. In a contest, entrants may have to answer trivia questions, take a photo, write a response or do other things that involve skill.
Sweepstakes:
A sweepstakes, also commonly referred to as giveaway, is a luck-based promotional event in which prize winners are usually selected at random. Prizes can vary from money and a free book signed by an author to electronics and even houses.
Do note that a sweepstakes must abide by U.S. No Purchase Necessary Laws to enter — according to the U.S. law (as well as the laws of several other countries), it’s illegal for a business to require the entrants to make a purchase in exchange for a chance to enter a competition or take a giveaway home. Therefore, a sweepstakes is a game of chance, compared to a contest being a game of skill.
Lottery:
A lottery is often used by businesses as a means to raise money by selling numbered tickets and giving away prizes to the holders of numbers drawn at random. Here, even though the winners are chosen randomly, participants still have to pay to play (unlike a sweepstakes). A lottery is also a game of luck but with an entry fee.
Private lotteries are illegal in the U.S., which means sponsors of sweepstakes or giveaways must distinguish their promotional campaigns from lotteries to be legal.
A lottery has three elements:
- A promotional campaign that offers a prize with value
- Entry requires consideration for participating in the event
- Winners of the campaign are chosen at random
In order to differentiate a giveaway from a lottery, you must remove one of these three requirements. That said, while any effective contest, giveaway or sweepstakes will obviously have a prize, and if the sweepstakes requires skill to win, then the winner cannot be chosen at random. Therefore, the easiest way to make things legal is to eliminate the element of consideration.
What is consideration?
In legalese, consideration can be defined as something of value. Different states have varying definitions of what constitutes consideration. In essence, consideration refers to different ways people can buy into a contest through monetary or non-monetary actions.
- Monetary actions require participants to make a financial contribution in order to enter promotions. This can include buying a ticket or purchasing a product.
- Non-monetary actions require entrants to forfeit their time in order to enter promotions. Such actions can be making a certain number of visits to a store, filling out an in-depth survey or following the social media pages of the sponsor of the promotion.
Is there an alternate method of entry?
Typically there are additional methods. In some cases, sweepstakes or giveaways are required to provide an alternate method of entry (AMOE) in order to avoid falling under illegal lottery laws. AMOEs are free and easy ways that allow participants to enter promotions without having to make a purchase.
So, if you’re launching a luck-based promotional campaign that lets users enter by buying your product, you must also offer a free method for them to enter (which awards them the same number of entries). This way, the purchase is no longer a requirement and it does not give people increased odds of winning the prize, keeping your promotion no longer in violation of the No Purchase Necessary Laws. Some examples of AMOE are completing an online form or entering via email.
| Talk to us about how our back-office services can help your business stay compliant. |
Laws that govern contests and giveaways
In the U.S., various federal and state laws regulate and oversee promotional campaigns for contests and sweepstakes.
Federal laws:
Several federal agencies have jurisdiction to oversee promotional activities. These are:
- The Federal Trade Commission (FTC)
- The Federal Communications Commission (FCC)
- The Department of Justice (DOJ)
- The United States Postal Service (when sweepstakes include a mail component)
- The IRS: You may need to obtain a W-9 from the winner(s) and file a 1099-MISC form for each winner
Keep in mind:
Running a promotional campaign that involves tobacco, alcohol, firearms, insurance, gasoline or dairy products is strictly regulated in the U.S.
State laws:
Different states have different laws and exceptions when it comes to contest and sweepstakes promotions. Fortunately, most giveaways are legally compliant as long as they are not considered lotteries. Also, most states strictly regulate giveaways where tobacco, alcohol or guns are involved.
While all states are required to follow the same laws found throughout the U.S. for running contests and sweepstakes, here are some examples of specific state laws governing contests and giveaways.
- New York: In the state of New York, prizes worth $5,000 or more must be bonded and registered 30 days prior to the start of the giveaway. Also, the sweepstakes must also publish the list of winners and make it available to anyone who asks for it.
- Rhode Island: In Rhode Island, any promotional campaign that takes place within a retail location must register with the state if the prize is valued over $500. Even with an AMOE, any promotion asking participants to visit a store must be registered.
- Florida: In Florida, a prize value that exceeds $5,000 must be bonded and registered seven days prior to the start of the sweepstakes. In addition, giveaways must file a winners list with the state and make it available it to anyone who requests it.
- Massachusetts: Giveaways related to tobacco are banned in Massachusetts.
- Colorado: In Colorado, contests and giveaways are prohibited from requiring participants to make a purchase or other forms of consideration to enter a promotion. Numerous states allow purchase requirements within contests where winners are chosen based on criteria or skill.
Other laws and regulations
In order to keep your contests and sweepstakes completely legal, there are some other things you must always do:
- Announce the start and end dates for submitting entries for a contest or giveaway in your terms and conditions document.
- Disclose when and how winners will be chosen. If you’re running a skill-based contest, disclose the judging panel as well as the selection criteria.
- Announce when prizes will be given.
- Contact all winning entrants. If a winning entrant fails to respond to you within a disclosed period of time, you are typically allowed to disqualify them and redraw/reselect a winner as part of the promotion.
- Even if a sponsor or supplier fails to provide you with the prize, you are still legally bound to provide one to the winner(s).
- In some cases, you might be required to report the winnings to the IRS.
Disclaimer
: Please note that this article is not a substitute for legal advice, nor does it determine if the promotional campaign you’re running, or plan to run, is in compliance with all applicable local, state and federal laws. We strongly recommend consulting with a lawyer in order to draft and review your official rules, regulations and policies before launching a promotion.
Want more?
Escalon provides startups and small to midsized businesses with accounting, strategic finance, CFO services and support. Talk to an expert today.
