Offering a contest in the USA? Know these laws

Contests, giveaways, sweepstakes, or similar promotions, which allow participants 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 operate a contest or giveaway at your company effectively.

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:

A contest, also referred to as a game of skill, is a promotional campaign where participants strive to emerge as winners by outperforming others. The winners are selected or judged based on their merit or a specific skill element, such as their performance or the submission they make as part of the contest. In order to participate in a contest, entrants may be required to answer trivia questions, capture a photo, write a response, or engage in other activities that demonstrate their skill.

Sweepstakes:

 A sweepstakes, also known as a giveaway, is an exciting promotional event where lucky winners are chosen at random to receive a wide range of prizes. These prizes can range from cash and exclusive books signed by popular authors to high-tech electronics and even dream homes.

It's important to note that a sweepstakes must comply with U.S. No Purchase Necessary Laws. According to these laws, it is illegal for a business to require participants to make a purchase in order to enter a competition or receive a giveaway. This means that a sweepstakes is considered a game of chance, while a contest is a game of skill.

Lottery:

Lotteries are often utilized by businesses as a fundraising method, involving the sale of numbered tickets and awarding prizes to randomly chosen ticket holders. In this type of promotion, participants are required to pay an entry fee in order to participate, distinguishing it from a sweepstakes. Lotteries are games of luck where winners are selected at random, but with the added element of an entry fee.

Sponsors of sweepstakes or giveaways in the U.S. must ensure that their promotional campaigns are distinct from lotteries in order to comply with the law, as private lotteries are illegal.

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

To distinguish a giveaway from a lottery, it is necessary to eliminate one of these three requirements. However, it is important to note that a successful contest, giveaway, or sweepstakes will always have a prize. If the sweepstakes involves skill in order to win, then the winner cannot be chosen randomly. Therefore, the most straightforward way to adhere to legal requirements is to remove the element of consideration.

What is consideration?

 Consideration, in legal terms, encompasses anything of value. The definition of consideration can vary across different states, but ultimately it refers to the various ways in which individuals can participate in a contest by either taking 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?

 In many instances, sweepstakes or giveaways may be obligated to offer an alternative way for participants to enter, known as an Alternate Method of Entry (AMOE), to prevent violating laws related to lotteries. AMOEs provide participants with a free and convenient option to enter the promotion without having to make a purchase.

To ensure compliance with No Purchase Necessary Laws, it is crucial to offer a free method of entry for your luck-based promotional campaign. This allows users to participate without having to purchase your product, eliminating any advantage in winning odds. Examples of Alternate Methods of Entry (AMOE) include filling out an online form or entering via email. By providing these options, you can keep your promotion in line with the law and give everyone an equal chance to win the prize.

Laws that govern contests and giveaways

Promotional campaigns for contests and sweepstakes in the United States are subject to regulation and oversight by a combination of federal and state laws. These laws ensure that businesses adhere to legal requirements and protect participants in these promotions. It is important for companies to be aware of and comply with these laws to avoid any legal issues or penalties.

Federal laws:

 There are several federal agencies that have the authority to supervise and regulate promotional activities. These agencies play a crucial role in ensuring that businesses comply with the necessary legal requirements.

• 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:

 Promotional campaigns that include tobacco, alcohol, firearms, insurance, gasoline, or dairy products are subject to strict regulations in the United States.

State laws:

Fortunately, each state has its own set of laws and regulations when it comes to contest and sweepstakes promotions, allowing businesses to navigate the legal landscape. While most giveaways comply with the law as long as they are not considered lotteries, it's important to note that states have strict regulations regarding giveaways involving tobacco, alcohol, or guns. While all states must adhere to the same laws governing contests and sweepstakes in the United States, here are some examples of specific state laws that govern these promotional campaigns.

• 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.

 

What "No Purchase to Enter or Win" Means in Sweepstakes

Any legitimate sweepstakes is totally free to enter. It's illegal in the United States to run a giveaway that requires a purchase or a membership to enter. That's why, when you read sweepstakes rules, you'll see terms like: "No purchase necessary," "No purchase necessary to enter or win," or "a purchase will not affect your chances of winning."

This seems strange when the goal of a giveaway is to increase business for the company that's sponsoring it. However, companies need to rely on other marketing tactics to turn the visitors they get to their giveaways into paying customers.

That means that companies cannot let people enter and then disqualify them if they don't buy something, and they can't give better odds to people who do buy their products.

But how does it work? And what exactly is prohibited? And how do AMOEs play into the law? To answer those questions, you first need to understand what consideration means.

What Does "Consideration" Mean in Sweepstakes

In sweepstakes terms, "consideration" is simply exchanging something of value for either a prize or the chance of winning a prize. In the United States, sweepstakes that award prizes by chance, like a random drawing, cannot require any consideration or they will be in violation of the law.

In the United States, only the government can run lotteries; some jurisdictions prohibit them altogether. So in order for sweepstakes to be legal, they cannot be a lottery.

The definition of a lottery is:

A randomly-drawn giveaway with a chance to win a prize that has monetary value and has an element of consideration.

At least one of those three characteristics must not be present for sweepstakes to be legal. The most common element to eliminate is consideration.

Consideration isn't just a matter of money exchanging hands; anything that financially profits the sponsoring company counts.

So a sweepstakes sponsor cannot force entrants to purchase a product to enter sweepstakes, but they also can't require that entrants fill out an extensive and time-consuming survey or listen to a sales presentation to claim a prize.

Now that might sound clear, but there are plenty of gray areas about what qualifies or doesn't qualify as consideration when you are entering sweepstakes.

For example, some giveaways make it mandatory for entrants to opt in to receive their newsletters to enter their sweepstakes. Does that count as consideration? Having a larger email list is a benefit to the sponsor, but it might not directly translate into profit.

The question would have to be brought up in a court case to get a definitive answer. But many companies make signing up for a newsletter optional, to stay on the safe side of the law.

Have You Seen Sweepstakes Where You Need to Make a Purchase to Enter?

So if sweepstakes can't require a purchase to enter or to win, why is it legal to run giveaways where entrants have to look under a cap of a soda bottle to enter? Or those where you have to show a receipt proving you've purchased certain products before you can enter? Isn't that consideration.

It is.

However, it is legal — in most jurisdictions — to let people enter with a purchase if there is also a way to get the same number of entries without buying anything. These are called alternate methods of entry (AMOEs).

So if a beverage company is holding an under-the-cap giveaway, read the rules and you'll find that you can use the alternate entry method to enter for free by mail, with a telephone call, or through another method.

Note that the requirement is that no purchase must be necessary to enter AND that a purchase can't affect your chances of winning. That means that entrants have to be able to get the same number of maximum entries through non-purchase entry methods as through entry methods that require a purchase.

What About Sweepstakes Where You Need to Be a Paid Member to Enter?

Sometimes companies like Verizon or Sirius XM hold giveaways where you have to be a paying member to enter. Why doesn't that violate the no purchase necessary law?

If you read the rules, you'll find that they're using another loophole: They'll say that you have to have been a member before the giveaway began. 

Most jurisdictions accept that paying money to join wasn't a requirement to enter or win since the payment had to have been made before the chance to win existed. Therefore, the giveaway itself doesn't have any element of consideration to it.

What About Internet Access? Does That Count as a Purchase?

Consideration doesn't even have to be paid directly to the company sponsoring a giveaway. If sweepstakes require entrants to do anything costing money, they risk violating the no-purchase-necessary sweepstakes laws.

But what about the methods used to enter sweepstakes? While a stamp and envelope for mail-in sweepstakes don't count as consideration, what about buying a computer and signing up for internet access? Will hosting sweepstakes online get companies in trouble?

The short answer is — maybe. Because laws vary by state and can change over time, it's hard to give a more concrete answer. In the article, Don't Gamble with Internet Sweepstakes, the National Law Review writes:

There has been some concern that requiring a computer and/or Internet access to enter a sweepstakes could be deemed consideration. However, as long as consumers are not specifically induced to purchase Internet access and/or a computer for the purpose of participating in a promotion, Internet sweepstakes are not likely to be deemed an illegal lottery on that basis alone. 

Meanwhile, Dale Joerling of Thompson Coburn writes:

Is getting online 'consideration'?​Another consideration quandary pops up when deciding whether it constitutes consideration to require a person to go on to the Internet to enter a sweepstakes. Many argue the Internet is so ubiquitous and accessible that requiring someone to enter online can't be considered consideration. Others argue equally forcibly that only about 70 percent of Americans have Internet access at home, so not everybody can enter an online sweepstakes or play a game free of charge. They also argue that while most U.S. residents are familiar with use of the Internet, some still may not be comfortable registering for a sweepstakes online.

To be safe, sweepstakes sponsors use a few different methods to ensure that their giveaways are legal. For example, some use mail as an alternate entry method, as described above. Others state in the rules that, in order to be eligible to enter, entrants must have a computer and internet service before the beginning of the giveaway begins. And others suggest free ways to get online, such as using computers at libraries.

Why Can Contests Charge Money to Enter?

If selling entries into sweepstakes, or requiring a purchase to enter, is illegal, why do some creative contests charge fees to enter and win?

To find the answer, go back to the three elements of an illegal lottery: consideration, a prize with monetary value, and a random drawing for the winner.

Contests, by their nature, don't draw winners at random. They use a judging system to select the winning entries, so they don't have the three elements required to be an illegal lottery.

Many contests are free to enter, meaning that they avoid two out of three of the elements of an illegal lottery. But if the winner is selected by judges (or another skill-based manner), a no-purchase-necessary entry method isn't mandatory.

So Who Enforces No Purchase Necessary Laws?

It doesn't do much good to say that legal sweepstakes can't require a purchase if the law isn't enforced. There are a few different governmental agencies in the United States who are responsible for ensuring that sweepstakes really aren't pay-to-play:

• The FCC: The Federal Communications Commission is responsible for advertising that takes place online or on the internet. The FCC can get involved in giveaways that are available on or which are advertised through these methods. You can read what the FCC has to say about sweepstakes and lotteries here: Broadcast Contests, Lotteries, and Solicitation of Funds. 
• The FTC: The Federal Trade Commission is responsible for protecting consumers and promoting fair competition. This includes making sure that sweepstakes entrants aren't told, or tricked into believing, that they must make purchases to win. The FTC also has specific rules regarding sweepstakes that must be followed. You can read more about the FTC's involvement with giveaways here: Advertising FAQ's: A Guide for Small Business.
• The USPS: Mail-in sweepstakes and sweepstakes that are advertised through the mail also fall under the jurisdiction of the United States Postal Service. Read more about what the USPS has to say about no purchase necessary to enter rules here: Publication 546 - A Consumer's Guide to Sweepstakes and Lotteries.

• Your State's Attorney General: Aside from federal regulations, states also have requirements about how sweepstakes are handled. You can find more information and also report violations by visiting your local attorney general's website. 

If you find a giveaway that is in violation of the no purchase necessary sweepstakes law, you can report it to the appropriate agencies.

 

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.