Sweepstakes Offers: Legal Promotion or Illegal Gambling?

There are legal restrictions, requirements and repercussions when businesses mix advertising with gambling

by Jim Stipe

SweepstakesMany businesses look to hold sweepstakes, raffles, poker tournaments and other contests for marketing purposes. They don’t realize that these activities can amount to illegal gambling.

“Gambling” generally means risking something of value for a chance to win a prize. With only limited exceptions, it is against the law for an Arizona business to benefit from gambling. Businesses that turn a blind eye can quickly find themselves faced with serious legal consequences.

Sweepstakes 

Businesses of all sizes and types hold sweepstakes. They are so popular that entire websites exist to disseminate information on the hundreds of available contests. Done carefully, sweepstakes can be a legal means to promote a business.

Decades ago, sweepstakes were simply ill-disguised lotteries. Players would have to give some form of consideration, such as buying a product, in order to gain entry into the sweepstakes. This format caused the sweepstakes to fall within the broad definition of gambling, where the participant had to risk something of value for a chance to win a prize.

Eventually, federal regulators enacted sweepstakes regulations requiring a viable means to enter the contest without compelling a payment or a purchase of products or services. Regulations also now require a conspicuous disclosure indicating that a payment or purchase will not increase the chances of winning. Additionally, sweepstakes must be operated fairly with no misleading advertising related to them.

The material terms of the sweepstakes must be completely and clearly disclosed to potential players, and the contests ultimately conducted as announced. Although the material terms of the sweepstakes will vary depending on the contest, the following topics should be covered: (1) sponsoring business contact information; (2) the estimated odds of winning a prize; (3) an accurate description of prizes, including their value and costs or conditions to receive them; (4) how to enter and the deadline for doing so; (5) who is eligible to enter; and (6) when and how winners are selected, notified and can claim their prizes.

Businesses must pay close attention to risk when holding sweepstakes. Running afoul of the law usually happens when the business makes money directly from the sweepstakes. The purpose of a legitimate sweepstakes or other contest is to generate buzz, not squeeze money from participants.

Raffles

Raffles involve selling entries, usually in the form of tickets, to win prizes. They are a form of gambling and generally illegal in Arizona, except when operated by certain tax-exempt charitable organizations. Businesses may not hold raffles for profitable gain, so it’s best to consider an alternative form of promotion such as a sweepstakes.

Some for-profit businesses do support or sponsor charities. There is nothing wrong with a business gaining some exposure by helping to sell raffle tickets or providing a raffle prize, so long as the raffle is operated pursuant to Arizona law for charitable purposes.

Poker Tournaments

Poker involving betting and prizes falls within the definition of illegal gambling unless players are engaged in “social gambling.” Social gambling is a term used to define gambling that is not conducted as a business. It involves players who are at least 21 years old who compete on equal terms with each other, and where no other person stands to gain, directly or indirectly, from the gambling. It is not unlawful to engage in social gambling in Arizona.

Businesses sometimes look to host poker tournaments for marketing purposes. For this to be legal, participation by a potential player cannot be contingent on any payment to the business no matter how small and no matter what it is called, including a cover charge, chair rental, ante or rake. Additionally, there cannot be even an indirect benefit to the business, such as profiting from refreshment sales or table rentals. Once there is any benefit to a non-player, the poker game will not qualify as legal social gambling and will put the hosting business at risk.

Note that there are no special rules in place for Internet poker. Beware of engaging or operating any poker site where there is any payment, betting or prize awarded. The site will most likely turn out to be illegal in Arizona.

Deliver on Promises

Promotions help build brand awareness and often result in more traffic, buyers and sales. Businesses just need to remember to determine if the activity is legal, follow the rules, pay close attention to risk and deliver the prize per their promise.

James Stipe is an AV-rated AV® Preeminent 5.0 out of 5 peer review-rated attorney in Martindale-Hubbell who joined Burch & Cracchiolo, P.A. in 1992. He practices in the areas of Commercial Litigation, Insurance Defense/Personal Injury Litigation and Indian Gaming Law. In the gaming arena, Stipe represents regulators in litigation and negotiations relating to Tribal/State Gaming compacts, and has counseled gaming vendors and tribal governments. He is the past Chair of the Indian Law Section of the State Bar of Arizona. 

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