Businesses and charities love to raise funds and awareness by holding games of chance, especially raffles and sweepstakes. These can be fun ways to get people involved in a marketing campaign for a new product, or in participating in a community event. However, there are very strict laws about how to legally hold a raffle or sweepstakes. It’s important to know the requirements here, to make sure your business doesn’t end up accidentally running an illegal lottery.
Charities are allowed to hold opportunity drawings such as raffles, so long as they meet the requirements laid out in the California Penal Code. Specifically, Section 320.5 of the Penal Code states that such raffles must generally be registered with the state, with some specific exceptions. The main exception is a raffle where there is a general distribution of tickets (for example, everyone who attends an event gets a ticket for a door prize), all tickets given away have the same chance of winning (regardless of whether they were given away or given in return for a donation), and it is clear that participants are not required to pay for their chance to win. It’s important to note that selling the tickets and only giving away free ones when asked does not qualify under this exemption.
Charities who plan to sell tickets for their raffles must register annually with the state, and at least 60 days before the scheduled date of your raffle. This registration includes filing an informational statement and a financial report. The financial report requires you to detail such things as what will be done with the funds from the raffle and who will be paying the expenses of the event. Charities should note that, because of the “90/10 rule” in Penal Code Section 320.5, 90% of the funds collected during the raffle must be used for charitable purposes, and only 10% can be used to pay for expenses, operating costs, or other expenditures.
In many situations, particularly for larger prizes, the charity is responsible for notifying the IRS of the winnings and even withholding taxes. It’s important to collect the right information before releasing the prizes to ensure you are complying with federal tax law.
Sweepstakes are giveaways where the winner is chosen by luck. These are also by state and federal law. Many businesses use sweepstakes to promote purchase of a particular product. One of the big requirements to keep in mind when running a sweepstakes is that you cannot require participants of a sweepstakes to purchase an entry. Instead, some free, alternate method of entry (such as mailing a postcard to a particular address) must be provided. You may already be familiar with this particular requirement, as it’s the reason sweepstakes always state “No Purchase Necessary.”
The requirement to not force participants to provide anything of value in exchange for an entry can be can difficult thing to comply with for some businesses. In the modern age, personal information can sometimes be more valuable to businesses than a simple, one-time monetary transaction. As such, it is important to tread very carefully when designing your “alternate method of entry,” and consult with your business attorney to ensure you aren’t violating sweepstakes regulations with your contest.
If you’re interested in running a raffle or sweepstakes for your organization, reach out to the team at Chase Law Group, P.C. Call (310) 545-7700 to schedule an appointment with a member of our staff today to discuss your goals and applicable state and federal law. We want to help you raise money and awareness correctly and legally.