What is an Illegal Lottery? Understanding the Risks and Legalities.

Lotteries have been a popular way of both raising money and entertainment for centuries now. However, in the United States and other countries, lotteries are very strictly regulated by both state laws and federal laws. When promotions do not follow the strict guidelines around gaming and lottery classifications, they maybe deemed an “illegal lottery.” In this article, we will explore what constitutes an illegal lottery, what are the consequences of being deemed an illegal lottery and how you can ensure that your promotion will not be deemed an illegal lottery.

What Defines a Lottery?

To understand how to avoid running an illegal lottery, we must first define what a lottery is. Lotteries generally have three main elements:

1. Consideration: Participants pay money or give something of value to enter. Consideration could be many things, in some states, consideration could be “time spent” (think a two-hour timeshare presentation). To learn more about what consideration is, contact one of RTM’s sweepstakes lawyers today or look at our No Purchase Necessary blog.
2. Chance: Winners are chosen by random chance.
3. Prize: An item of value is awarded.

These elements all together are what constitute a lottery. If a promotion has all these elements together then it would qualify as a lottery. Legal lotteries are typically run by licensed organizations or government agencies, adhering to the strict regulatory guidelines that ensure transparency, fairness, and security for participants.

Differences Between Legal and Illegal Lotteries

The key difference between a legal and illegal lottery is that legal lotteries are licensed and regulated by the government. Lotteries are most often state run, not by private citizens or companies.

The government regulates lotteries strictly because without oversight, lotteries are very susceptible to fraud, corruption, and exploitation. You may have seen promotions such as contests and sweepstakes in the past that closely resemble a lottery, however, there are a few key differences that differentiate the two.

How is a Sweepstakes Different from a Lottery?

You may be asking yourself, “I want to run a promotion that has a purchase to enter requirement, but I don’t want to be subjected to such rigorous legal scrutiny or apply for licenses.”

Luckily, there are still ways to run sweepstakes and contests without your promotion being considered an illegal lottery.

The key differences between a sweepstakes and a lottery are as follows:

• Entry Cost: A lottery has a form of consideration to enter, which may be an entry cost or requiring a purchase to enter the promotion. A sweepstakes, on the other hand, always hasa free method of entry. A sweepstakes can either be entirely free to enter or it can offer an alternate method of entry or AMOE if a purchase is required to enter. To learn more about AMOE, read our blog on the topic.
• Prize: A lottery offers a prize, such as cash, goods, or services. While sweepstakes also offer a prize, the prize is fixed, having been funded by the sweepstakes sponsor, without requiring financial input from entrants. The prize pool does not grow as more people enter.
• Legal Regulations: A lottery requires a license from a governing body to operate legally. As we have discussed, lotteries are subject to strict legal regulations and oversight. Sweepstakes are also legally regulated; however, they do not require a license to run. Instead, it is recommended to have your sweepstakes governed by a set of official rules.

What are the Consequences of Running an Illegal Lottery?

There are strict penalties in the United States and abroad imposed on people who are found to be running an illegal lottery. Whether you are an organizer or a participant, the consequences can be very severe.

• Fines: Individuals involved in an illegal lottery can face large fines. These fines can be applied to both the participants and organizers of the lottery.
• Imprisonment: Organization and running of illegal lotteries can even lead to jail time, especially if the lottery is operated on a large scale.
• Reputation: If you are worried about the reputation of your brand (or yourself), you should be concerned about running an illegal lottery. Illegal lotteries can negatively affect your customers' impression of your brand and your company, making them think you are not trustworthy.

How to Protect Yourself from Illegal Lotteries

If you want to make sure that your next sweepstakes or purchase to enter promotion is run legally and within the confines of state and federal law, it's best practice to reach out to a qualified sweepstakes lawyer. A sweepstakes lawyer can ensure that your promotion is structured legally and does not violate domestic or international law. Running illegal lotteries comes with many risks, including fraud, fines, and even jail time. Reach out to Realtime Media today to learn how we and our legal team can help you distinguish your next promotion from a lottery.