Q: I am interested in starting a game show-like Web site where people pay an annual subscription for a chance at winning a weekly prize that is skill-based. On the Internet, is it legal to collect money and then disburse a portion of it through a contest?

Answer:

There are three types of promotions categories. These vary greatly in regulation by state, so be sure to consult federal law and an attorney in your state for more information.

• Sweepstakes: Sweepstakes are games of chance that do not require payment to enter and do not require skill to win. Sweepstakes are legal but are subject to some regulation by the FTC and state laws, especially in New York, Florida, Rhode Island and Arizona, among others.

• Contests: Contests are games of skill that may require an entry fee. How much skill and how great an entry fee may be required are matters of state statute and case law, so it's important to consult an attorney about the details. However, a great level of skill is not usually required, and entry fees that reasonably cover the expenses of the entry are usually permitted. It's important ensure your contest also complies with regulations regarding contest judging.
• Lotteries: Lotteries are games of chance that do not require skill but do require payment to enter. Lotteries are illegal except if run by the government, nonprofit organizations in certain circumstances and a few other exceptions. Therefore, it is important if you are running a sweepstakes that you have a means of entering that does not include making a purchase or payment so that the promotion is not considered an illegal lottery.

Internet Promotions

Promotion rules are a contract between the entity running the promotion and the person entering the contest (the entrant). Therefore, it is very important that all terms and details of the promotion are set forth clearly, agreed to by the entrant and followed by the entity offering the promotion. Failure to follow the rules may be breach of contract by the entity as well as a violation of state and/or federal laws. It is always best to have an attorney draft your promotion rules due to the level of regulation and detail involved.

The Rules

Promotion rules are a contract between the entity running the promotion and the person entering the contest (the entrant). Therefore, it is very important that all terms and details of the promotion are set forth clearly, agreed to by the entrant and followed by the entity offering the promotion. Failure to follow the rules may be breach of contract by the entity as well as a violation of state and/or federal laws. It is always best to have an attorney draft your promotion rules due to the level of regulation and detail involved.

FTC Regulations

Some states and the FTC have included the Internet in their regulations. It is important to keep in mind that promotion regulations are enacted to protect consumers and therefore states most often will apply them broadly.

For your proposed Internet contest site, it's important to consider the contest regulations in your state. Additionally, you have some risk due to jurisdictional issues from the Internet. Depending on a variety of factors, since this contest is through a Web site, you may be considered to be doing business in the location of your entrants and subject to jurisdiction there; at least in theory, this means you should comply with the regulations where all your entrants are located. One way to address this problem is to exclude entrants from certain states and countries. Another way is to comply with the most restrictive regulations in the hope that you will therefore comply with them all. In any case, consultation with a lawyer is best to help you choose the level of risk you are comfortable with and to draft your rules to lessen that risk.

All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.

1 Readers are cautioned not to rely on this article as legal advice as it is
no substitution for a consultation with an attorney and an accountant in your state. Based
on jurisdiction and time, the law varies and changes.