Get rich quick or too good to be true? - giveaway raffles, staying on the right side of gambling provision regulations

By Craig Weston and Alexandra Marchant from Irwin Mitchell's Regulatory Investigation Group

Giveaway raffles are becoming more prevalent in the social medial age particularly amongst young entrepreneurial, and it’s an area of business that many may be surprised to read sits on the boundary of gambling commission regulations. Recently, we have seen a rise in advertisement of giveaways, work lotteries and even families raffling off their home, leading to an increase in enquires from young, non-business people entering a potentially regulated area for the first time.

It is key that those looking to enter this potential market understand the regulatory framework and take advice on their proposed business model, terms and conditions and how the competition/raffle is run. Get it wrong and you could be committing a criminal offence.

The scenario:

A young entrepreneur notices a demand for raffles involving high value ticket items such as cars or unique items such as signed memorabilia.  Wanting to capitalise on the demand they are looking to set up a company and sell tickets for a raffle for each item.  They want to advertise on social media and take payment online.

The basics:

If you’re selling tickets to a raffle it’s likely you’re running a lottery which does fall under the gambling commission regulations unless an exemption applies or it can be properly categorised as a prize competition a free draw (discussed below)

The Gambling Act 2005, which came into force in September 2007, repealed the Lotteries and Amusements Act 1976 and the Betting, Gaming and Lotteries Act 1963. A lottery is defined by the Gambling Act 2005 if:

• Entrants are required to pay to participate
• Prizes are awarded to winning entrants
• The prizes are allocated using a process of chance (or, if a series of processes, where the first relies wholly on chance)

The above definition is set out comprehensively in the act and defines two types of lottery, a simple lottery and a complex lottery. The difference generally is that a simple lottery uses one process to award prizes, a complex lottery allocated prices using a series of processes.

It is a criminal offence to run a lottery unless either you have a lottery operating licence or the lottery is exempt from the licensing requirement because it is a private lottery (e.g. a workplace lottery), a customer lottery, an incidental non-commercial lottery or a small society lottery and in each case the exempt lottery fulfils certain conditions set out in the Gambling Act. Small society lotteries (that is, lotteries below certain financial thresholds which are operated by non-commercial societies) still need to be registered with the local licensing authority.

Any individual or company involved in promoting or managing an illegal lottery – including a competition which is a lottery – is guilty of a criminal offence under the 2005 Act, and on conviction is liable to a fine of up to £5,000 and/or imprisonment for up to 51 weeks (England and Wales) or six months (Scotland).

Lotteries, or raffles, are commonly held at fairs, fetes, concerts, parties and so on. This article summarises gambling commission advice on the wide exemptions that apply to lotteries and draws unregulated by the Commission.

Certain types of lotteries do not require licence or registration

 A lottery may fall outside of regulation if it is not run for private gain or commercial purposes, and is only promoted in order to raise funds for a good cause such as a charity.  As such it is unlikely that any of the exemptions below will be of any use to the young entrepreneur in our scenario who wants to make money from the raffling of goods.

Incidental lotteries 

Incidental lotteries must be held at an event. The event itself may be either commercial or non-commercial, such as a fair or a dinner.

In order to fall into this category, the purpose of the lottery must itself be for ‘good purpose causes’ i.e. a charitable raffle, and must not be for private or commercial gain.

Incidental lotteries must also comply with the following conditions:

• Those responsible can deduct a maximum of £100 from lottery proceeds to pay for expenses incurred organising, for example buying paper raffle tickets
• A maximum of £500 lottery proceeds can be spent on buying prizes for the raffle. There is no maximum for donated prizes.
• Lottery prizes cannot roll over
• Tickets can only be sold during the event and at the location. Results must be drawn at the event or after it has finished.

Private lotteries 

Private lotteries, which include private society lotteries, work lotteries and residents’ lotteries also do not require regulation on licence.

Private lotteries must comply with conditions relating to tickets, such as:

• Tickets can only be sold by or on behalf of the promoters
• Tickets are non-transferable
• All tickets must be the same price, and must be paid for before tickets are given out
• Prizes cannot roll over from one lottery to another

Customer lotteries

A customer lottery is promoted by a promoter who occupies premises in Great Britain in the course of business. Tickets in the lottery are only sold at a time where the purchaser is on the business premises as a customer of the promoter.

There are a number of conditions on running a customer lottery, including:

• All conditions that apply to private lotteries, as above
• No profit can be made from the lottery
• Tickets cannot be sold to children under the age of 16
• The lottery can only be advertised on business premises
• Another customer lottery cannot take place within seven days
• Prizes cannot be worth more than £50

It is the responsibility of the organiser to ensure your lottery is legally compliant. For further guidance on incidental and private lotteries, see Schedule 11 of the Act. If in doubt the Gambling Commission advises seeking legal advice.

So can you run a draw for private gain?

The above examples are effective ways to run a lottery outside of the regulation, but cannot be utilised by those wishing to make private or commercial gain.

Fortunately for individuals wishing to do exactly that, skill competitions and free prize draws remain outside the Gambling Act – but it is important to structure such competitions and draws so that they do not inadvertently fall within the definition of a lottery, betting or gaming. Taking advice on the structure of the draw and the detail fo any applicable terms and conditions and the nature of your advertising is crucial to ensure you are operating legally.

Both prize competitions and free draws can be run for commercial or private gain, and can be an ideal way of promoting your product. You do not need permission from the gambling commission or a licencing authority to organise and run a prize competition or free draw, as long as they meet the requirements of the act discussed below.

Prize competitions 

A prize competition is a form of pay-to-enter giveaway where the outcome is determined by the application of knowledge, judgement or skill. Prize competitions, if they satisfy the ‘skill’ test under the Gambling Act 2005, are not regulated by the gambling commission.

So, can any correctly answered question be used to demonstrate skill and therefore take a competition outside of the definition of a lottery?

No. Under s.14(5) of the Act, a process which requires the entrant to exercise skill or judgement will still be considered to rely wholly on chance (and therefore fall within the definition of a lottery) unless it:

• Prevents a significant proportion of those who participate to being entered into the prize draw, or
• Deters a significant proportion of those who wish to participate from actually do so

That doesn’t mean the question has to be strenuously difficult to answer. In fact, the Gambling Commission does not think that a question which can be easily answered with a bit of basic research would fail this test – it just means that your question probably shouldn’t be ‘what is the capital of the USA ?’ The more difficult the question or the more elements to the question the easier it will be to demonstrate sufficient skill or judgement is being exercised.

Where all correct entries are then put into a random draw this does not make it a lottery as the first step was a skill competition.

If in any doubt about whether a giveaway involves the exercise of skill, the Commission advises organisers to consider the two tests in s.14(5), as explained above. We would advise taking legal advise on the type of skill element you propose and also keeping an audit trial of material that supports your view that the skill requirement is satisfied

Free draws

Another variation of the above, and one that is common in the media, is the pay-to-enter raffle which also allows free entries by an alternative means e.g. “texts cost £2 or enter free by post”

The Gambling Act 2005 distinguishes between two types of free draw – the first where all entries are free, the second where there is the option to either pay or enter freely.

The conditions on running are genuine free draw are:

• The draw is genuinely accessible to enter without paying
• The option to enter freely is widely publicised and therefore likely to come to the attention of those wishing to participate. Free entry must be advertised with as much prominence as the paid for route.
• Prizes are allocated without distinguishing entries from each route

The Act defines free as any a method of communication charged at the normal rate i.e. no additional payment over what it normally costs to use a method of communication. For example, free entry by first or second class post is permissible, but a draw which required the use of special delivery would be classed as ‘free’.

So, by virtue of having an option to enter freely (even if very few people would choose to, for example, enter by post rather than by text) this is considered a ‘free draw’ and is again unregulated.

You must ensure however that the free entry route is sufficiently prominent and available withing the timeframe of the prize draw.   

Conclusion

Lotteries are illegal unless they fall into a category specifically permitted by law.

If you’re looking to organise a lottery a good cause, such as private society, for charity or within your workplace that is not for private gain consider incidental, work or residential lotteries.

Those interested in profiting commercially may choose to run a prize completion or a free draw, closely adhering to the guidelines above to ensure the activity remains unregulated.

If you’re interested in organising a small lottery that does not require licence or registration or a prize competition/free draw, below are some tips to help you find yourself on the right side of the line:

• Be specific with your deadline ‘deadline for entries tomorrow at noon’ should be ‘deadline for entries is 12 noon GMT, 30 March 2021’
• Make sure you have mechanisms in place to monitor the fairness of the draw
• Be aware of anti-money laundering regulations
• State clearly whether or not you will accept refunds, and if so ensure you have a system in place to record them
• Consider the provisions of the The British Code of Advertising, Sale Promotion and Direct Marketing (known as 'the CAP Code') which require disclosure of certain information before or at the time of entry into any prize promotion.

If in any doubt check gambling commission guidance online at https://www.gamblingcommission.gov.uk/home.aspx or seek legal advice.