Running a contest is a great way to increase customer engagement and promote your business. People get excited about product giveaways and the opportunity to win prizes. But it's not all fun and games.
Before you launch your online contest, you need to consider and create the giveaway rules. You also need to make sure your online contest rules follow state and federal regulations and social media platform rules and requirements.
The first thing to determine is whether your online giveaway is a sweepstakes or a contest. Most online giveaways are sweepstakes. A sweepstakes is a game of chance. Anyone can enter and the winner is selected randomly. In a sweepstakes, everyone has the same chance at winning. If you own a coffee shop and offer the chance to win a free year of coffee beans to everyone who likes your store on Instagram, you are running a sweepstakes.
Online contests are also free to enter but they involve some level of skill or judgement. Contests ask users to upload their own content---photos, videos, stories, or performances---and someone selects the winners. In a true contest, everyone does not have an equal opportunity to win. If you ask contestants to create a spring cup design for your coffee shop and have a panel of judges vote on the winner, you are running a contest.
Both sweepstakes and contests are giveaways because contestants can enter to win for free.
If people pay to enter your contest, it is no longer a giveaway. When people have to purchase a ticket or a product for a chance to win, the giveaway becomes a lottery. Lotteries are a form of gambling and are highly regulated by state and federal law. You must have a license to run a lottery. Any lotteries conducted without the proper paperwork are illegal and can result in criminal charges.
In order to avoid accidentally running a lottery, your giveaway rules should clearly state that no purchase is required to win. Sometimes businesses do provide a contest entry with a purchase. An example of this is McDonald's Monopoly game. When you purchase an item from McDonald's during the contest you automatically get a chance to win a prize. However, the official contest rules also provide an alternative method to enter. People can enter by filling out a form online or sending an entry form through the mail. As long as a free entry option exists, your contest will remain a giveaway.
Every contest must define the terms, identify the prize and describe the method for selecting winners. All of your contest promotions must provide a link to these official rules.
The terms define the elements of participation in your online contest. They include:
Be specific when describing the prize. If you state the prize is $1,000, clearly identify whether that means $1,000 in cash, or a $1,000 gift card for your services with no cash value.
Do not leave any part of the prize subject to interpretation. If you offer a grand prize trip to Hawaii, spell out what the trip includes: airfare, hotel, food, excursions. You can include as much or as little as you want in the prize. But you must decide what's included and communicate it clearly in the official giveaway rules.
In a sweepstakes, winners are selected at random. You should use a third-party to select random winners so you can't be accused of impropriety.
If your online giveaway is a contest, you must spell out the method and criteria used to judge entries and select winners. You should identify who will select the winner and describe the criteria that will be used. Include objective criteria in the official online contest rules. If the contest does not use objective factors, state that winners will be chosen based on personal, subjective determination.
These three elements comprise your promotion and are legally binding. Be sure to draft them carefully.
If your contest selects winners based on user-generated content, you must consider copyright laws. Participants who submit original work, like photos, videos, stories, and music, to your contest maintain the rights to their work.
This means that you if want to use any of the content submitted by participants for your own purposes, you will need to get permission from the individuals. A blanket statement in the online contest rules requiring entrants to assign rights to any work submitted to the contest is not enough.
You might want to have entrants specifically sign a consent form at the time of entry. Or you can seek consent only from those participants whose content you'd like to feature. This can be done electronically through email or direct messaging on social media platforms. Most of the time users are thrilled to let you feature their content. But it's better to be safe than sorry.
If your contest involves high value items, such as cars, trips, and cash, there are extra hurdles. You should have winners sign an affidavit of eligibility declaring they are eligible to win the prize. You must also collect winners' Social Security numbers for all prizes over $600 so you can report this information to the Internal Revenue Service (IRS).
You should also have winners sign liability and publicity releases. The publicity release allows your business to use, display, and publish a winner's identity, including their name and photo, in promotional materials related to the giveaway. This differs from the usage rights discussed above which allows you to use specific content the user created for the contest for your business. The liability release protects you and your business from liability for taxes, claims, demands, or losses related to the contest or prize.
You must also report certain contests to the IRS. Your online contest rules should inform contestants that winners are liable for any and all taxes related to their prize and that winners will receive a Form 1099 from the IRS requiring them to declare the amount of their winnings.
Many states have their own laws and regulations governing online contests. For instance, California prohibits the use of the word “lucky”. Each state usually has information about contest rules on their official websites. You should design your contest to meet the most restrictive state rules. Always include a “void where prohibited” disclaimer.
Given the various federal and state regulations, it's always a good idea to have your attorney review your official contest rules.
Each social platform has its own rules about giveaways. For instance, Facebook requires all contests to include official rules, eligibility requirements, and a statement that Facebook is not a sponsor of the contest. It also prohibits contests that require entrants to “share” a post to enter a contest.
Make sure your giveaway rules comply with the terms of service of each social media platform you are using. You can find the full details of their guidelines on each platform's policy page.