Top tips for running a legal prize competition or free draw

Prize competitions and free draws under the gambling act 2005

Facebook is on a quest to stamp out illegal lotteries masquerading as competitions on its social media platforms and has now teamed up with the Gambling Commission to enforce this. The recently published Gambling Commission Compliance and Enforcement Report 2019 – 2020 highlights co-operation between Facebook and the regulator:

“Social media lotteries are a growing issue due to their increasing presence on Facebook and other sites. Historically such lotteries were low-level events, and intelligence identified many were being run from home by a small group of people and for low value prizes. However recent intelligence suggests larger, more organised operations may be in effect, generating significant profit for the individuals ultimately controlling these. From May 2019 to May 2020, 245 illegal lotteries were referred by us to Facebook for closure.”

Lotteries run for commercial gain are illegal in Great Britain (the punishment on conviction is imprisonment or a fine). Commercial competitions that require participants to pay to enter and distribute prizes by a process relying wholly on chance are likely to fall into the “lottery” definition under s.14 Gambling Act 2005. Some exceptions apply, such as product promotions, where the price of the product is not increased to reflect entry into the competition.

However, it is possible to run a competition as a genuine skill competition or a “free draw” to avoid falling into the legal definition of a lottery. In prize competitions, genuine skill is required. In free draws, participants must have the option of enter by paying, or (for “free”) by post, telephone call, text or email. First-class or second-class post is acceptable and telephone/text entries must not use premium-rate numbers.

Below are some practical tips to ensure that you stay on the right side of the law when running competitions.

Free draws

• Consider which territories you would like to run your competition in. You may need advice about whether promoting the competition is legal to residents of a particular country. To advertise the competition on social media in that country is likely to require a local legal opinion. Bear in mind that personal taxation, import duty and delivery charges may apply if you deliver prizes across borders, so make sure that your terms and conditions cater for this. Would, for example, a European entrant want to win a UK registered right-hand-drive car?
• It is a legal requirement that the free entry option (usually the postal route) must be publicised so that it is “likely to come to the attention of each individual who proposes to participate”. This means that the option to enter for free must be prominent and legible at the point of paid entry. You should use clear, visible text and in sufficient font size, so that the free entry option is visible to all participants (even if they then decide to pay to enter). Mobile versions of websites, apps and social media entries etc. will all need to comply. If a competition is to allow international entrants, how will you allow non-UK residents to enter for free?
• Avoid the temptation to hide the free-entry-route instructions in the terms and conditions. The view of the Advertising Standards Agency (“ASA”) is that the free entry is a significant term of a promotion and that the instructions should be clearly visible and not hidden away in the terms.
• It is acceptable (though not mandatory) to combine both a “skill” question and free-entry mechanic into the same draw. However, the skill question on its own would often not suffice, due to its simplicity. If you include a question, free entrants must answer the question correctly as well.
• Work out your pricing and odds so that you can make a profit. What will you do if you do not sell enough tickets? What happens if you receive a lot of free entries? You should make it clear whether limits on tickets are for paid entries or for both paid and free entries, as this will affect the odds of winning and you must not mislead entrants.
• Ticket pricing will influence how many free entries you receive. A second-class stamp costs 65p and a first-class stamp 76p. For most lower-priced competitions, it is hardly worth the hassle of entering by post. As the price of entry increases, postal entry becomes more attractive.
• Be careful how you work out the closing date. The ASA position is that closing dates can only be extended in exceptional circumstances and that extending a closing date would be misleading. Consider closing only when a specific number of tickets have been sold, rather than on a specific date.
• It is preferable to automatically allocate draw numbers to entrants. It is arguable that allowing entrants to choose numbers could be “gaming” or “betting” under the Gambling Act 2005. Playing a game of chance for a prize or trying to predict the outcome of a random number generator could be classed as regulated gambling, so it is best to avoid this argument by allocating numbers to entrants automatically.
• The system for allocating prizes must not differentiate between those who have paid to enter and those who enter for free. You can’t therefore make the odds more favourable for paid entrants.
• Selecting the winner should use a verifiably random computer process or be under the supervision of an independent observer. Streaming the selection process on social media is now common and this avoids allegations that the selection process was rigged.
• Prizes must be awarded as described or if this is not possible, a reasonable equivalent (of roughly equal value) must be awarded.
• You should not change your terms and conditions during a competition as this is unfair for people who have already entered.
• Consult an independent tax advisor about your competition early on – bear in mind your ticket sales could be liable to VAT, remote gaming duty and/or lottery duty. It would be wise to approach HMRC in advance to work out what tax or duty (if any) will be payable, so that you do not store up a tax liability (or potentially commit an offence).
• Get help completing Facebook’s Real Money Gaming (RMG) advertising approval form. You may only get one shot at this. You will need to lodge a legal opinion for the territory you would like to advertise in, confirming that the competition is legal (without the need for any licence). Make sure you get a legal opinion from a lawyer who is a gambling expert. You will also need to consider how you are going to verify the age of winners (whilst it is not a legal requirement, Facebook will insist on competitions being 18+).

Prize/skill competitions

• It is very hard to get a skill competition right, so that they do not fall into the legal definition of a lottery. Broadly speaking, the skill element must prevent a significant proportion of people who wish to enter from doing so and prevent a significant proportion of those who enter from receiving a prize. Blindingly obvious questions, multiple choice or answers that can be found on Google in seconds will not involve sufficient skill. Just because a competitor is getting away with a simple “skill” question does not mean it is legal.

At Keystone we have worked with a large number of prize competitions and free draws to get their structuring right from a legal perspective and to help them obtain approval from Facebook for Real Money Gaming advertising. Please get in touch with Richard Williams using the below details should you have any questions arising from this article.