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Law Educator, Esq.
Law Educator, Esq., Attorney
Category: Business Law
Satisfied Customers: 118673
Experience:  All corporate law, including non-profits and charitable fraternal organizations.
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I would like some advice regarding the legalities of running

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I would like some advice regarding the legalities of running on-line contests through a website/web business, whereby members could win cash, gift prizes and other ‘larger prizes’ which I will describe shortly.
Let me start with the cash and gift prizes. Is it legal for us as an online company to offer new registering members the chance to win cash and prizes?
There is no registration fee to the members, and there are no other costs to the members, however for any new member to win they would have to comply with certain terms and conditions which would include performing certain functions.
The primary points in the terms and conditions are listed below:
• Sign up as a member on the site
• During the registration agree to invite people listed in their email address book (Gmail, Yahoo, AOL, etc) to also register as a member of the site. Other company’s such as LinkedIn and I believe Twitter already do this except they do not require that you do this. This invite feature is completed automatically through our software. New members simply have to enter their email address and password XXXXX that account, which is only used and kept for this “invite” purpose. As I mentioned, other big companies are already doing this but not requiring it. If we are unable to mandate that they invite their address book we can structure the contest so that the members who refer the most new members are the ones who win the prizes and therefore it behooves them to invite their friends to join via the address book.
• New member would agree that prizes (cash or otherwise) would be awarded to the top 10 members that enroll the most new members. We have a way of tracking this information.
• Additionally, members would agree that prizes will only be awarded once website membership has reached certain levels which will be disclosed in the terms and conditions they agree to. For example, a cash prize of $1000 would be awarded once the website has 100,000 registered members. A new Ford Flex would be awarded once the website has 1,000,000 registered members.
• Members would also have to agree to maintain a certain amount of activity on the website which would be measured by a variety of means, i.e., time on site, frequency on site, amount of posts being uploaded to site, etc.
• If additional skill is required to make the contest legal we can implement the need for members to reach certain point levels through site activity, some of which require time, effort and we believe skill. We say “believe” because in order for a member to reach certain point levels they must have their posts voted into the top 10 posts of the day or week or whatever time frame we set up. More “skill” can be added by requiring a member to correctly answer certain questions related to the topic of the site, i.e. politics or sports.
• I have attached a link for a current contest being run by a credit union. From what I can see, no skill would be required to win this contest.
Now regarding the aforementioned ‘larger prize’, we would like to run a similar contest but award the winners a percentage of the websites net revenue and a percentage of any buy-out (acquisition/selling price) the web business receives and accepts?
For example, if the web business made a net profit of $100,000 per month we would award $10,000 a month in prize money. If the business sold for $1,000,000.00, we would award the winners 10% or $100,000.00? We want to do this because we believe that our active members, that help us reach a level of success, should be rewarded for the part they play in that success.
In order to be eligible to receive this 10%, members again would have to comply with similar terms and conditions as was previously outlined.
Thank you for your opinion on this subject.
As long as there is no fee or charge for entering into such a contest, the business is free to give away what they want as a prize and it is not considered gambling. You are not "mandating" their sending invites to new members, it is a requirement for registration on your site to be eligible for entry into the contest (semantics, but it is still voluntary on them as to whether or not to do so).

As long as there is no money coming from the entrants in this contest, even for the larger prize, then it is not considered gambling, so you can set the prize up and how it will be awarded as you choose as long as you publish the rules and have some way to verify or account that the rules are being followed and can substantiate that to anyone who may challenge whether or not they won.

The botXXXXX XXXXXne with these offers is that you cannot accept any money from the entrants to participate.

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