The holiday giving season is upon us. Many nonprofit organizations will be focused on Giving Tuesday, their corporate supporter arrangements like matching campaigns and charitable sales promotions, and traditional, direct donor fundraising efforts as we close out the year. But another often-considered fundraising structure, especially with end-of-year events resuming (or at least inching toward pre-pandemic levels), is the trusted charitable raffle.
While the raffle itself may be a familiar concept, the compliance considerations and potential pitfalls facing nonprofit organizations that conduct these fundraisers often are not. Making sure a raffle is structured and conducted properly is critical, because to fail to do so could mean hosting an illegal lottery. Receiving a state notice concerning potential civil or even criminal penalties isn't the "warmest wishes" holiday card most organizations want to receive. As such, when planning for your organization's next raffle, keep these basic considerations in mind.
Understand the Assignment: Avoid a Lottery
Lotteries, which are regulated under federal law and the laws of all 50 states, have three elements: (1) they offer prizes; (2) they operate on the basis of chance; and (3) consideration is paid to enter. At least one of these elements must be eliminated before a prize promotion can lawfully proceed, unless the promotion otherwise qualifies for an applicable exemption that permits the presence of all three elements. Failure to adhere to these rules can constitute illegal gambling, and prompt significant civil, criminal, and adverse reputational consequences.
Check the State Law Exception for Raffles
Most states have exceptions for charitable lotteries, i.e., raffles. Raffles generally include all three elements of a lottery, and thus are prohibited, but certain "eligible" or "qualified" nonprofit organizations may be permitted to conduct raffles under specific exceptions per state and/or local laws if various restrictions and other limits are observed. When reviewing whether a state's raffle exception allows your organization to conduct a raffle in the state, there are a myriad of particulars to confirm. Among the most important, be sure to check:
- Organizational eligibility. Although the general rule is that to host a raffle, the organization must be a nonprofit organization, many states take this further and specify that only tax-exempt organizations—or certain types of tax-exempt organizations—are eligible to host raffles. For example, many states limit raffle eligibility to tax-exempt charities recognized under Section 501(c)(3) of the Internal Revenue Code; others impose additional in-state presence requirements, such as being registered and in active existence in the state for a specified period of time leading up to the raffle registration application.
- Registration and reporting requirements. States and even local jurisdictions may impose registration, reporting, and record-keeping requirements on raffle sponsors. Be sure to confirm what must be filed and the filing deadline in connection with each promotion. If your organization plans to conduct multiple raffles throughout the year, consider the scope of the particular raffle permits (are they per event, for a set period of time, etc.).
- Prize restrictions. Applicable law may restrict the types or amounts of prizes awarded, or there may be requirements that a certain portion of funds raised in the raffle must be reserved for use by the charitable organization. California, for example, requires that at least 90 percent of the gross receipts from the sale of raffle tickets be used for the charitable sponsor of the raffle. Various other states—including local jurisdictions within them—may similarly limit the amount of raffle entry fees that can be paid out as cash prizes. Therefore, be ready to reassess the types of prizes to be offered, as needed.
- Limited scope of advertising and collection of payment for raffle entries. U.S. postal law restrictions provide that neither money for the purchase of a raffle ticket nor tickets may be sent through the U.S. mail unless the raffle ticket is free. For most organizations, this effectively bars mail-in raffle ticket collections unless an organization opts to restructure the fundraiser as a sweepstakes (and to meet those particular compliance considerations). Similarly, other jurisdictions limit the acceptable methods for receiving payment for raffle tickets (for example, accepting cash only for raffle ticket purchases). Still other jurisdictions prohibit advertising or selling tickets statewide. It's critical to check at the outset how applicable law may affect how your organization promotes your raffle event and how paid entries for the event will be collected.
In short, because states' laws are simultaneously so varied and so specific, the effect is that a nationwide charitable raffle is practically impossible to be carried on lawfully by a tax-exempt organization. Nevertheless, by making a list and checking it twice, your organization can be well on its way to a successful, compliant, and fun raffle fundraiser. Reviewing applicable state and local laws should always be the first place to start when planning a raffle, but when in doubt, the Venable Nonprofit Practice can help you make sure your organization stays on regulators' nice lists.