Legal loophole or future opportunity? Exploring the rise of sweepstakes gaming in the U.S.

David Gravel December 4, 2024

SiGMA news

Imagine winning a grand prize without spending a dime. This is the allure of sweepstakes gaming, a booming industry in the U.S. The sweepstakes industry has undergone a remarkable transformation in recent years, blurring the lines between marketing and gambling in a fast-growing market valued at billions. With federal laws enabling this unique form of promotional gaming and a complex patchwork of state regulations, sweepstakes operators have carved out a fertile yet contentious space for expansion.

This article is the first in a series of five exploring the rise of sweepstakes gaming, its regulatory challenges, and the opportunities it presents. But is this burgeoning sector a lucrative opportunity or a legal grey area poised for a crackdown?

What Are sweepstakes, and why are they booming?

Sweepstakes, as defined under U.S. law, are promotional contests where participants can win prizes without requiring a mandatory purchase or payment. This distinction allows operators to avoid classification as gambling, which remains heavily regulated in most states. Unlike traditional gambling, sweepstakes rely on a “no purchase necessary” model, offering free entry methods to sidestep anti-gambling laws.

Initially used by businesses to boost customer engagement, gaming platforms have now adopted sweepstakes, integrating them into casino-like experiences. Operators such as Chumba Casino and Stake replicate the thrill of online casinos and sportsbooks while leveraging the regulatory flexibility of sweepstakes. For instance, Chumba Casino offers virtual slot machines and table games where players can win real cash prizes through sweepstakes entries. This hybrid approach has created an industry projected to double its $3.4 billion value by 2025.

A loophole or a legitimate model?

The Deceptive Mail Prevention and Enforcement Act and other federal consumer protection laws govern sweepstakes, with the Federal Trade Commission (FTC) enforcing compliance. The FTC ensures promotions are free to enter, based purely on chance, and transparent about prize values and odds. Oversight by the Federal Communications Commission (FCC) and the U.S. Postal Service (USPS) further bolsters the model’s legitimacy, provided operators meet strict disclosure requirements.

However, critics argue sweepstakes exploit regulatory loopholes. By offering “free” entry while incentivising purchases of virtual currencies or other add-ons, some platforms blur the line between promotional gaming and gambling. Howard Glaser, global head of government affairs for Light & Wonder, warns: “If you are riding out your investment on the theory that it fits into sweepstakes law… please examine the basis.” The FTC has yet to fully address these ambiguities, leaving the industry reliant on self-regulation and exposed to heightened scrutiny.

A patchwork of regulations

While federal law provides overarching guidelines, the real challenges emerge at the state level. Some states embrace sweepstakes as legitimate promotional tools, while others impose strict regulations or ban them outright. For example, Florida and New York require operators to register and bond high-value prizes, adding layers of compliance. Meanwhile, Michigan has aggressively targeted sweepstakes-based casinos, issuing cease-and-desist orders to operators like VGW, the parent company of Chumba Casino and Luckyland Slots.

This fragmented regulatory landscape creates significant obstacles for operators aiming to scale nationwide. Platforms must contend with varying definitions of gambling, disparate compliance requirements, and enforcement actions. The lack of a unified legal framework leaves operators and investors navigating a precarious environment, adapting state by state to avoid litigation.

Opportunities and risks for operators

Despite these hurdles, the sweepstakes model offers undeniable advantages. It provides operators with a pathway into markets where traditional online gambling is prohibited. This flexibility has attracted not only gaming companies but also venture capital eager to capitalise on the sector’s rapid growth.

Recent analyses, such as 2024 report, highlight that this growth is being driven by the innovative fusion of promotional gaming with casino-like experiences. However, the report also underscores that sustainability hinges on how operators navigate an increasingly complex regulatory environment. With states like Michigan and Connecticut intensifying enforcement and payment processors facing class-action lawsuits, the industry’s expansion comes with mounting risks.

Critics within the regulated gaming sector argue that sweepstakes replicate gambling without adhering to equivalent consumer protection standards. At the 2024 Global Gaming Expo (G2E), Howard Glaser cautioned that operators relying on sweepstakes laws might invite intensified scrutiny, particularly from state attorneys general and payment processors. Matt Kaufman, managing director of digital and interactive gaming at Eilers & Krejcik Gaming, adds: “It’s an arbitrary distinction. If you occasionally run a sweepstakes product to promote sales, it’s fine, but if it’s frequent, it suddenly becomes problematic.”

Regulation or innovation?

The future of sweepstakes gaming depends on regulatory developments. Some stakeholders advocate for stricter enforcement to close perceived loopholes, while others see an opportunity to formalise the sector under a regulatory framework akin to online gambling. While regulation could legitimise the industry further, it would also impose additional compliance costs and operational burdens on operators.

For now, the industry sits at a critical crossroads. Lawmakers and regulators must determine whether to restrict sweepstakes or adapt laws to accommodate this evolving market. For operators and investors, the challenge lies in navigating uncertainty while leveraging the sector’s explosive growth.

Sweepstakes gaming is a fascinating intersection of marketing ingenuity and legal ambiguity. It provides significant opportunities for growth, but operators must tread carefully to balance expansion with compliance. As the industry continues to evolve, stakeholders must prepare for regulatory shifts while maintaining transparency and consumer protections. Whether sweepstakes mature into a fully regulated sector or succumbs to legal challenges remains uncertain. Its future hinges on how lawmakers, regulators, and operators address this pivotal moment. Will sweepstakes gaming continue to thrive, or will regulatory challenges stifle its growth?