Is it legal to run a business where members subscribe for a chance to purchase a product each month?

Question

Trying to determine the legality of a business idea in the United States. The business would offer a monthly membership for a set price. This membership grants the member 1 entry per month.

Each month a product that is only available on the resell market for a high markup is offered to the members for purchase at the original retail price by way of a random drawing.

A member would elect to use their entries granted to them by their membership to enter the drawing. By entering the drawing, the member is agreeing to purchase the product offered if their entry is selected.

I am aware that a for-profit raffle/lottery is not legal in the US, but was not sure if the described process would constitute a for-profit raffle or lottery since the winner is only granted the option to make a purchase. Searching for answers to this questions is only returning results for raffles that give away items of value.

Answer 1

california

This is a lottery, and thus illegal as a for-profit business

Calfornia Penal Code § 319 defines a "lottery" as

any scheme for the disposal or distribution of property by chance, among persons who have paid or promised to pay any valuable consideration for the chance of obtaining such property or a portion of it, or for any share or any interest in such property, upon any agreement, understanding, or expectation that it is to be distributed or disposed of by lot or chance."

Under Calfornia Penal Code § 320 (with some later exceptions for nonprofit charities),

Every person who contrives, prepares, sets up, proposes, or draws any lottery, is guilty of a misdemeanor

People v. Settles held that an obligation, such as the one you propose, is "property" within the meaning of the above section of the Penal Code:

The duty of the operators of this game to permit the winner to play further games free is an obligation arising from contract, and the right of the player in the matter is personal property (Civ. Code, sec. 663), and a thing in action. It is, therefore, property within the meaning of [29 Cal. App. 2d Supp. 787] section 319, Penal Code.

Therefore, running this scheme as a for-profit business would constitute a misdemeanor in California.

Answer 2

Jurisdiction: england-and-wales

This amounts to promotion of a lottery. The Gambling Act 2005 provides:

14(1) For the purposes of this Act an arrangement is a lottery, irrespective of how it is described, if it satisfies one of the descriptions of lottery in subsections (2) and (3).

14(2) An arrangement is a simple lottery if (a) persons are required to pay in order to participate in the arrangement, (b) in the course of the arrangement one or more prizes are allocated to one or more members of a class, and (c) the prizes are allocated by a process which relies wholly on chance.

252(1) For the purposes of this Act a person promotes a lottery if he makes or participates in making the arrangements for a lottery.

252(2) In particular, a person promotes a lottery if he (a) makes arrangements for the printing of lottery tickets, (b) makes arrangements for the printing of promotional material, (c) arranges for the distribution or publication of promotional material, (d) possesses promotional material with a view to its distribution or publication, (e) makes other arrangements to advertise a lottery, (f) invites a person to participate in a lottery, (g) sells or supplies a lottery ticket, (h) offers to sell or supply a lottery ticket, (i) possesses a lottery ticket with a view to its sale or supply, (j) does or offers to do anything by virtue of which a person becomes a member of a class among whom prizes in a lottery are to be allocated, or (k) uses premises for the purpose of allocating prizes or for any other purpose connected with the administration of a lottery.

Promoting a lottery is lawful if licensed by the Gambling Commission or if it is an exempt lottery and in all other cases is an offence:

258(1) A person commits an offence if he promotes a lottery unless (a) the exception in subsection (2) or (3) applies, or (b) the lottery is an exempt lottery.

258(2) This section does not apply to activity by a person if (a) he holds an operating licence authorising the activity, and (b) he acts in accordance with the terms and conditions of the licence.

258(3) This section does not apply to activity by a person if (a) he acts, otherwise than as an external lottery manager, on behalf of a person who holds an operating licence authorising the activity, and (b) the activity is carried on in accordance with the terms and conditions of the licence.

258(5) In this Act “exempt lottery” means a lottery which is exempt by virtue of a provision of Schedule 11.

Schedule 11 contains the list of exempt lotteries, none of which cover for-profit lotteries of the type you are describing.

As for whether or not your winning participant is receiving a prize, I think you are going to struggle to argue in court that selling something below market value doesn't count as an "item of value". If it were so simple, we could foresee lotteries which circumvent the law by offering a prize in which you are given an option to purchase a large bar of gold for £1. I can't see any court permitting that as it would effectively legalise unlicensed gambling and make a nonsense of the Act.

For completeness, while the Act doesn't define exactly what a prize is, it does set out a non-exhaustive list of things which do constitute a prize:

14(4) In this Act “prize” in relation to lotteries includes any money, articles or services (a) whether or not described as a prize, and (b) whether or not consisting wholly or partly of money paid, or articles or services provided, by the members of the class among whom the prize is allocated.