Avoid Making Your Project an Illegal Lottery
In an effort to encourage collectors to mint in-game NFTs, several Metaverse projects I’ve seen offer a chance to win prizes ranging from cryptocurrency to new cars. Unfortunately, projects offering these incentives are probably breaking the law. Here’s why…
In the vast majority of U.S. states, a “lottery” is typically defined as “any scheme or procedure whereby one or more prizes are distributed by chance among persons who have paid or promised consideration for a chance to win such prizes.”1720 ILCS 5/28-2(b), https://www.ilga.gov/legislation/ilcs/ilcs4.asp?DocName=072000050HArt%2E+28&ActID=1876&ChapterID=53&SeqStart=75900000&SeqEnd=769000000.
And, unless you are specifically licensed or registered to offer a lottery (e.g., like a state-run lottery), “knowingly setting up or promoting any lottery” in most U.S. states is considered “illegal gambling” and is therefore treated as a criminal offense. In Illinois, for example, it is punishable as a Class A misdemeanor for the first violation and a Class 4 felony for any subsequent violations.2720 ILCS 5/28-1(c), https://www.ilga.gov/legislation/ilcs/ilcs4.asp?DocName=072000050HArt%2E+28&ActID=1876&ChapterID=53&SeqStart=75900000&SeqEnd=769000000.
Most of the NFT/Metaverse projects I’ve seen which (likely) run afoul of U.S. state gambling laws typically have promotions which fall into one of two categories:
- Anyone who pays to mint an NFT will be entered into a random drawing to win a special prize (e.g., 1 BTC or a Tesla Model 3*); or
- Anyone who pays to mint an NFT and mints a rare NFT with certain attributes (or one of a designated “very rare” category of NFTs) will win a special prize.
*Teslas seem really popular for this sort of thing for some reason. 🤷♂️
In either case, unless the project offers participants the ability to be entered into the random drawing with “no purchase necessary” (and gives those entrants the same chance of winning as those who pay for their NFT to be minted), or restricts anyone from the U.S. from participating, it is likely that those projects are breaking the law.**
**They may also be breaking the law in jurisdictions outside the U.S., but since I only practice law in the U.S. I’m going to limit my comments to that jurisdiction.
Furthermore, because projects which offer illegal lotteries are likely violating the law, running a promotional campaign with these sorts of incentives means the project is also likely violating the terms of service of platforms such as OpenSea.
For example, the OpenSea Terms of Service state that “[y]ou agree that you will not violate any law, contract, intellectual property or other third-party right, and that you are solely responsible for your conduct and content, while accessing or using the Service.”
Getting arrested for conducting an illegal lottery in the U.S. is bad, but I reckon for most projects out there, getting delisted from platforms like OpenSea would be much worse.
Anyway, that’s it for Part I since I want to try to keep each of these posts under 500 words. Until next time.