United States: Raising Revenue Through Raffles – A Back-To-School Primer On The Raffle Act

Here in Texas, the "back-to-school" mentality is a triumph of imagination over experience. Clothing catalogs suggest that an autumn wardrobe includes corduroy pants and sensible sweaters, while our temperatures hover in the 90s into October. Nevertheless, educators, students, and parents approach the return to campus with energy, enthusiasm, and commitment to academics and extracurricular activities. These pursuits can rely heavily on funds raised by a school community. Accordingly, the back-to-school season is a prime time to review some of the laws that apply to school fundraising. This article focuses on state and federal laws governing raffles.

Raffles are a popular way to raise funds for school activities-and for good reason. They allow a school or booster club to transform a few in-kind donations into significant revenue, and they spread the work of raising funds across an army of ticket-seller volunteers. To ensure the success of their fundraiser, organizers should understand the legal requirements that apply to raffles.

General Legal Requirements for Raffles

The Texas Constitution, which generally prohibits raffles and lotteries, was amended in 1989 to allow specified organizations to hold charitable raffles. Following the amendment, the Texas Legislature passed the Charitable Raffle Enabling Act ("Raffle Act")1, which sets out the requirements that charitable raffles must satisfy.

Under the Raffle Act, only certain organizations are permitted to conduct raffles. Independent School Districts are not permitted to conduct raffles under the Raffle Act. Parent Teacher Organizations, booster clubs, or similar organization are qualified if they meet certain requirements. Specifically, the Raffle Act provides that an organization may conduct a raffle if it (1) does not distribute any income to its members, officers, or governing body other than as reasonable compensation for services; (2) has existed for three years; (3) is exempt from tax and has obtained exemption under I.R.C. §501(c); (4) does not involve itself in political campaigns or attempt to influence legislation, including by publishing or distributing statements or making campaign contributions; and (5) does not have or recognize any local chapter, affiliate, unit, or subsidiary organization in the state of Texas.

A qualified nonprofit organization may conduct two non-concurrent raffles per year. The raffles must conform to certain statutory requirements.

Raffle Ticket Appearance

The Raffle Act governs the appearance of the raffle tickets themselves. A raffle ticket must contain the following information:

  • The name and address of the organization;
  • The price of the ticket;
  • The date the prizes will be awarded; and
  • A general description of each prize worth more than ten dollars.

Raffle Prize Limitations

The Raffle Act restricts the prizes that can be raffled. In particular, money cannot be a raffle prize. This restriction applies not only to currency, but also to any instrument readily convertible to currency. Savings bonds and pre-paid stored-value credit cards can be awarded as prizes because they are non-negotiable and cannot be readily converted into their associated cash value.

An organization can raffle off a donated prize, regardless of value. However, if the organization purchases the raffle prize, the prize value normally cannot exceed $50,000. An organization can raffle off state lottery tickets with a total face value of less than $50,000, regardless of whether a prize in the lottery game to which the ticket relates exceeds $50,000.

Promoting the Raffle

The Raffle Act restricts the methods by which a raffle can be promoted and by which tickets can be sold. In particular, a raffle cannot be advertised using any medium of mass communication. Tickets may be advertised on the organization's website or through a publication or solicitation, including a newsletter, social media, or electronic mail provided only to previously-identified supporters of the organization.

The law does not prohibit students from selling tickets in an otherwise qualifying raffle, and the common practice of sending students home from school with raffle tickets to sell is permissible. However, federal law makes it a crime to "knowingly deposit in the mail" or "send or deliver by mail" material concerning a "scheme offering prizes dependent on lot or chance." The restriction applies to a variety of materials including raffle tickets and raffle ticket stubs. The penalty for violation includes a fine or imprisonment for up to two years. The penalty for subsequent offenses includes imprisonment for up to five years. Accordingly, an organization's plan for distributing and collecting raffle tickets should not rely on the mail system.

Reverse Raffles

In spite of its many restrictions and prohibitions, the Raffle Act permits a form of raffle that arguably is underused: reverse raffles.

In a reverse raffle, tickets are drawn until none remain. The holder of the last ticket drawn is the winner In a reverse raffle, the winner may be given a refund of his raffle ticket price as a prize.

After the drawing of tickets in a reverse raffle has begun, the sponsoring organization may auction off additional tickets to persons present at the drawing for more than face value. And, after the drawing has begun, the sponsoring organization may permit ticket holders to resell their own tickets to other people present at the drawing for more than the face value of the ticket. The sale must be made through a designated representative of the sponsoring organization, and at least ten percent of the sale proceeds must be retained by the organization. After the drawing has begun, the sponsoring organization may permit the holder of a previously-drawn ticket to purchase additional chances for the ticket to be selected to win a prize or to purchase additional tickets for the raffle.

With the right personality behind the microphone, a reverse raffle can provide the power and impact of a live auction or other live entertainment, at a fraction of the cost and effort.

Are you Raffle Ready?

Any raffle that does not comply with the Raffle Act is considered gambling under the Texas Penal Code. Conducting a noncompliant raffle is a Class A misdemeanor.2 Participating in an unauthorized raffle is a Class C misdemeanor.3 And, a county attorney, district attorney or the attorney general may bring an action in state court to stop a violation or potential violation of the Raffle Act.4

Strasburger & Price, LLP is proud to support the schools in the communities we serve. We stand ready to answer questions about raffles and other school fundraisers. We wish you luck and may the odds be ever in your favor!

Footnotes

1 Texas Occupations Code Chapter 2002.

2 Texas Penal Code §47.03(b).

3 Texas Penal Code §47.02(d).

4 Texas Occupations Code §2002.058.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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