Choosing smarts over luck with nonprofit raffles

Dear Mary, I am a member of a nonprofit that organizes a raffle every year. We sell tickets to people for $1 each, and they can win donated prizes. We make a good amount of money from the raffle that supports our group throughout the year.

Recently, someone made a comment that it might not be legal for us to be running a raffle. Is it? What if we call it an “opportunity drawing”?

Calling a raffle an opportunity drawing is like calling a lion a zebra and getting upset when your zebra eats your giraffe. If the sponsoring organization requires someone to purchase a ticket in order to win a prize, then we’re talking about a raffle. The good news is that complying with California’s nonprofit raffle requirements is not that difficult.

Generally, it is illegal for charities in California to sell the right to participate in a raffle, unless no purchase is actually necessary. However, the exception to the general rule prohibiting raffles is that certain qualified tax-exempt organizations may be allowed to have raffles if they follow the attorney general’s guidelines.

Charities and certain nonprofits may have raffles to raise funds for beneficial or charitable purposes in the state, provided at least

90 percent of the gross receipts from the raffle goes directly to beneficial or charitable purposes in California. The raffle must also be conducted under the supervision of someone who is 18 or older.

Your nonprofit must register with the attorney general’s Registry of Charitable Trusts before you conduct the raffle, and the organization must file financial disclosure reports on each raffle event. You can get the forms for registration and reporting on the attorney general’s website: oag.ca.gov. You can also look up previous raffles and find out how much money was collected, or on what date a charity will be holding a raffle.

There are other rules and regulations that you should know. You may not use a gaming machine (like a slot machine) to run the raffle. Also, you may not operate or conduct the raffle online, but you may advertise the raffle online. Your organization’s members may participate in the raffle.

“Young” nonprofit groups may be disqualified from conducting a raffle. The general rule is that a nonprofit must be doing business in California for at least one year before conducting the raffle.

If you are unsure whether your group qualifies as an eligible organization, take a look at your exemption letter that you received from the Franchise Tax Board when you organized. If you can’t find that letter, ask the tax board for a copy.

Please be aware that 50/50 raffles are illegal in California. As I stated above, 90 percent of the gross ticket-sale revenue must be used for charitable purposes. In a 50/50 raffle, half of the revenue is awarded as a prize. The rules do not preclude using funds from sources other than raffle-ticket proceeds to pay for the costs of the raffle, but you need to be careful. If you end up causing a loss to a nonprofit corporation, your board of directors could be personally liable for breaching their fiduciary duty.

Raffles must be registered with the attorney general before they take place, and must be filed before Sept. 1 (and at least 60 days before the raffle). If your organization is a nonprofit religious organization, a school, or a hospital, you are not required to register and report, although you still have to follow the other rules.

What are the consequences of not following the rules? Gambling is illegal in California and unless you meet the applicable criteria, a raffle is considered gambling. Failure to comply with the penal code is a misdemeanor and violations are typically passed along to the district attorney’s office.

Mary Luros is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached at mary@hudsonluros.com or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.