Running a contest can be a great way to increase awareness of your practice. But before you decide to use a prize-based promotion to attract new clients, be sure your contest is legal.

Graham Bodel, co-founder and director of Chalten Fee-Only Advisors in Vancouver, says his one-year-old firm plans on running a contest whereby winners get a financial e-book. “To the extent that we can provide education for investing, it leads back to good awareness of what we do. It’s an opportunity to spread the word about your company.”

He plans on writing the book, or giving away one written by someone else. “I thought it would be a good follow-up to attract people to our newsletter. Maybe [I’ll] say, ‘Listen, if you sign up for our newsletter, we’ll put you in a contest to win our new e-book.’ ”

In order to run that contest, he would need to comply with Canadian and provincial contest regulations and ensure the content isn’t actually a lottery, says Chad Finkelstein, a business lawyer with Dale & Lessmann LLP in Toronto.

“Contests [and lotteries] are governed by the federal Criminal Code and also the Competition Act,” he says, explaining that lotteries have three elements:

1. payment is required for contest entry;

2. chance or randomness is the basis of game play; and

3. there is a prize.

“If you’re running an operation that has all three of those things, [that’s] gambling, because that’s saying, ‘Throw your money into this thing you have no control over and maybe you’ll win something shiny.’ And that tends to cause impulsive behaviour,” he explains.

Finkelstein says running an unlicensed lottery is a criminal offence. “The maximum penalty is up to two years in jail. It’s anywhere from being told to shut it down to being fined up to $2 million and charged criminally.”

Ensuring it’s legal

To make sure a contest is legal, Finkelstein says advisors have to “eliminate one or two lottery elements from what you’re offering.”

Since it’s not logical to eliminate the prize, many organizers eliminate the payment requirement, he notes. “That’s why, in every contest, it almost always says in caps and bold letters ‘no purchase necessary.’ ”

Alternatively, he suggests eliminating the chance factor. “What a lot of contest organizers will do is a random draw; then they ask a skill-testing question,” says Finkelstein.

Case law from Alberta, he says, has established the minimum difficulty for a skill-testing question. “It’s basically a BEDMAS equation—the math order of operations from elementary school.” And, if a contest is based on pure skill and eliminates the chance element (e.g., an essay-writing or photography contest), entry payments can be accepted.

You’ll also have to make sure prospects and clients understand the contest. “The federal Competition Act says you have to give full and fair adequate disclosure of all the terms and conditions and rules.”

Finkelstein says the entry form should, at minimum, state “what the contest period is, when is the winner determined, what the approximate retail value of each prize is, what your odds of winning are and who is eligible to enter.” Then, there should be an obvious link to a page outlining the full contest rules.

He adds it’s common to see Quebec residents eliminated from entry. That’s because its provincial regulator—Régie des alcools, des courses et des jeux—has extensive requirements. For example, “Quebec is the only place in Canada where you actually have to submit your rules and all promotional materials in advance to the provincial regulator. And all of it needs to be submitted in both English and French.”

Using Bodel as an example, if he does run a contest to win a financial e-book, he’d have to eliminate at least one of the lottery elements, include the bare minimum contest rules on the entry form, and have a link to a page detailing the full list of rules. A lawyer should be asked to draft those rules.

Being compliant

Bodel would also have to consider regulatory compliance. Wendy Rudd, IIROC’s senior vice-president of member regulation and strategic initiatives, says IIROC doesn’t explicitly prohibit advisors from running contests.

“However, there are rules that may apply depending on the specific nature of the contest. For example, it may be acceptable for an advisor to provide a gift on a one-off basis to a client who refers new business. But if the advisor or firm runs a referral contest on a regular basis, or the value of the gifts for referrals is significant, then the activity may be considered a referral arrangement.”

She says a contest would also have to consider IIROC’s rules around conflict of interest rules, including those that relate to marketing, disclosure and advisor compensation.

“Firms and advisors are responsible for identifying potential conflicts of interest between the interests of the firm or advisor and the interests of a client,” says Rudd. “And an advisor must act in a manner that is consistent with the best interests of the client.”

To ensure his contest is compliant, Bodel would first confirm all communications were clear and there was no chance of misleading clients. He says, “From a process perspective, [any] communications would need to contain a link to a general disclaimer stating, for example, that the communication is in no way a solicitation to purchase securities, is for information purposes only and not intended to provide specific advice.”

And before distributing contest materials, he’d have to get approval from his compliance department.

In terms of taxation of the prize, Finkelstein says it depends on the size and type. Generally, sales tax would be charged. But, with the right language, the prize winner (rather than the advisory firm) can be responsible for paying provincial or federal sales tax. “You want to say that each user is responsible for their own taxes that may apply to each prize. So if you win a vacation, for example, it may be all expenses paid, but not the taxes.”

Though there are many legal and regulatory considerations, Bodel is most concerned about a contest seeming disingenuous. That’s why he’d prefer to focus on education through an e-book prize.

“What I can’t stand is when you see a contest that says, ‘You win a free consultation with our advisory team,’ which is clearly just saying it’s an opportunity for me to pitch to you. It’s a gimmick. It has to be genuinely beneficial to the other person, not to the advisor firm running the contest.”

Contest case study

In 2012, Time Inc. set the precedent for what not to do when promoting a contest. The media giant had sent out flyers stating that, if recipients entered a contest and subscribed to Time magazine, they could win a cash prize. Unfortunately, one Canadian man didn’t read the fine print indicating the contest rules, and mistakenly thought he’d just won more than $800,000. He sued Time.

Chad Finkelstein, a business lawyer at Dale & Lessmann LLP, says, “The Supreme Court found in favour of the guy, saying the contest was misleading.”

While the plaintiff only received $15,000 in damages, Finkelsetein says, “Time Inc. was found guilty for having engaged in misleading advertising and not properly disclosing the terms and conditions. When you’re writing up these terms, you need to assume your customers don’t understand or know anything about your contest. If you’ve written them in a way that the average consumer would be confused or misled, you could be liable.”

Sarah Cunningham-Scharf is a Toronto-based financial writer.