Sweepstakes Casino Giant Invited Comparisons To Now-Banned Internet Cafés, Documents Show

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California has easily been the most aggressive state in tackling the ongoing problem of Internet sweepstakes cafés. In 2015, the California Legislature enacted Business and Professions Code section 17539.1(a)(12), which effectively outlawed land-based sweepstakes operations that “simulate gambling” or involve “gambling-themed games.” To this day, the California Bureau of Gambling Control continues to post a Law Enforcement Advisory warning about internet sweepstakes cafés, calling them “illegal gambling operations.”

Despite this clear prohibition, the internet café business model has effectively transitioned to the world wide web, according to several lawsuits filed against Virtual Gaming World (VGW), the Australian-based operator of the leading sweepstakes-based casino websites Chumba Casino and Luckyland Slots. (VGW has been named in 17 lawsuits nationally, including several in California which seek to force VGW to “shut down their illegal gambling websites” for violating California’s strict anti-gambling laws). “The gambling internet café operations have transitioned into calling the internet home,” one lawsuit proclaims, pointing to VGW’s alleged role in “pioneering this migration of ‘sweepstakes casinos’ to the world wide web.”

Because section 17539.1(a)(12)’s ban against “gambling-themed” sweepstakes applies only to “business establishments,” California lawmakers recently introduced Assembly Bill 831 to extend the prohibition to “online” gambling-themed sweepstakes games. AB 831 is consistent with the policy underlying § 17539.1(a)(12), which as the California Attorney General noted, “was intended to assure that gambling-themed sweepstakes operations would be prohibited under the Unfair Competition Act (Bus. & Prof. Code § 17200) as unfair business practices.”

VGW, both directly and via the Social Gaming Leadership Alliance, opposes AB 831 on the basis that it “seeks to criminalise online social games that leverage sweepstakes promotions.” VGW and groups representing other sweepstakes casino operators have long maintained that their online ‘casino-style’ sweepstakes games are legal because they offer free ways to enter.

But that is the same flawed argument that was historically advanced by internet sweepstakes cafes – and courts throughout the U.S. (including in California) have consistently rejected it.

While VGW attempts to distance itself from the now-outlawed internet sweepstakes cafes – since its games are entirely online and involve a different product (i.e., virtual currency) – it willingly embraced the internet café business model when seeking investors.

VGW prospectus touts “internet sweepstakes cafes” as a business model

Back in January 2016, when it sought to raise capital in the equity markets, VGW admitted that its business model was comparable to the “internet sweepstakes cafes” that have “proliferated across the US over the last 10 years.” Ironically, just one year earlier, California passed legislation banning internet sweepstake cafes – a development apparently lost on VGW. In a prospectus filed with the Australian Securities Exchange, VGW included an “independent industry report” from H2 Gambling Capital – which is described as “the leading authority regarding market intelligence on the global gaming industry.” The report (which follows page 66) “provided an assessment of the current US gaming market” for investors.

The VGW-funded report highlighted the proliferation and market size of internet sweepstakes cafes – “over 5,000 now operating in 12 states” with turnover exceeding $10 billion annually (see Prospectus, pp. 69 & 95) – as indicative of the “significant opportunity” and “considerable commercial need” for “Internet Sweepstakes Gaming” in the U.S. market. (Id., pp. 96-97; ¶¶ 71 & 80 of H2 Report). The report goes on to characterize the “internet sweepstakes café business model” as a “land-based example that has evolved and proliferated across the US over the last 10 years” (Id., p. 95) and stated that it “may be equally applicable as a business model” for “Internet Sweepstakes Gaming” (Id., p. 97; ¶¶ 70 & 83 of H2 Report).

The report states that the size of the U.S. market for “Internet Sweepstakes Gaming” could be estimated based on “the total size of the US online real money gaming market (particularly casino, poker and lottery) if it was fully regulated and licensed across the US,” adding that this “represents the market within which the internet sweepstakes cafe model presently operates”:

Likewise, in an October 2015 press release in Australia, VGW stated on the first page (bullet #3) that its social sweepstakes casino website – Chumba Casino – is “targeting the global casino market, particularly the unrealised United States real-money gaming market.”

Indeed, the prospectus refers to “gambling” 79 times, and noted that “despite significant prohibition, the US remains by far the largest gaming market in the world.” (pp. 69 & 73).

The prospectus confirms that the “core part” of VGW’s “business model” is to combine “social casino gaming and cash prize gaming using Sweepstakes Credits” – which it refers to as “Social Sweepstakes.” (Prospectus, pp. 13, 18 & 62). Under its Social Sweepstakes model, “Sweepstakes Credits are generally awarded on a 1-for-1 basis, with a denomination of US$0.01 for each Sweepstakes Credit. For example, a US$10 purchase of 900,000 Gold Coins would also entitle the player to 1,000 Sweepstakes Cash Credits with a denomination of US$10.” (Id., p. 60). This is the same pricing methodology that was used by internet sweepstakes cafes operating throughout California in the early 2000’s. See California Department of Justice, Bureau of Gambling Control, Law Enforcement Advisory No. 11, Dec. 5, 2012 (noting that internet café customers received sweepstakes “entries” or credits” based upon the amount spent, e.g., 100 sweepstakes entries for $1.00 of Internet time purchased.”).

According to the prospectus, the Social Sweepstakes sector “has experienced a strong rate of early adoption in the United States.” (see pp. 18 & 66). “Sweepstakes gameplay facilitates a cash prize gaming experience in markets where online gambling may be prohibited,” the prospectus candidly acknowledges. (Id., p. 60). “The United States market is largely unrealised from the perspective of servicing players seeking a cash prize online gaming experience and this presents a strong growth opportunity for VGW Holdings as it seeks to increase its share of the US online gaming market,” the prospectus adds. (Id., pp. 18 & 66). The prospectus then refers “prospective investors” to the H2 report which points to the success of “Internet Sweepstakes Cafes” as a “land-based” example that is “equally applicable as a business model” to “Internet Sweepstakes Gaming.” (Id., pp. 66 & 95-97). Based on the proliferation of internet sweepstakes cafes across the US over the preceding 10 years and the “largely unrealised” online component, the H2 report concludes that the real money “internet sweepstakes” segment of the US gaming market “remains strong, with considerable further growth still to come over the next 5 years to the end of the decade.” (Id., pp. 18, 66, 68 & 98).

The timing of the prospectus may be problematic for VGW in California

It remains a mystery why VGW would have touted “internet sweepstakes cafes” as an “equally applicable” business model for online sweepstakes casinos (such as Chumba Casino and Luckyland Slots) at a time when California had already declared such businesses to be illegal. Of course, the prospectus was obviously not drafted with just one state in mind – albeit, one which is considered the Holy Grail of U.S. gaming markets. But that is some colossal oversight by VGW – especially now as the company makes the rounds in California and urges a legislative body which outlawed internet sweepstakes cafés some ten years earlier to not ban the online analog of the same business model (at least according to VGW’s 2016 prospectus).

The favorable comparisons to internet sweepstakes cafés drawn throughout the prospectus dovetail with recent reporting by The Australian Financial Review. In a March 2024 profile of VGW’s founder Laurence Escalante, AFR associate editor and investigative reporter Primrose Riordan interviewed the company’s former chief operating officer, Ben Reichel, who told her that “Laurence came up with the idea to use sweepstakes laws in the US to replicate online casinos and slot machines, as at the time you couldn’t get a license for online gambling. It was a brilliant idea, people were keen to have an online gambling experience.”

The AFR profile addresses the similarities to internet cafes, with Ms. Riordan writing that “in meetings, Escalante and company executives had discussed internet cafés in Florida that had managed to avoid restrictions on gambling by offering so-called sweepstakes games with chances to win prizes if customers purchased access to onsite computers.” (Escalante denied that Florida’s internet cafés were the “inspiration” for VGW, calling it a “total fabrication.”).

Artificial separation of “consideration” from the chance to win real money

The similarities, however, cannot be ignored.

Online sweepstakes casinos use a similar pricing structure to disguise or mask the payment, also known as “consideration.” For context, many states’ anti-gambling laws (including California’s) define an illegal lottery as comprised of three essential elements: prize, chance, and consideration (i.e., payment). Sweepstakes promotions typically possess two of the three characteristics of a lottery: chance and a prize. Therefore, to avoid classification as an illegal lottery, a valid promotional sweepstakes must not involve the payment of any consideration.

Online sweepstakes casinos attempt to sidestep the element of consideration by using a two-tiered system of virtual coins. The first type of virtual currency – called “Gold Coins” – can be used to play ‘casino-style’ games (such as slots, roulette, blackjack and poker) in a “standard mode” with no potential for redeeming any prizes. The second type of virtual currency – typically called “Sweeps Coins” – can be used to play the same games in a “promotional sweepstakes mode,” where they carry real monetary value and can be redeemed for prizes and money. Players may switch between these modes easily and as frequently as they would like.

While there are several ways for players to receive Sweeps Coins for free, the most common way to obtain Sweeps Coins beyond a nominal amount is by purchasing Gold Coins. The more Gold Coins that a player purchases, the more Sweeps Coins the player also receives. Critically, the number of Sweeps Coins received as a free “bonus” corresponds with the amount of real money spent. There is essentially a 1:1 correlation between the number of dollars spent and the number of Sweeps Coins provided in each purchase. The same rate of exchange applies when it’s time to cash out as well. Sweeps Coins are redeemable at a conversion rate of 1:1.

This is the same construct that was used by “Internet sweepstakes cafés” in the early 2000’s to offer real money casino-style gambling under the guise of a sweepstakes promotion. These operations – often located in suburban strip malls – “promoted” the sale of products such as Internet access time or long-distance telephone minutes by offering “free” sweepstakes entries to customers. When customers purchased the product, they received a corresponding number of “sweepstakes” points for each dollar spent. (Typically, for every $1 dollar spent, the customer would receive 100 sweepstakes points). Customers then used those sweepstakes points to play “casino-style” slot machine games for cash prizes redeemable at a value of one cent per point. In other words, $1 dollar in and $1 out. Just like the internet cafés, online sweepstakes casinos artificially separate the consideration from the chance to win real money by claiming that the payment is for a “product” (i.e., Gold Coins) and the sweepstakes entries (i.e., Sweeps Coins) are “free,” while conveniently providing the purchaser with a “bonus” allotment of Sweeps Coins that is nearly equivalent in value to the Gold Coin purchase price.

Indeed, the Louisiana Attorney General recently declared that online sweepstakes casinos “are utilizing the same concept that was used by ‘Internet sweepstakes cafes.’” She was referring specifically to the 1:1 pricing formula in which website users “may purchase ‘Gold Coins’ and receive free ‘Sweeps Coins’ ‘as a bonus,’ typically in the same dollar amount as the purchase, which can then be used to play casino games and be redeemed for cash or valuable prizes.” As the Attorney General explained, “these online operators are attempting to artificially separate the consideration from the chance to win real money. However, disguised and/or indirect consideration is still consideration and constitutes illegal gambling.”

Courts throughout the United States have repeatedly determined that such tactics were an obvious pretext and cover for illegal gambling. For example, in Telesweeps of Butler Valley, Inc. v. Kelley, a Pennsylvania federal district court held that the purchase of a long-distance telephone card that comes with a commensurate number of free entries to participate in a ‘casino-style’ sweepstakes games for prizes constituted “indirect consideration” to participate in the sweepstakes, even though no purchase was necessary and several alternative methods of free entry were available. In rejecting the defendant’s argument that the customer was simply paying for long-distance telephone calling minutes and not the sweepstakes entries, the district court declared that “plaintiff’s attempt to separate the consideration from the chance to win by inserting a step between the two elements is clever, but it merely elevates form over substance. At bottom, what Telesweeps is doing constitutes gambling.”

Similarly, in Lucky Bob’s Internet Café, LLC v. California Dep’t of Justice, a California federal district court found consideration to exist where customers were given 100 free entries to a “sweepstakes” for every $1 of purchased internet time and played casino-style games of chance to find out whether they won a prize. The fact that customers could also obtain free entries without a purchase did not change the result. Citing prior California appellate court rulings, the court held that “the consideration element is satisfied when some customers by chance receive more than what they paid for. . . . Once the elements of chance and prizes are added, the consideration paid is no longer solely for internet time. Paying for the chance to win money, rather than the use of Internet time, may be the customer’s main focus.”

In rejecting a similar sweepstakes scheme in Cleveland v. Thorne, the Ohio Court of Appeals explained, “the justice system is not some lumbering oaf who must ignore the patently obvious gambling scheme apparent here simply because of a contrived separation between consideration and the scheme of chance.” The court declared that “the law in this arena serves no purpose to elevate form to such a high degree that the nature of the transaction should be ignored,” adding that “there is no justification for ignoring the nature of the transaction simply because the system is designed in such a way as to artificially isolate one part of the illegal transaction from another. The justice system is not so blinded by chicanery.”

As the South Carolina Attorney General put it, “a gambling scheme cannot be transformed into legitimacy merely by splitting it into two parts. . . . To try and conceal gambling behind the façade of the purchase of Internet time is . . . nothing more than legal trickery.”

Other parallels between online sweepstakes casinos and internet cafes

In addition to the nearly 1:1 correlation between money spent and Sweeps Coins received — a pricing structure which indicates that Gold Coins are merely a “cover” for the purchase of Sweeps Coins — there are several other factors which show that the true purpose of the sweepstakes casino websites is gambling, and that just like the Internet sweepstakes cafés which preceded their launch, the use of the term “sweepstakes” is a pretext for gambling.

First, the ‘casino-like’ atmosphere and imagery associated with the sweepstakes casino websites, as well as the aggressive online advertising which is carefully crafted to exploit the appeal of gambling and is frequently loaded with images of people holding outsized checks indicating how much money they won gambling on the websites, suggests that the “true purpose” of the business is to promote sweepstakes play, as opposed to a good or service.

For example, in United States v. Davis, the United States Court of Appeals for the Fifth Circuit, applying Texas law, pointed to the “casino-like atmosphere” of the Internet cafés – “complete with tinted windows and free food and drink” and “a variety of casino-like games available on each computer terminal” – as persuasive evidence that “the defendants’ true purpose for the cafés was to create a place where people would be comfortable staying for a long time, purchasing Internet time and playing the sweepstakes.” Based on this evidence, the Fifth Circuit concluded that “the main purpose and function” of the business “was to induce people to play the sweepstakes, and that the Internet time sold by the cafés—albeit at fair market value—was not the primary subject of the transaction, but instead mere subterfuge.”

As the California Court of Appeal for the Second District appropriately observed in People ex rel. Lockyer v. Pacific Gaming Technologies, in referring to a slot machine-style sweepstakes promotion, “if it looks like a duck, walks like a duck, and sounds like a duck, it is a duck.”

Second, the duration of the “sweepstakes” promotion also demonstrates that the true purpose of the website is not to promote a bona fide consumer good or service, but instead gambling. A traditional sweepstakes promotion “is a limited term event designed to attract consumer attention to a product or business, and ordinarily expires after a few weeks or months.” By contrast, sweepstakes casinos offer real money casino-style sweepstakes games perpetually.

In an opinion issued last month, the Louisiana Attorney General pointed to the “perpetual duration” and “ongoing nature” of the casino-style sweepstakes games as an indicator that the “true purpose” of online sweepstakes casino websites was to promote illegal gambling.

Third, the typical payout percentage for a temporary promotional sweepstakes is “a trivial share of the revenue earned by the company.” For example, the typical grand prize for McDonald’s annual Monopoly-themed sweepstakes is usually about $1 million, which is a tiny fraction of the billions of dollars McDonald’s earns each year. By contrast, commercial casinos typically pay out between 80-96 percent of their revenues (sometimes referred to as the “return to player” or “RTP”). Chumba Casino claims to have a 90-96% RTP on its website.

Fourth, conditions designed to keep users playing the sweepstakes games for a longer period of time and, consequently, spending more money to facilitate sweepstakes play are indicative that the true purpose of the business is to promote sweepstakes play, as opposed to a legitimate good or service. Unlike traditional sweepstakes games where prizes can be claimed immediately, many online sweepstakes casinos have a “minimum permitted redemption” threshold that limits a user’s ability to redeem prizes unless their Sweeps Coins balance is above a certain amount. In most cases, the minimum redemption threshold is 100 Sweeps Coins. Thus, if a user never reaches 100 Sweeps Coins won, he or she can never redeem anything. This causes consumers to continue gambling and eventually lose their balance.

Fifth, many of the users of the websites largely ignore their ample supply of Gold Coins in favor of playing Sweeps Coins, which is a clear indication that the Sweeps Coins, and not the supposedly promoted product (Gold Coins), are the primary subject of the transaction.

The available evidence strongly suggests that online sweepstakes casino spenders are far more interested in the Sweeps Coins that are included as a “bonus” item when they purchase Gold Coins. An online survey conducted by the American Gaming Association in June found that, among players who spend money on these platforms, 67% said that they were “primarily interested” in obtaining the Sweeps Coins rather than the Gold Coins, emphasizing the appeal of the tokens with redeemable cash value. Of these spenders, 76% said Sweeps Coins were either “very” or “extremely important” in deciding whether to buy a package of Gold Coins.

In sum, the parallels between the ‘dual-currency’ online sweepstakes casino websites and the Internet café business model—which courts have held are incontestably gambling—are clear:

• Both sell a “product” that comes with a commensurate number of “free” sweepstakes entries to play real money ‘casino-style’ games of chance in a ‘casino-like’ setting. Instead of the cafes selling a prepaid phone card or internet access time, the online sweepstakes casinos sell a nonredeemable “virtual gold coin.”).
• Both run sweepstakes games perpetually and not on a limited and occasional basis, as is typical with legitimate promotional sweepstakes such as those offered by McDonald’s or Starbucks;
• Both offer casino-like payouts, typically 90% or more of revenues, whereas legitimate promotional sweepstakes normally have very low prize to entrant ratios.
• Both offer several ways to get free entries without requiring a product purchase, such as by mailing a postcard to a designated P.O. Box address (although the number of free entries awarded through this method is usually a very low amount).

Given these striking similarities and the frequent references to the “internet sweepstakes cafe business model” in its 2016 prospectus, VGW seems like an odd (if not downright puzzling) choice to lead the opposition to Assembly Bill 831. In essence, a company which once compared itself to internet sweepstakes cafes and is seemingly deploying a similar business model is tasked with convincing a legislative body which previously outlawed internet sweepstakes cafes to do an about face and not only refrain from banning the online versions of the same games but to regulate them instead. That seems like an especially tall order in light of California’s continuing crackdown on internet cafes and its ongoing tribal compact obligations which guarantee Native American tribes exclusivity over casino-style gaming.