Originally Posted by m44
This is a complicated question Panda Rascal. The laws are going to be totally different from state to state. Generally speaking, anything where you risk cash for the chance at winning a prize is considered gambling.
Here's a link that may be interesting: http://nccriminallaw.sog.unc.edu/?p=4014
^^^^ Basically by purchasing a internet card (like a phone card) you were entered into a "sweepstakes" where you could win cash/prizes. This was considered gambling by the state, because a statute makes it a crime to “operate . . . an electronic machine” to “[c]onduct a sweepstakes through the use of an entertaining display, including . . . the reveal of a prize.”
People have even gone after Chuck E. Cheese for having "illegal gambling" machines. http://www.coin-op.org/?p=595
I'm not trying to scare you off the IAP coins thing. As long as those prizes are in-game, you will be fine. But, if you want to start trading in digital prizes for real-life prizes you're going to have problems.
hey! thanks for replying and giving insights! I'm thinking about this properly as it could be a really good idea or a really bad one.
My ideal game has no sweepstakes feature though, it will just allow players who have earned enough virtual coin to buy plushies, shirts, and some other merchandise in real life.