It seems far too complicated to ever actually be brought into existence. That said, I would not participate. I'll take my guaranteed 1-2% rather than a Hail-Mary 500,000%.
I wouldn't say it couldn't be done. Variations have been done in several (non-US) countries.
The government of the UK offers a variation on the standard Lottery Bond. Through the NS&I (National Savings and Investment), the public can purchase Premium Bonds worth £1 each, with a minimum spend of £100 (or £50 if paying by monthly standing order). The maximum (as of the 2007 tax year) that an individual can hold is £30,000.
The bonds themselves attract no interest, are perpetual and are redeemable at par (face value) at any time. The attraction for an investor is that, each month, a draw takes place and, should an investor hold one of the bond numbers chosen, then the bond-holder will be awarded a prize of variable value.
As of July 2007, there were two £1 million prizes awarded each month, plus over 1 million smaller prizes ranging in value from £50 up to £500,000. All prizes are tax free and, with approximately 23 billion bonds issued, the chances of any one bond winning a prize for that month are approximately 24000 to 1. However, it is important to recognise that, on winning a prize, the bond is not redeemed but remains 'in the pool' for all forthcoming draws.
The prize fund is paid for out of the equivalent interest payable on the entire bond pool for that month. As of July 2007 this is 3.80%. A bond holder with a sufficiently large pool of premium bonds could hence reasonably expect to achieve this type of return should he hold his bonds for long enough.
Although riskier than a typical European bond, the UK Premium Bond offers the chance of enjoying a significantly larger windfall.
South Africa also had a variation that was reportedly extremely popular, until the National lottery shut it down for being an illegal lottery.