The concept of the "rainbow party" was created in 2003 on an episode of the Oprah Winfrey show entitled "Is Your Child Leading a Double Life?" A guest had come on the program and told of a story where young teens would go to a party. The girls would wear lipstick of varying colors and give a blow job to various boys. The "winner" of the party would be the boy whose penis had the biggest variety of lipstick colors and the girl who won would be judged by the depth of penetration, indicated by how far her lipstick went down on the boy...so to speak.
Deborah Tolman, director of the Center for Research on Gender and Sexuality at San Francisco State University, said that neither she nor any of her staff had ever encountered the practice before the revelation on the program and that it was likely that the guest either completely fabricated the story out of whole cloth or heard of one example and mistakenly believed that the practice was widespread, a textbook example of Tuchman's Law.
The fabrication of information of this nature for political purposes is called a moral panic and the intent of such is to enlarge the power of government to regulate consensual sex in violation of the Constitution, especially if there is no valid legislative purpose for doing so. Moral panics of this nature have occurred frequently throughout American history and often have had long-lasting negative effects, such as John Harvey Kellogg's crusade against masturbation in the late 19th Century which directly led to the widespread practice of infant male circumcision in the United States, a practice which still exists to this day although the reasoning behind why it became common has largely been forgotten.
Despite this (or perhaps because of it), the concept of the "rainbow party" has been used as a scare tactic by people who are openly hostile to the free exchange of sexual information, such as author Paul Rudtis who wrote a book entitled "Rainbow Party" intended to scare teenagers away from sex (like that's ever worked in the last 50,000 years).
Since the concept's creation in 2003, it has been mentioned on several dramatic television programs such as Huff, CSI, The OC and NCIS. Even with prominent mentions such as these, there has never been any evidence that the actual practice of "rainbow parties" is widespread or even generally known among today's teenagers, despite the wishes to the contrary by many authoritarian control freaks and desperate horny teenage boys wondering where they all are and why they never happen around where they live.