Your code will result in:
<nick> *£aughing Out £oud*
<nick> that is funny lol
I will recommend you do it like so:
on *:input:*:{
if ((/* !iswm $1) && (!$ctrlenter) && (!$inpaste)) {
say $replace($1-,lol,*£aughing Out £oud*) | halt
}
}
This will correctly result in:
<nick> that is funny *£aughing Out £oud*