By James Bowden

Small businesses are the prime engine for job creation in the United States, and small businesses start with an idea and someone with the guts to put the blood, sweat, and tears into building that idea into a business. Unfortunately, most entrepreneurs start their businesses in a hole when it comes to capital formation. This leads to an unfortunate convergence of two related problems: a need to seek investments from others and an inability to afford good legal advice.

I think that business schools should have a class on practical securities laws for entrepreneurs. Securities laws are complex, often counter-intuitive, and the consequences for finding yourself on the wrong side of them are, well … They’ll put a big damper on a start-up company. So, in the mean time, here are a few tips for entrepreneurs looking to do some capital raising for their small business:

• DO NOT expect venture capital firms or angel investors to be interested if a few hundred thousand dollars is more than enough. Professional investors will not be interested in taking the risk of losing everything in exchange for a percentage return on a few hundred thousand bucks, and the cost of putting the terms on paper will wash out any gains. 
• DO put pen to paper if and when you do receive invested funds. Informality is great for many things, but when you are taking other people’s money it is best to keep a record. Also, if you are wondering whether you should keep the money in a segregated account held in the name of the business, you (a) should definitely do so, and (b) should be dolt slapped for even considering putting the money you raise in a personal account. 
• DO NOT advertise investments in your business on Facebook, Twitter, or any other social media site. Short summary of federal securities laws - offering investment opportunities in a business by internet message qualifies as an offer to sell securities, and securities offerings come in three types: registered, exempt, and illegal. Registered offerings aren’t the domain of start-ups, so don’t worry about those yet. In order to be exempt, offerings have to qualify into certain statutory or rule-based exemptions. Staying within the exemptions offered by federal law means staying small, both in offering size and number of investors solicited, and not engaging in advertising or general solicitation. I’m not aware of any case where an offer to sell securities sent via Facebook status update has been subject to a regulatory action, but this is probably a race you don’t want to win. 
• DO know what you are offering, specifically whether it is equity or debt, and make it very clear to any and all investors. Equity is (generally) a fractional interest in the business as a going concern representing opportunity to participate in the upside benefit of the success of a company, but if the company doesn’t succeed the equity holders get nothing. Debt is an unqualified promise to pay. Both categories come in all different stripes, but the difference between the two is the difference between night and day. Of course, if you are just getting a loan (from a bank, the small business administration, or even your parents), that debt is not a security. Bonds are securities. If you have any question about the difference, ask someone.
• DO provide a write-up of what an investor will be investing in. Describe the business, the management, the market, the geographic area served, etc., etc. Err on the side of disclosure. Make sure all of the facts are correct. Include every bit of information that is necessary to ensure that the information you do include isn’t misleading. Proofread. 
• DO NOT provide promises of future performance. The term sheet, offering memorandum, or whatever you choose to call it should qualify all financial projections and projections of future performance as being subject to factors not in the control of the business, and point out that investments in a start-up business involve a high degree of risk. Investors should know to independently investigate the business, ask questions, and be instructed not to rely on any projections provided by the business, financial or otherwise. 
• DO know what kind of offering you are going to go with. For the most part, small businesses will be starting with small offerings to people they know – also known as “Friends and Family Offerings.”  The tough thing about friends and family is that you probably don’t want money to come between you, even if they are eager to support you. The level of formality of the investment, whether it is phrased as a loan or if you issue stock in the new business, is something that you will need to think carefully about. This may not be legal advice but the sad truth is that many (if not most) entrepreneurial efforts fail, and no one is sure what makes those that do succeed different from those that fail. If telling a friend or family member that they have lost their entire investment isn’t a conversation you think you could have with them it probably isn’t a good idea to ask them to invest in the first place.
  

I think that is a good start.  I'll work on a syllabus if any of the business schools are interested.