Selling Equity: A High-Stakes Game Sidestepping the traps of equity fund-raising

The Facebook post reads: "Startup medical device company looking for investors." An eBay ad offers "double-digit growth potential for early investors." And with loans in short supply, you might be tempted to hang an "investors wanted" sign of your own. But be warned: Selling equity is very different from borrowing from Aunt Sally. And it's easy to run afoul of state and federal securities laws, no matter how small the investment.

When Aunt Sally loans you money, she expects to get it back. But when you sell equity, your investors have no recourse if you don't succeed. Their money is just plain gone. That's why the Securities and Exchange Commission and equivalent state agencies want to weigh in. Their prime concern is that investors understand the risks and can afford the hit if the venture doesn't perform as hoped.

While securities regulations offer a number of exemptions that allow small companies to raise equity, you should always seek the advice of a qualified attorney to keep you out of hot water. According to Tonio DeSorrento, an attorney in the Washington, D.C., office of Orrick, Herrington & Sutcliffe LLP, missteps put you at risk of fines, shareholder lawsuits, repayment demands and charges of fraud, and they even undermine your ability to raise money in the future.