Anybody who claims it's easy to raise a small chunk of private equity either hasn't done it or isn't telling the whole truth. In reality, once you reach beyond relatives, selling $100,000 or $200,000 worth of stock can be grueling. Plus, you need to stay within federal and state regulations for private offerings. (See table below.)

Many entrepreneurs never get funded, but the founders of Santa Fe Supply and Rental, in Pueblo, Colo., were fortunate. Over a period of six months Terrye Clear and Bill Donahue persuaded six local investors to put up $105,000 to start their construction-equipment business. Here are the steps they followed to obtain the money:

Compiling the hit list. Clear and Donahue began on the premise that their best bets were local residents within a radius of about 35 miles. "We spent hours at my dining-room table, asking each other whom we knew," Clear notes. Their initial hit list had 20 names. They scrupulously avoided trying to raise money from customers. "We didn't want to be pressured to give investors any special treatment," Clear explains. "And we didn't want to give the ones who didn't invest a reason not to do business with us."

Explaining the business. Between them, Clear and Donahue had nearly 20 years of experience at another construction-equipment business. So within their detailed business plan, they were able to provide reams of information about how their former employer approached the business and how they intended to do better. "We had charts showing sales, profits, and product mix over a period of more than 10 years," Clear says. Included in the package was a list of prospective customers, complete with commitment letters.

Clear and Donahue arranged meetings with 15 of the 20 people on their original list, and they spent anywhere from one to three hours with each prospect. Only two individuals from the group agreed to buy a $15,000 unit.

Making another list. After exhausting the first batch of prospects, Clear and Donahue asked their attorney and accountant for referrals. And they continued generating new names on their own. Eventually, they found four more investors (none from the attorney or accountant), and one of the original customers bought a second unit. Total outside money: $105,000. "It helped when we told people we were putting in our own money," Clear says.

Creating an exit. Investors were told not to expect dividends for three to five years. As for getting their money out in a pinch, they got the right to sell their interests as long as they gave the company first refusal. If Santa Fe Supply and Rental agrees to buy out investors, as it already has in the case of two people with health problems, it can take up to five years to complete the purchase. But the company came up with the cash right away. "We paid them their principal plus the interest on a high-yield CD," says Clear. "And both people were delighted." -- Bruce G. Posner

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Selling Small Doses of Equity
Interested in raising some equity without having to go through elaborate filings with federal and state authorities? Below are the major exemptions to registration with the Securities and Exchange Commission, along with how they work.

Exemptionlimit Limit on number of investors Documentation required
SEC Rule 504 $1 million None Disclosure document must be cleared by one or more U-7 states; SEC Form D must be filed after sale
SEC Rule 505 $5 million None, if all investors are "accredited"*; 35, if nonaccredited SEC Form D, if investors are accredited; if not, form S-18
SEC Rule 506 None 35 "experienced investors"**; no limit on accredited investors Form S-1 for experienced investors; Form D for accredited investors
1933 Act 4(2) None Fewer than 25 Whatever attorney deems necessary to protect exemption
1933 Act 3(a)(11) None None, if all reside in the same state Varies from state tostate. Company must keep good records on investors and use of proceeds to protect exemption

*"Accredited" investors are institutions or individuals with at least $200,000 in annual adjusted gross income or a net worth of at least $1 million.

**"Experienced" investors are people capable of evaluating the merits and risks of a prospective investment.

Source: Drew Field/Direct Share Marketing, San Francisco.