The Trust Indenture Act of 1939 regulates public issues of large securities. The Investment Company Act of 1940 regulates publicly owned businesses that deal primarily in the buying and selling of securities. The Investors Advisers Act of 1940 sets down rules for the registration and regulation of investment advisors, similar to those used in the Securities Exchange Act of 1934. The Securities Investor Protection Act of 1970 established the Securities Investor Protection Corporation, which has the authority to oversee the liquidation of securities firms and to pay off debts owed to their customers.

The Illinois securities laws are administered by the Secretary of State. Alleged violators of Illinois securities law may be sued through the Office of the Attorney General, Secretary of State. Penalties include restraining orders, injunctions, and return of all unlawful sales, including profits made. Unlawful sales are voidable and can allow the purchaser to sue the seller for the value of the security plus interest. In addition, sellers of unlawful securities may be held criminally liable, subject to imprisonment, fines or both.

A limited offering (issuance of securities within a 12-month period) is exempt if made to not more than 35 residents of Illinois or if the aggregate price of the securities sold within the state does not exceed $100,000. A sale of securities to a relative, spouse or relative of the spouse will be deemed a sale to an additional purchaser.

Securities listed on the American, New York, Pacific Coast, Midwest and Philadelphia Stock Exchanges and the Chicago Board Options Exchange are exempt. Further, securities satisfying the National Association of Securities Dealers Automated Quotation National Market System are exempt from registration.

Anyone trying to use a lender to raise money for a new business will need to give a prospective lender detailed information about the form the new company will take. At a minimum, a prospective business owner will have to provide information about his or her current financial situation, including all business and personal assets and debts. Also, an applicant must be prepared to provide information about how the money requested will be spent and a full description of the intent of the business, along with information about the experience and management capabilities of the owner and those expected to be employed in top positions. A lender also will want to know how much money the owner plans to invest in the business and any projections of how much the business is expected to earn in its first year.

Retail and service-oriented businesses often have more difficulty obtaining financing because the funding for these types of businesses is used for expenses such as inventory, fixtures, and working capital--collateral that usually does not meet a lender's criteria for resale recovery. Often, these endeavors are financed primarily, if not fully, through equity. With that background in mind, following are various types of debt financing options that are available.

Conventional Bank Loans

It is almost impossible to finance a business with 100 percent debt. Cautious bankers--and bankers are a cautious bunch--typically require that at least half of the startup costs be covered by the owner, and nearly any source of financing will require at least a 20 percent equity stake by the owner.

As noted above, financiers are more willing to provide funding for projects in which there is collateral that can be easily sold if necessary to recoup their investment. Thus, manufacturing and industrial operations historically are easier ventures to finance than retail and service businesses.

A bank is a corporation that earns money by maintaining savings and checking accounts, issuing loans and credit, and dealing in negotiable securities for governments and corporations. Banks invest the money entrusted to them by their customers. The investments that banks are allowed to make are regulated, and banks are defined by the limitations put upon them. The types of banks (in order from least to most regulated) are commercial banks, savings banks, and savings and loans. Commercial banks are the most common and least regulated type of bank. These banks must have more deposits on hand than other types of banks in order to handle the daily transactions of the bank and prevent a money shortage (and the panic that can result). These types of banks are often publicly held corporations.

Savings banks are a rarer form of bank, although they are fairly common in the midwest. These are limited-service banks that were originally formed to encourage people to save their money. To this end, savings banks traditionally offered as their major service "time" savings accounts that prevented withdrawal of deposited money until a set period of time had elapsed. In modern times, the services of this type of bank have expanded somewhat. A business person looking for a lender should note that a savings bank sometimes offers higher interest rates on accounts than a commercial bank. This is because a savings bank does not have to keep as high a portion of its deposits in reserve as commercial banks. Savings banks are usually owned in the form of a partnership of depositors who receive dividends in the form of interest on their accounts. The third type of bank is a savings and loan association. Despite news of scandals and problems in recent years, savings and loan banks traditionally have been highly regulated, conservative organizations whose primary purpose--other than encouraging savings--is to provide loans for homes and businesses.

Asset-Based Lenders

Only about one out of every ten investments reaps profits for venture capital companies, so they are choosy about where they place their money. Many firms specialize in certain areas in which they have expertise. Before approaching a venture capitalist, a business owner should prepare a solid business plan that takes into account marketing plans, cash flow, and research needs.

Public Financing

In addition to the SBA, there are a number of other government programs, at the local, state, and federal levels, designed to help specific kinds of businesses. For example, some programs are designed to assist minority owned businesses.

Franchises are governed by both state and federal law. It is extremely important to know these laws before starting a business that may franchise or if considering becoming a franchisee for another business. The laws are drafted using broad language and some people find themselves in violation of the laws, even though they are not engaged in activities they consider to be franchising.

The Federal Trade Commission (FTC) enforces laws and rules regulating franchises. These rules do not require a business to register with or seek the approval of the FTC before offering or selling a franchise; they only apply to franchises that are "in or affecting interstate commerce." Although there are differences between state and federal franchise laws, it is most important to remember that the name of a company is not important as long as the relationship meets the definition of a franchise. This means that if a business is entering into a limited partnership, it may also be entering into a franchise agreement. The FTC rules define a franchise as a "continuing commercial relationship" between two or more parties. This continuing relationship is further defined as one in which supplies for reorder are made available to the purchaser after the first required inventory is purchased.

There are three basic types of "continuing commercial relationships" covered by the rules:

• Package franchises, "business format" franchises, which are defined as prepackaged business programs developed and identified by the franchisor. McDonald's is an example of this type of franchise.
• Product franchises, in which the franchisor sells goods that bear his or her trade name to a franchisee, who in turn sells them to the public under the same name. The dealer company maintains some degree of control over the selling of the goods by the franchisee in this arrangement.
• Business opportunity ventures, in which the franchisor retains more control than in either of the previous arrangements. In this type of franchising agreement, the franchisee is required to buy and sell the goods or services of the franchisor or another business. The franchisor also arranges the location of the business, seeks out business for the junior partner, and even provides employees. An example of this type of arrangement is a vending machine route. The franchisor company finds a place to put the machines and sells the candy to the franchisee, but the franchisee collects the money and restocks the machines.

Illinois Secretary of State, Securities Division, Capitol Building, #213, Springfield, IL 62756, phone: (217) 782-2256.

Federal Trade Commission, Sixth and Pennsylvania, Washington, D.C. 20560, phone: (202) 326-2000.

United States Security and Exchange Commission, 450 Fifth Street NW, #31024, Washington D.C. 20549, phone: (202) 942-8088.

United States Small Business Administration, 500 West Madison Street, #1250, Chicago, IL 60661-2511, phone: (312) 353-4528.