This comment applies to Australia law, but most other countries will have similar rules.
I am now about to get into a grey area where some may consider I am giving legal advice. Let me make it clear that I am not, and you should not rely on anything that I say here. All I am giving you is a pointer in the right direction. If you want to go down this path you need to seek expert legal advice.
Having said that lets get on with it.
The second method is a small capital raising. Basically you are allowed under the Australian Corporations Law to raise, via a private company, no more than $2 million dollars from a group of people not exceeding 20.
You are allowed to do this on the basis that there is some connection between you and the people investing, i.e long time associates, accountant, lawyer etc. I assume you get the idea.
The advantage of this approach, in the Australia context, is that you are not breaking the Corporations Law.
The disadvantage is that the tax concession under Part 10BA of the Income Tax Assessment Act is only available to the company not to the individual investors. But hey your going to make money and so you should be in a position to pay fully franked dividends to you shareholders, who needs 10BA anyway.
The other advantage of this approach is that it is a more professional approach to the fund raising exercise. Do it right and it adds to your credibilty with your investors and just as importantly with the government regulators. (ASIC is always watching what people are doing).