Earlier quoted context omitted.
> Always explain rationale around the No, to help them improve This is my inclination: "We liked your attitude, you seem intelligent, and well-spoken, but we have concerns about your knowledge of , maybe start contributing to or experiment in and reapply in a year or two." ...my concern is opening up my company for legal liabilities. Am I just being paranoid?
Based on what you wrote, you're probably being paranoid. I deliver lots of 'No' answers as well, and I don't see any issues with what you wrote. Legal liability tends to be around the generic responses where candidates may assume the worst (race, gender/orientation, age, etc.). A specific response that points to a lack of experience in a certain area seems a safer bet than 'not a fit' in most cases.
I stay far away from those sweeping personality statements personally.