Once you have prepared an executive summary, a business plan and detailed financial projections, as well as determined the optimal structure for the proposed financing and created appropriate legal entities, you are ready to create the legal document(s) that you will provide to investors in order to raise funds.

Private placement memoranda (PPMs) are documents that disclose all relevant, material information that a reasonable investor would want to know in deciding whether or not to make the investment in question.   A PPM is different from a prospectus.  The term, prospectus, is used when referring to an offering document for registered securities, whereas the term, private placement memorandum, is used for securities that are exempt from registration under Regulation D.

Regulation D is a series of six rules, Rules 501-506, establishing three transactional (that is, for the one transaction, not for the company itself) exemptions from the registration requirements of the Securities Act of 1933.

Rules 501-503 set forth definitions, terms and conditions that apply throughout the Regulation, while specific exemptions are set out in Rules 504-506.

Rule 504 applies to transactions in which up to $1 million of securities are sold in any consecutive twelve-month period. Rule 504 imposes no ceiling on the number of investors, permits the payment of commissions, and imposes no restrictions on the manner of offering or resale of securities. Further, Rule 504 does not prescribe specific disclosure requirements. Generally, the intent of Rule 504 is to shift the obligation of regulating very small offerings to state "Blue Sky" administrators, though the offerings continue to be subject to federal anti-fraud and civil liability provisions.

Rule 505 applies to transactions in which not more than $5 million of securities is sold in any consecutive twelve-month period. Sales to thirty-five non-accredited investors and to an unlimited number of accredited investors are permitted. An issuer under Rule 505 may not use any general solicitation or general advertising to sell its securities.

Rule 506 has no dollar limitation of the offering. Rule 506 is available to all issuers for offerings sold to not more than thirty-five non-accredited purchasers and an unlimited number of accredited investors. Rule 506, however, unlike 504 and 505, requires an issuer to make a subjective determination that at the time of acquisition of the investment each non-accredited purchaser meets a certain sophistication standard, either individually or in conjunction with a "Purchaser Representative." Like Rule 505, Rule 506 prohibits any general solicitation or general advertising.   Most Regulation D transactions are offered pursuant to Rule 506.

Preparing a PPM pursuant to Rule 504, 505 or 506 generally involves either (i) sandwiching a slightly modified version of your business plan in a significant amount of legalese, including a subscription agreement, or (ii) sandwiching a very condensed version of your business plan in the legalese, including a subscription agreement, and then attaching your full business plan as an appendix.  If you take the latter approach, you need to make sure that there are no conflicts between your very condensed business plan and your full business plan attached as an appendix.

In either case, the fact that you are still subject to state and federal anti-fraud statutes means that the totality of the information that you supply in the PPM discloses all relevant, material information that a reasonable investor would wish to know before deciding whether or not to invest in your company or project.  This is a relatively tall order.

You can be accused of securities fraud if you actually lie in the PPM, making what lawyers call an affirmative representation.   You can also be accused of securities fraud for failing to disclose information that a reasonable investor would want to know.  The reasonable investor standard is amorphous, as it must be.  If you place yourself in the shoes of a potential investor, and you would want to know a given fact if you were considering investing, then the fact should probably be disclosed, especially if it is negative.

You will probably want to have a lawyer when finalizing the PPM, but you can do much of the work for the attorney, thereby minimizing expense, by getting hold of some boilerplate of the legalese portion of a PPM, either from your attorney or online, and trying to put the thing together yourself.  Then you can hand it over to him for fine-tuning and final approval.