A private placement memorandum has two jobs. (1) Raise money. (2) Don't defraud the investors. When you sell shares of stock, LLC interests, or limited partner interests to private investors, you are selling securities. Securities laws always apply, even when the deal is small or the investors are friends. In the PPM the price, fees, risks, conflicts, and the exit rules are set in stone before money changes hands. The vast majority of retail investors have never seen one. That's not you, anymore. This page walks through a real one, and also a very good one: the 47-page memorandum for Smithson, L.P., published by Fundsmith.
This article is the capital-raising big brother of my letter of intent guide. The Letter of Intent Guide is useful when someone buys your business. This page is useful when you are growing it. The format is one I have used on our most successful page: take the standard document, and explain every section in order, the way I did for the Multi-Board 8.0 real estate contract.
What is a PPM and When Do You Need One?
The Securities Act of 1933 is really one concept reduced to a law. The concept is that you cannot sell a security to the public unless you register it with the SEC. Registration is the IPO process. It is (very) slow and (ungodly) expensive. Small companies avoid it by selling privately instead, under the exemption in Section 4(a)(2) of the Act for "transactions by an issuer not involving any public offering."
Do not assume your deal sits outside this system because it involves a tiny Chicago LLC instead of a stock corporation. The Supreme Court defined the reach of the securities laws in SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946). In that case, the SCOTUS says an investment contract is any "contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." Howey involved rows of orange trees sold with a management contract. For those of us with small children, this reminds me of the Spongebob quote "Is Mayonnaise a vegetable?" In this case, "Are orange trees a stock?" Yes. So the ownership interest in your $450,000 net asset LLC running an investment property and a coin-laundry are too.
Then, the Supreme Court drew a line around private-offerings in SEC v. Ralston Purina Co., 346 U.S. 119, 125 (1953). A private offering is one made only to investors who can "fend for themselves," because they have access to the same kind of information that registration would provide. If you remember nothing else from this whole article: the issuer claiming the exemption carries the burden of proving it. The issuer is the team raising the money. They get stuck with the entire diligence framework. Courts still apply that test today. Regulation D exists to give issuers a safer harbor inside the Ralston Purina framework, not a substitute for it.
Regulation D is the SEC's safe harbor for private sales of equities. The two key parts of it are Rule 506(b) and (c). (B) gives you an easier time if you sell only to accredited investors and do not advertise. Then, you can raise an unlimited amount of funds. The newer option, Rule 506(c), allows public advertising, but then you must take reasonable steps to verify that every purchaser is accredited. If you've ever seen something like "We only take investment from people with $1,000,000" in the brokerage accounts, that's a Rule 506(c) warning. In a registered offering, the disclosure document is called a prospectus. In a private offering, it is called a private placement memorandum. These are essentially the same thing.
Surprisingly, in an all-accredited Rule 506(b) offering, no rule dictates the contents of your disclosure document. There is no particular form they must take or content that must be in a PPM. The specific information requirements in Rule 502(b) of Regulation D apply when you sell to investors who are not accredited. Every serious sponsor does a PPM anyway, just to avoid the liability for fraud. Rule 10b-5 under the Securities Exchange Act of 1934 makes it unlawful to make an untrue statement of a material fact, or to omit a material fact, in connection with the sale of a security. Believe it or not, in law school we had an entire semester class about only this rule and nothing else. When a deal goes bad, the first question is: what were the investors told? The PPM is the written answer. Nobody would like to tell a judge, "Your Honor, we didn't tell the investors anything."
Why Does Everyone Use PPMs?
Fundsmith is the fund management firm founded by Terry Smith in 2010. Smithson, L.P. is a Delaware limited partnership that Fundsmith manages for U.S. investors. It follows the same strategy as Smithson Investment Trust plc, the firm's UK-listed small and mid-cap fund. Fundsmith posts the Smithson, L.P. memorandum on its U.S. website, which is super rare. There is a cottage industry of lawyers on X/Twitter that give out model PPMs for $1,000 each.
The document rocks. First, it is complete and probably cost over $100,000 of legal work to create. Every section a PPM should have is present here. It's typeset, well ordered, with clear headings. Second, it is short at only forty-seven pages. I personally have a 177 page PPM for a real property development in Houston on my computer right now. Third, the deal it describes is unusually clean: one management fee, no performance fee, monthly liquidity, and the whole business plan stated in plain English. It is an exemplary teaching copy.
Why did I highlight these numbers? Look, the risk factors and taxation together take 21 of the 47 pages. About half of the best PPM I've ever seen is the issuer explaining how you can lose money and how you will be taxed. The drafter made a conscious decision to exhaustively address the possibility of loss, rubbing your nose in it for nearly the entire document. The astute observer will ask "so your PPM should be pessimistic and tell people that it's all going to hell in a handbasket?" Yes! A good PPM tells everyone that there is a serious chance that nobody gets their money back.
Think back to the trials of Sam Bankman-Fried and Caroline Ellison. He ran FTX, the crypto exchange. She ran Alameda Research, its sister hedge fund. Customer money flowed quietly from one to the other, and both were convicted of fraud. It is darkly funny that their books were quite good. The company held an early stake in Anthropic that the bankruptcy estate later sold for a fortune to help repay customers. The assets were fine. The disclosure was fiction. A boring, honest disclosure regime is the difference between an embarrassing down year and a prison sentence.
Back to the Fundsmith PPM, let's look at what's here by volume:
| Section | Pages | The Job It Does |
|---|---|---|
| Cover and notices | 3 | Getting Out of SEC Rules |
| Executive summary | 1 | Every player and their fee |
| Investment program | 1 | The strategy and limitations |
| Management | 2 | Who handles your money |
| Summary of terms | 7 | The term sheet of the deal |
| Risk factors and conflicts | 10 | Tells you how you lose it all |
| Brokerage and custody | 1 | Says who holds the assets |
| Administration agreement | 2 | Says who keeps the books |
| Subscriptions | 2 | Who may invest, and how |
| Withdrawals | 1 | How and when you get out |
| Taxation | 11 | How the IRS taxes your investment |
| ERISA, inquiries, directory | 5 | Retirement money rules and contacts |
The Cover and the Wall of Capital Letters
Open the Smithson memorandum and the first thing you hit is three pages of dense capital letters. Readers skip them. Lawyers started here. Each block, or "legend," does a specific legal job. The interests "have not been and will not be registered under the Securities Act of 1933." The offering is made "in reliance upon an exemption from the registration requirements." The partnership will not register under the Investment Company Act of 1940, "in reliance on the exclusion set forth in Section 3(c)(7)." The securities are "subject to restrictions on transferability and resale." No person is authorized to make any representation not contained in the memorandum.
Read those again as a set and you can see what they are. They are exact terms to get into an exemption. A private offering stays private if and only if the issuer controls who receives it, what they are told, and what they do with the securities afterward. The legend is the rulebook of the game. The document is numbered, addressed to one named offeree, and prohibited from being passed along. That is also why the cover of a publicly posted document still says "confidential." The label is doing exemption work, not secrecy work.
The Executive Summary: The Whole Deal on One Page
Page five of the Smithson memorandum is a single page that answers every first-order question. Who is the issuer? A Delaware limited partnership formed in January 2020. Who controls it? Two general partner entities, both Fundsmith affiliates. Who picks the investments? Fundsmith LLP, an English partnership regulated by the UK Financial Conduct Authority and registered with the SEC as an investment adviser. What does it cost? A management fee of 1.0% per year on accounts under $5 million, and 0.9% above that, calculated daily and paid monthly. That is the only fee listed. What is the minimum? Generally $250,000. How do you get out? Monthly, on sixty days' notice.
Look at this structure. Every private investment fund has the same skeleton: an entity that holds the money, a manager entity that runs it, and the investors who own interests in the first entity. The PPM's first job is to name the anatomy of its body, the bones and connective muscles. In a small Chicago deal, the same skeleton appears but for a smaller animal: your LLC is the issuer, you or your management company is the manager, and your operating agreement plays the role the partnership agreement plays here. Whether you're an elephant or a mouse, you still need a brain, a heart, a spine and all the other same parts. If any of those are missing from the PPM, as the kids say, you're cooked.
Making Promises: The Investment Program Heading
The investment program section states the objective, the selection criteria, and the restrictions. Good fences make good neighbors, good restrictions make a good fund. The Smithson fund promises it will not invest in derivatives, will not hedge currency, will not put more than 10% of gross assets in a single issuer, will not hold more than 20% in affiliated issuers, will not take a stake that controls 20% or more of any company, and will not borrow more than 10% of net asset value, and then only short term. The portfolio will generally hold 25 to 40 companies with market values between GBP 500 million and GBP 15 billion at purchase.
This isn't marketing, even if it is an appealing thing to read. Rather, this text forms the boundaries of the manager's discretion. The fund wrote those boundaries into the disclosure upon which the investors relied. A strategy section that says "the manager may invest in any asset it deems appropriate" is a slush fund. How keen are you to give me an investment that goes wherever I feel like it should? Do you think that investment is going into good companies, or going to a bunch of businesses that will make me tons of money if they take off? A strategy section with numbers creates promises. When I review a PPM for an investor, I'm looking for guard rails. If my client is "manufacturing a car" with a PPM, let's make sure the damn thing has some seatbelts and traction control, right?
Management: Why Did This Guy get Fired for Writing a Book?
The management section has bios of the general partners, the portfolio managers, and the executives. Look at Terry Smith's bio. He was head of UK company research at UBS Phillips & Drew, "a position from which he was dismissed in 1992 following the publication of his bestselling book Accounting for Growth." Why would he tell you he got fired for writing a book?
A marketing document would never volunteer a firing. But, a disclosure document thinks differently. Omitting a material fact is just as actionable under Rule 10b-5 as stating a false one. It's the difference between telling your spouse "I was with the kids all day" and "I was with the kids all day at the emergency room." The measure is materiality.
In Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988), the Supreme Court held that a fact is material when there is a substantial likelihood that a reasonable investor would view it as significantly altering the "total mix" of available information. The history of the people who will control the money passes that test easily. So, a proper bio includes some awkward facts, told in the issuer's own framing, before anyone else can tell them. I have actually seen one that discloses someone cheated on his wife, because an investor might see that as dishonesty. Your own PPM must include the bad year, the prior venture that failed, the professional discipline, etc. I have previously sued a guy for raising money for a home rehab flipping business when he disclosed 10 profitable deals and did not disclose two that broke even. Even just saying "Billy has done ten flips with a total volume of $5,000,000" is fraud if Bill has really done twelve flips with a total volume of $5,000,000.
Planning a Raise This Year?
Talk to me before you take the first check. We will walk through your structure, who your investors can legally be, and what your disclosure package needs to say.
The Summary of Terms: Money Money Money
The summary of terms is the longest front-half section at seven pages, laid out as a two-column table. It is the term sheet of the entire deal, and it opens with a sentence to commit to memory. The summary "is qualified in its entirety by" the partnership agreement. Translation: the PPM describes the deal, but the partnership agreement is the deal. In any conflict, the agreement wins. Never invest in a partnership or an LLC without reading the actual governing agreement behind the memorandum. Please take a minute to realize how frustrating being an attorney in this space can be when your clients regularly say "oh man I wish I had seen that partnership agreement."
Inside the table, a few entries deserve special attention:
Fees and expenses, including the expense cap
Beyond the management fee, the fund pays its own operating costs, and the memorandum lists thirteen categories of costs. Then comes a protective term: while the fund's net asset value is under $150 million, ordinary operating expenses are capped at 0.20% per year, with listed exclusions. A cap like that tells you the sponsor thought about how expense drag punishes small funds. In a small syndication, the equivalent question is who pays the deal's legal and accounting bills, and whether the sponsor can charge its own overhead to the investors. The document should answer it, or nobody should invest.
The exculpation and indemnification standard
The general partners and the manager are not liable to the fund or its investors for losses "in the absence of willful misconduct, recklessness, or gross negligence," and the fund indemnifies them on the same standard. In plain terms: ordinary negligence is forgiven, and if they are sued, the fund pays their defense. Nearly every private deal contains a clause like this. There are some attorneys of the opinion that if you draft a PPM or Operating Agreement that does not include this statement, you're committing malpractice. The standard of care it states is the single most important sentence for an investor's future lawsuit. It defines what you can and cannot sue the manager(s) for.
Transfers, amendments, and pulling the rip cord
Interests cannot be transferred without the general partner's consent, which it may withhold in its sole discretion. The partnership agreement can be amended with majority consent, but no amendment may increase an investor's obligations, cut its capital account, or cut its share of profits without that investor's consent. And for other amendments an investor dislikes, the document gives at least 45 days to withdraw before the change takes effect. When I review a deal, I check for that escape hatch. Its absence means terms can change around you while your money stays locked in. If you're jumping out of a plane with a golden parachute, you need a rip cord to pull so you don't splat the ground.
Allocations, new issues, and side letters
Profit and loss are allocated to capital accounts pro rata each month, with a carve-out for "new issues" under FINRA Rule 5130, which restricts who may share in IPO gains. Elsewhere the memorandum discloses that the general partner may enter into side letters giving specific investors different fees, withdrawal rights, or information access. Side letters are legal and common. The disclosure is the point: you are told, before you invest, that someone else may be getting a better deal than you. Someone is always getting a better deal, the question is only whether your deal could be better.
Risk Factors and Conflicts: The Fun Part
This is the longest section of the document and the most frequently misread by amateurs. Ten pages here cover market risk, concentration, small-company risk, foreign markets, currency, cybersecurity, key personnel, withdrawal suspensions, and more. Novices skim this as boilerplate, because it is not written for them. Rather, it is written with a crystal ball for the lawsuit that hasn't happened yet. When an investor is told about a risk in writing, they have a much harder time suing over it when the risk arrives. This is where investors get told about those risks.
We've got a pretty recent case example. In Cornielsen v. Infinium Capital Management, LLC, 916 F.3d 589 (7th Cir. 2019), employees of a Chicago trading firm converted loans to their employer into equity and lost everything. They sued, pointing to optimistic statements made at "town hall style" meetings. The Seventh Circuit affirmed dismissal. The PPM had disclosed, bluntly, the company's $53 million debt, the junior ranking of the employees' equity, and the board's power to suspend redemptions. It was probably pretty dumb to turn your loans into equities when the company was eight figures in debt and said they might not ever pay it. The written disclosures contradicted the oral optimism, and a non-reliance clause in the subscription agreement confirmed that no one was investing on the strength of anything outside the documents. The boring risk document beat the entire lawsuit. Illinois state courts run a parallel doctrine: detailed and specific cautionary language can neutralize claims about forward-looking projections, though it will not shield an issuer who withheld known present facts. Lagen v. Balcor Co., 274 Ill. App. 3d 11 (2d Dist. 1995).
Everyone wants a quick solution, so here is one. Take the risk category. Sort every paragraph into two piles. Pile one: risks that could appear word for word in any fund's PPM. Markets fall. Currencies move. Hackers exist. Skim those. Stuff happens. Pile two: risks that could only be written about this deal. In Smithson's case: the portfolio is concentrated in 25 to 40 stocks, the fund refuses to hedge currency, it does not intend to pay distributions, withdrawals can be suspended, and side-letter investors may receive information that lets them exit before you. Pile two actually matters. Read every word of it.
The conflicts pages are just as instructive. This memorandum discloses that Fundsmith manages other funds with similar strategies, that its principals may invest personally, that trade errors are generally borne by the fund rather than the manager, and that K&L Gates, the law firm that prepared the document, represents the fund and the manager, and "does not represent the interests of any Limited Partner." That last one is the sentence every investor should notice. The lawyers who wrote the document you are reading do not work for you. If the deal is large, bring your own. We're really not that expensive. This whole article review took me like 13 hours to do in microscopic detail. At my usual fees, that's between $5-7,000, or 2-3% on the minimum investment.
Custody and Administration: Who Holds Your Money
Oh look, Chicago is mentioned here. The custodian and the administrator are both The Northern Trust Company, 333 South Wabash Avenue, Chicago. Northern Trust holds the assets as a "qualified custodian" under Rule 206(4)-2 of the Investment Advisers Act, and as administrator it independently calculates the fund's net asset value daily, keeps the books, runs anti-money-laundering checks on investors, and sends each investor a monthly statement. The auditor is Deloitte. Yeah yeah, everyone on the internet hates Deloitte these days, but they're a big house that does big boy work.
I'm really just making a point to structure. The manager picks investments. A separate institution holds the assets. Another function, at that separate institution, computes the returns and reports them to investors directly. The historic fund frauds ran through self-custody: managers who held the money and typed their own account statements. Oh, I'm sorry, I meant to say they hyped their own account statements. When a PPM names no independent custodian or administrator it is not automatically a fraud, but it is fraud adjacent. I would price that in.
Subscriptions: Beyond the Velvet Rope
The subscriptions section explains how an investor actually gets in, and who is allowed in at all. Smithson runs a double eligibility screen. Every investor must be an accredited investor under Rule 501 of Regulation D. And because the fund relies on Section 3(c)(7) of the Investment Company Act to avoid registering as an investment company, every investor must also be a qualified purchaser, which the memorandum describes as generally meaning individuals with more than $5,000,000 of qualifying investments and entities with more than $25,000,000. Subscriptions are accepted monthly, the minimum is $250,000, the general partner may reject anyone for any reason, and the anti-money-laundering pages explain the passport-and-utility-bill identity checks the administrator runs. You can do your own OFAC and KYC on things like this, but... why bother?
You will not use 3(c)(7) for a Main Street raise. The exclusion that fits small deals is Section 3(c)(1), which is generally available while the fund's securities are held by no more than 100 beneficial owners. The mechanics scale down directly: a subscription agreement in which the investor certifies its status, an investor questionnaire that documents the certification, and the sponsor's right to reject. These certifications are the evidence that your exemption's conditions were met, investor by investor. The Seventh Circuit enforces this fine print, as a non-reliance clause in a written purchase agreement precludes securities fraud damages based on prior oral statements. Rissman v. Rissman, 213 F.3d 381, 383-84 (7th Cir. 2000), applied to a PPM and subscription agreement in Cornielsen, discussed above.
Withdrawals: Getting Your Money Out
One page governs the exit. A limited partner may withdraw as of the first business day of any month on sixty calendar days' prior notice. A withdrawal request, once given, cannot be revoked. Proceeds are normally paid in cash within seven business days. Then come the qualifiers: the general partner may suspend withdrawals when markets close or assets cannot be valued, may pay a withdrawing investor in securities instead of cash, and may force any investor out at any time, for any reason. So sometimes you want out, sometimes you're told to leave.
Monthly liquidity on sixty days' notice is quite generous by private-fund standards. I've written a few at 180 days. Your comparison point in a small deal is usually far starker: a real estate syndication or an operating-business raise typically offers no withdrawal right at all until the property or company is sold. Honestly, that is a legitimate structure. It just has to be disclosed in exactly this section, in plain words, so no investor can later claim they thought they could get out at will. Clear exit terms are the difference between an investment and a hostage negotiation.
Taxation and ERISA: The Back Third
Eleven pages of tax. Nobody enjoys eleven pages of tax but accounting nerds. Every deal needs its own version. Partnership taxation is where sophisticated investors focus first. There's a few core disclosures, like how the partnership itself pays no federal income tax, and each partner reports its allocable share of income and gains each year. The document says plainly that a partner's tax liability in a year "could exceed the cash distributions made by the Partnership" to that partner. That is phantom income: taxed on paper gains, with no cash distributed to pay the bill. It also warns that Schedule K-1s may arrive after filing deadlines, so partners may need extensions. Every LLC and partnership deal I paper carries the same two warnings. It would be malpractice not to write this in.
The ERISA section covers retirement money. The DOL's plan asset rules treat a private fund's assets as retirement plan assets, with heavy fiduciary consequences for the manager, if benefit plan investors reach 25% or more of any class of interests. There are a lot of retirement plans that do investing, and if you want that money in your company, you'll have to write to spec. Therefore, the memorandum states the fund will monitor and stay under that line. Small sponsors hit this exact issue the first time a friend offers to invest through a self-directed IRA. I've had this come up three times with companies buying real estate at tax sales. While it seems like there's only 7 people who have self-directed IRAs, it is also the case that those people are extremely active investors. If you want their money, you have to follow the rules.
Why Did You Read a Billion Dollar Finance Article if you Need $500,000?
You are not launching a global equity fund. I mean, I would be very happy if you were and you were reading my page, considering hiring this law firm. Seriously, that would be truly awesome! But, realistically you are raising around $500,000 for a building, or $2 million for your company. This process can simplify substantially at that smaller scale.
We can make a much simpler set of exemptions. A small raise typically uses Rule 506(b), no advertising, accredited investors only, with Section 3(c)(1) instead of 3(c)(7) if the vehicle is a fund. The issuer must file a Form D notice with the SEC after the first sale. And there's some stuff to do with getting an EDGAR account set up. But, for the most part, you can do it online with an afternoon of work and a big brain.
There's some Chicago specific problems that don't go away when you scale down. In Donohoe v. Consolidated Operating & Production Corp., 982 F.2d 1130 (7th Cir. 1992), Chicago sponsors raised money for four oil-drilling limited partnerships through four separate PPMs, each sized to fit inside a small-offering exemption. When the wells came up dry, the investors argued the four offerings were really one large unregistered offering. The doctrine is called integration. The sponsors survived it, barely, because each partnership genuinely stood or fell on its own wells. The lesson is free from the outside: you cannot slice one raise into small pieces to stay under an exemption's limits, and even winning that argument took years of litigation. Structure the raise as what it actually is. You might hate writing specific structures, but let me tell you that you will hate years of complex litigation and depositions much more.
Illinois, the state that regulates everything, absolutely regulates securities too. Under section 13(A) of the Illinois Securities Law of 1953, every sale of a security made in violation of the Act is voidable at the election of the purchaser. 815 ILCS 5/13(A). The Illinois Supreme Court walked through the mechanics in Goldfine v. Barack, Ferrazzano, Kirschbaum & Perlman, 2014 IL 116362. The purchaser recovers the full amount paid, plus interest at 10% per year where no rate was stipulated, less any income received. The court must also award the purchaser's costs and reasonable attorney fees. And liability is joint and several. It reaches the officers and directors who participated or aided in making the sale, personally. So, either you comply with the act or you guarantee investment plus ten percent annual profits, out of your own pocket. I would choose to comply with the act.
This formula is mechanical, as opposed to something you can argue to a judge. In Kugler v. Southmark Realty Partners III, 309 Ill. App. 3d 790 (1st Dist. 1999), a class of limited partners applied it and took judgment for $891,672.25, growing by $114.30 every day it went unpaid. A noncompliant offering does not simply risk a lawsuit. It makes the lawsuit more profitable than even moonshot funds.
But at least there's a decent statute of limitations. Under section 13(D), an investor generally must sue within 3 years of the sale, extended by a discovery rule but capped at 2 additional years. In Lucas v. Downtown Greenville Investors Ltd. Partnership, 284 Ill. App. 3d 37 (2d Dist. 1996), limited partners sought rescission over statements in a real estate PPM and lost on timing. The court's reasoning is the closing lesson of this whole page: the PPM's own accurate text had put the investors on notice of the true facts years earlier. Precision does not just prevent claims, but begins the process of eliminating them entirely.
The anatomy of these deals does not change. Every section of the Smithson PPM document has a counterpart in a competent small-deal PPM that is shorter but still present.
Finally, a closing observation. The Smithson memorandum spends its pages on risk, conflicts, tax, and mechanics. It spends few if any words on sales. There is no performance chart, no market opportunity essay, no adjectives. The selling happened somewhere else. The PPM's job is to disclose. When an owner shows me a draft "PPM" that reads like a pitch deck with legends stapled on, the document fails. Exciting pitch deck, boring PPM. Cool charts with many colors in the sales docs, scary black and white in the risk docs. Some conversations should be exciting and some should be sober. The PPM is a sober document.
Ready to Paper Your Raise Properly?
Send me the outline of your deal: the entity, the amount, and who the investors are. I will tell you which exemption fits, what your disclosure package needs, and where the traps are.
Frequently Asked Questions
A private placement memorandum, or PPM, is the disclosure document for a private securities offering. It plays the role a prospectus plays in a public offering. It describes the issuer, the terms of the investment, the fees, the risks, the conflicts of interest, the tax treatment, and how investors get in and out. Its legal purpose is to prove that investors were qualified and were told every material fact before they invested.
Not always. In a Rule 506(b) offering sold only to accredited investors, no rule dictates the contents of a disclosure document, and the specific information requirements of Rule 502(b) of Regulation D apply when you sell to non-accredited investors. But the antifraud rules, including Rule 10b-5, apply to every securities sale. A PPM is how an issuer documents that it disclosed the material facts. Serious people write PPMs.
Accredited investor is defined in Rule 501 of Regulation D. For individuals, the common tests are income over $200,000 in each of the two most recent years ($300,000 jointly with a spouse or spousal equivalent) with the same expectation for the current year, or net worth over $1 million excluding the value of a primary residence. Certain entities and holders of certain securities licenses also qualify. Most private offerings are limited to accredited investors.
Both are Regulation D exemptions with no cap on the amount raised. Under Rule 506(b) you may not advertise the offering, you may include a limited number of sophisticated non-accredited investors, and investors can self-certify their accredited status. Under Rule 506(c) you may advertise publicly, but every purchaser must be accredited and the issuer must take reasonable steps to verify that status, such as reviewing tax returns or getting a letter from the investor's CPA or attorney.
The Smithson, L.P. memorandum this article walks through contains the standard set: cover page legends, an executive summary, the investment program, management biographies, a summary of terms, risk factors and conflicts of interest, brokerage and custody, the administration agreement, subscription procedures, withdrawal terms, a taxation section, and ERISA considerations. A small offering keeps the same anatomy in shorter form, with a use-of-proceeds section that usually takes the place of a fund strategy.
Because it is a complete, professionally drafted PPM that the public can actually read. Fundsmith publishes the Smithson, L.P. memorandum on its U.S. website, while most PPMs stay locked in deal rooms. It is short and snappy. The document is easy to read and learn from.