PPMs (Private Placement Memos for the uninitiated) look pretty complicated. They’re usually thick documents full of run-on sentences, some charts and a few paragraphs in all caps. A client asked me to describe a PPM’s structure. I drew a picture of a simple sandwich.

So why are PPMs frequently so complicated? Because they’re often based on legal requirements that never apply to private placements. Federal regulations state that if equity (e.g. stock) is sold to people that are so poor they must be incapable of making rational financial decisions (or as they’re known in the securities world, “nonaccredited investors”), then the issuer must give them a Dagwood sandwich of a PPM full of audited financials, marketing arrangements, disclosures of relationships with experts, risk factors, offering price factors, a plan of distributions, descriptions of officers and directors, management arrangements, federal tax aspects, management’s discussion and analysis of certain factors and, of course, the residential addresses of the officers and directors.

If, however, a company is selling stock to people so rich that the government assumes they must be smart (or, as the SEC calls them, “accredited investors”), then you don’t need to disclose anything. At all. Just ask for a check and give them a smile and a stock certificate.

You could provide no documentation, but of course that would be dangerous. Even though Regulation D, the typical set of rules used in a private placement, shields a startup from a lot of legal problems, it won’t prevent an investor from suing for fraud.

For that reason, a startup, at a bare minimum, should describe the risk factors – those paragraphs that say things like the founders have no previous experience, that the intellectual property protection is nonexistent, that competitors could steamroll the company, etc. That’s the top bread slice of the sandwich.

Then, you have to have your pitch document, otherwise known as the business plan.  It basically contradicts everything in the risk factors section: the management team is peerless, the company has applied for patents, the company has a competitive advantage over big players, etc. That’s the meat of the sandwich.

Finally, you should explain what, exactly, the investor has to pay to buy in and what he gets in return for his investment. That’s the bottom slice of bread.

Sometimes investors expect to see a full-blown PPM, even though they rarely read the whole thing. If that’s the case, you have to produce what they expect. Often however, an investor doesn’t want or need to see a thick document. In that case, all you need to do is give him a simple BLT.