I have never been involved in this, or even seen one, but I would bet that in order to pull it off, and pull it off well, a concrete base is best, taking care to mind your frost line. And as far as mortaring between the rocks, hydrolic cement is non shrinking and works well with water, I have used it to stop water leaks underwater and while dealing with pressure. (stopping leaking basements and manholes) Good luck.
It all depends what type of structure you would like to build but with it being about 3' tall you would not need to use any type of rubber liner. All solid concrete. None of that foam crap you see those guys making cheap waterfalls. also rebar is a must to help hold it from sliding. I have just built waterfeature that his about 5' high that spills into my 4' raised spa. About every 2 feet back I went I made an 18" deep x 16" x 4' wide footing w/ rebar so my structure wont slide down my hill. there are many steps into building waterfeatures. plumbing, water sealing, cementious overspray your whole rock work so that the acid stain will be consitant through-out, staining, etc. Here is a photo of my water feature that I am almost finished with , I am also a first timer good luck