Many jurisdictions, in order to prevent unscrupulous stock promoters or company owners from defrauding investors through misinformation and ambiguity, impose intense disclosure and risk reporting requirements on sellers of securities in the form of an investor's prospectus.The prospectus is a document which must be provided to prospective equity investors which highlights all the potential risks of buying the shares of the company and involves a high level of disclosure. In addition, it must be approved by the regulatory body before the company's securities can be sold. However, creating a detailed document like the prospectus can be expensive, and companies will want to save on costs where they can by avoiding the prospectus requirement under one of several exceptions provided under the law.Depending on the jurisdiction, this obligation only triggers for privately held companies once the number of their shareholders exceeds some limit (e.g. 50 shareholders). Once they exceed the limit, they will be required to issue a prospectus to their investors irrespective of whether or not they are private.Nonetheless, private companies could still rely on other exemptions if they exceed the 50 shareholder threshold. One common exemption is for "Accredited Investors" who are considered sophisticated enough to be able to do their own research and due diligence. Another common exemption arises when the potential purchaser of their shares is someone who is not dealing at "arm's length" with the corporation. The founder of the company, the company's employees, close friends and family of the founder, and others like these individuals would not be considered "at arm's length". The idea is that these people are very likely to be better informed about the company than someone who is only loosely affiliated (or entirely unaffiliated) with the company and its members. It should be noted that there will still be some disclosure requirements for such individuals (e.g. a requirement to file a notice of exempt distribution may be required) but nothing as demanding as a prospectus.However, these other exemptions will probably require additional filing with a regulatory body, which will come with a cost and have a deadline - and with penalties associated!