Quick Answer
The traditional intrastate offering safe harbor lets an issuer raise capital without federal registration if the issuer is incorporated in the offering state, meets one of four "doing business" thresholds (80% of revenues, 80% of assets, 80% of proceeds, or a majority of employees in-state), and offers and sells only to residents of that state. Securities are locked to in-state resales for six months from the issuer's sale date.
The intrastate offering safe harbor is the oldest exempt-securities path the Series 79 outline covers. The logic is simple: if everyone involved in the offering is inside one state, the federal interest in protecting the offering disappears and the state's securities regulator takes over. The traditional safe harbor puts hard numbers on what "everyone inside one state" means.
Issuer Residence and the Doing-Business Test
The traditional intrastate safe harbor sets two issuer-level requirements that must both be satisfied at the same time: a residence test and an operational test.
Issuer residence:
- For a corporation, the issuer is a resident of the state in which it is incorporated
- For a limited liability company (LLC) or partnership, the issuer is a resident of the state in which it is organized
- A Delaware-incorporated company cannot use the traditional safe harbor to do a "Texas" offering even if all its operations are in Texas. The state of incorporation, not the state of operations, controls
Doing-business test (must satisfy any ONE of the four alternatives):
| Alternative | Threshold | What It Measures |
|---|---|---|
| Revenue | At least 80% of consolidated gross revenues from operations within the state | Where the issuer earns its money |
| Assets | At least 80% of consolidated assets located within the state | Where the issuer's property is |
| Net proceeds | At least 80% of the net proceeds of the offering used within the state | Where the new capital goes |
| Employees | A majority of employees based in the state | Where the workforce is |
Think of it this way: The issuer-residence test is a single yes/no question (incorporated in the state, yes or no). The doing-business test gives the issuer four shots to qualify: revenues, assets, proceeds, or employees. The issuer needs to win on just one of the four.
Exam Tip: Gotchas
- The traditional safe harbor's issuer-residence test is the state of incorporation, not the principal place of business. A Texas-headquartered Delaware corporation cannot use the traditional safe harbor for a Texas intrastate offering. This is exactly the issue the modernized exemption was created to fix.
- The doing-business test only requires ONE of the four alternatives. The exam may write a scenario where the issuer fails the revenue test but passes the asset test. That issuer still qualifies. The four are alternatives, not cumulative.
- Three of the four thresholds are 80%; the employees alternative is "majority" (more than 50%). Easy to mix up under exam pressure. Revenues, assets, and net proceeds all key off 80%. Only the employee test uses majority.
Offer and Sale Restrictions
The "intrastate" part of the safe harbor means both the offer and the sale of the securities have to stay inside the state.
The rule:
- Both offers and sales must be made only to residents of the state where the issuer is incorporated
- An out-of-state offer (even one that does not result in a sale) breaks the exemption
- A general internet posting that reaches out-of-state residents is treated as an out-of-state offer and disqualifies the offering
Purchaser residence (for entity buyers):
- For a corporation, LLC, partnership, or other legal entity, the purchaser's residence is its principal place of business
- If the entity was formed specifically to acquire the securities, the rule "looks through" the entity to the residence of its beneficial owners. Every beneficial owner must be in-state for the look-through to qualify
Real-world example: A Texas brewery wants to use the traditional intrastate safe harbor. It builds a website that anyone can visit and posts the offering circular. A California resident sees the post. The brewery has just made an out-of-state offer, even if no sale results. The exemption is broken for the whole offering.
Exam Tip: Gotchas
- Out-of-state offers disqualify the traditional safe harbor, even without a sale. The exam likes to write scenarios where the issuer posts marketing materials online or sends them to out-of-state contacts. That alone breaks the safe harbor. The modernized exemption was designed to fix exactly this problem (covered in the next section).
- The look-through rule applies only when the entity was formed to acquire the securities. A real operating company that buys the securities is a single purchaser at its principal place of business. A shell formed yesterday to make this one investment triggers look-through to its beneficial owners.
Resale Restrictions
The intrastate logic does not end when the securities are sold. The resale lock keeps the offering inside the state for a defined period.
The six-month resale lock:
- Securities sold under the traditional safe harbor can be resold only to in-state residents for six months from the date the issuer sold them to the original purchaser
- The clock starts at the issuer's sale date, not at any later resale date
- Certificates must bear a legend disclosing the resale restriction
- After the six-month period, resales to out-of-state persons are permitted
Think of it this way: The traditional safe harbor keeps the offering bottled inside the state for half a year. After six months pass from when the issuer sold each security, that specific security is free to travel.
Exam Tip: Gotchas
- The six-month resale lock starts at the issuer's sale, not at the secondary resale. The first purchaser holds for some period and then resells in-state; the buyer in that secondary trade is locked in-state for the remainder of the six months, not for a fresh six months.
- An out-of-state resale during the six-month window breaks the exemption for the whole offering, not just for the resold security. This is why issuers use the certificate legend and Blue Sky restrictions to police resales during the lock period.
- The intrastate resale lock is NOT the public-information-and-volume resale path that governs restricted securities. Do not confuse the two. The restricted-securities resale path governs resales of securities purchased through exempt transactions (covered in the next unit). The intrastate lock is a residency lock, not a public-information-and-volume lock.
No SEC Filing; State Blue Sky Still Applies
The traditional intrastate safe harbor is one of the very few SEC paths that involves zero federal filings.
| Filing Requirement | Traditional Safe Harbor |
|---|---|
| SEC registration statement (S-1) | Not required |
| SEC notice filing | Not required |
| State Blue Sky registration | Required (the state's securities regulator runs the show) |
| State notice filing | As required by state law |
The trade-off is that the issuer must comply with the offering state's securities law in full. Different states have different exemptions, notice requirements, and merit-review standards, so the practical complexity sits on the state side even though the federal side is silent.
Exam Tip: Gotchas
- The traditional intrastate safe harbor involves no SEC filing at all. If the scenario says the issuer filed Form 1-A, the issuer is using Regulation A, not the intrastate safe harbor. If the scenario says the issuer filed Form D, the issuer is using Regulation D (exempt-transaction unit, not the intrastate safe harbor).
- State Blue Sky compliance is mandatory. "No federal filing" is not "no filings." The state's securities act fully applies and is often the more complex side of the deal.