Quick Answer
The modernized intrastate offering exemption is the SEC's update to the intrastate path. It permits out-of-state offers (including via the internet and social media) so long as all actual sales are to in-state residents. The issuer-residence test shifts from state of incorporation (under the traditional safe harbor) to principal place of business (under the modernized exemption). Every other requirement, including the four "doing business" alternatives and the six-month resale lock, mirrors the traditional path.
The traditional safe harbor worked well in 1934 when "intrastate" meant local newspaper ads and door-to-door solicitation. The modern internet does not respect state lines. A small-issuer's website is visible in all 50 states the moment it goes live, which under the traditional safe harbor would disqualify the offering. The SEC adopted the modernized exemption to let small issuers solicit broadly online while selling only within their home state.
The Two Differences From the Traditional Safe Harbor
The modernized exemption is best understood by what it changed. The rule is a parallel intrastate path that diverges from the traditional safe harbor in exactly two places.
Difference 1: Out-of-state offers are permitted.
- Under the traditional safe harbor, both offers and sales had to be in-state. An out-of-state offer alone broke the exemption
- Under the modernized exemption, the issuer may offer the securities to anyone, anywhere, including general internet posts and social media, so long as all sales are to in-state residents
- The compliance burden moves from the offer side to the sale side: the issuer screens at purchase, not at first contact
Difference 2: The issuer-residence test is principal place of business, not state of incorporation.
- Under the traditional safe harbor, a Delaware-incorporated business could not run a Texas intrastate offering, even if its headquarters, factories, and workforce were all in Texas
- Under the modernized exemption, "principal place of business" means the location from which the officers, partners, or managers primarily direct, control, and coordinate the activities of the issuer
- A Texas-headquartered Delaware corporation can now use the modernized exemption to do a Texas intrastate offering
Think of it this way: The modernized exemption unlocks two of the three things that made the traditional safe harbor hard to use in the modern era. The third (the six-month in-state resale lock) stays in place, because the SEC still wanted the offering to settle inside the state before it could disperse nationally.
What the Modernized Exemption Keeps From the Traditional Safe Harbor
Everything except those two changes is identical to the traditional safe harbor. The shared mechanics are worth restating because the exam will test them as facts that apply to both paths.
| Element | Traditional Safe Harbor | Modernized Exemption |
|---|---|---|
| Doing-business test (one of four) | 80% revenues / 80% assets / 80% net proceeds / majority of employees | Same |
| Sales to in-state residents only | Required | Required |
| Six-month resale lock to in-state residents | Required (legend on certificate) | Required (legend on certificate) |
| SEC registration statement | Not required | Not required |
| SEC notice filing | Not required | Not required |
| State Blue Sky compliance | Required | Required |
| Purchaser-residence look-through for entities formed to buy | Applies | Applies |
The four "doing business" alternatives (any one of which satisfies the operational test) are the same: 80% of consolidated gross revenues from in-state operations, 80% of consolidated assets in-state, 80% of net proceeds used in-state, or a majority of employees in-state.
Exam Tip: Gotchas
- The modernized exemption allows out-of-state OFFERS but NOT out-of-state SALES. This is the single most-tested split. The issuer can market the deal to anyone, anywhere, but the actual purchasers must be in-state residents. Anything sold to an out-of-state buyer breaks the exemption.
- Both intrastate paths require sales only to in-state residents. A modernized-exemption scenario where the issuer sells to an out-of-state buyer is not "looser than the traditional safe harbor." Both paths forbid out-of-state sales. The modernization opened the offer side, not the sale side.
Traditional vs Modernized Intrastate Paths Side-by-Side
The exam writes scenario questions that hinge on which intrastate path applies. The compact comparison:
| Element | Traditional Safe Harbor | Modernized Exemption |
|---|---|---|
| Adoption date | Long-standing safe harbor (predates the modernized exemption) | October 2016 |
| Issuer-residence test | State of incorporation / organization | Principal place of business in the state |
| Out-of-state offers | Prohibited (breaks the exemption) | Permitted (including internet, social media, general solicitation) |
| Out-of-state sales | Prohibited | Prohibited |
| Doing-business test | One of four 80% / majority alternatives | Same one of four 80% / majority alternatives |
| Resale lock to in-state residents | Six months from issuer sale | Six months from issuer sale |
| SEC filing | None | None |
| State Blue Sky law | Applies | Applies |
Real-world example: A Texas-headquartered Delaware LLC wants to raise $2 million from Texas residents to expand its brewery. It plans to advertise the offering on Instagram and through a public-facing website.
- Under the traditional safe harbor, the LLC fails twice: the LLC is organized in Delaware (so the issuer-residence test fails for the traditional path), and the Instagram posts reach out-of-state viewers (so the out-of-state-offer rule fails)
- Under the modernized exemption, the LLC qualifies: principal place of business is Texas (residence test satisfied), out-of-state social-media reach is allowed for offers, and the LLC just needs to screen actual purchases to confirm in-state residency
Exam Tip: Gotchas
- The modernized exemption was adopted specifically to accommodate internet-era offerings. It permits out-of-state online offers while preserving the in-state-sales rule. The traditional safe harbor predates the modernized exemption by decades.
- The six-month resale restriction is a state-of-residency lock, not a freely tradable holding period. Both intrastate paths lock resales to in-state buyers for six months. After the six months, resales to out-of-state buyers are permitted under both paths.
- An issuer using the modernized exemption that ends up selling to an out-of-state buyer breaks the exemption. The exam will write a scenario where a buyer claims in-state residency but is actually out of state. The issuer is on the hook to verify residency at the point of sale; getting it wrong costs the exemption.