Quick Answer
An issuer can sell securities without registering under the Securities Act if every offer and sale stays inside one state, the issuer resides there, and the issuer meets a doing-business test showing local operations. This is a nonexclusive safe harbor: a missed condition still leaves the underlying exemption arguable on its own facts.
An intrastate offering trades federal registration for a strict geographic boundary: every participant, on both the offer side and the sale side, has to be inside the same state as the issuer.
When Is an Issuer a Resident of a State?
Residency depends on the issuer's form:
- A corporation, limited partnership, trust, or other entity organized under state law is resident where it is both organized and has its principal place of business
- An unincorporated entity is resident where it has its principal place of business
- An individual issuer is resident where they have their principal residence
Exam Tip: Gotchas
- An entity issuer needs both organization and operations in the same state. A company incorporated in one state but headquartered in another fails this residency test.
What Counts as Doing Business in the State?
The issuer must meet at least one of four alternative tests:
- At least 80% of consolidated gross revenue comes from business, real property, or services within the state, or
- At least 80% of consolidated assets are located within the state, or
- The issuer intends to use, and does use, at least 80% of net offering proceeds within the state, to operate a business or real property, to buy real property there, or to render services there, or
- A majority of the issuer's employees are based in the state
Think of it this way: the residency test asks where the issuer legally lives, while the doing-business test asks whether the issuer actually operates there. The doing-business test offers four different yardsticks, and meeting just one of them is enough.
Who Can Buy the Securities?
Every offer and every sale must go only to persons resident in the issuer's state, or to persons the issuer reasonably believes are residents there.
A buyer's residency is tested differently from the issuer's:
- An entity buyer is resident where it has its principal place of business alone. It does not also have to be organized in the state, which is where the buyer test parts company with the issuer test
- An individual buyer is resident where their principal residence is
- A trust that its home state does not treat as a separate legal entity is resident in each state where a trustee is resident
- An entity formed for the specific purpose of buying into this offering is not a resident of the state unless every one of its beneficial owners is a resident of that state
Exam Tip: Gotchas
- A signed statement of residency is not enough by itself. A written representation of in-state residency from the purchaser, standing alone, does not support a reasonable belief that the purchaser is a resident. The issuer needs more than a bare signed statement.
- A company formed just to buy into the offering does not get in on its own address. An ordinary entity buyer qualifies on its principal place of business, but a purpose-formed one qualifies only if all of its beneficial owners are in-state residents.
What Should You Check on Exam Day?
- Confirm an entity issuer is both organized in, and headquartered in, the same state before applying this exemption.
- Test an entity buyer on its principal place of business alone, and a purpose-formed buyer on the residency of all of its beneficial owners.
- Test doing-business against all four alternative measures; meeting just one of the four is sufficient.
- Remember offers, not just sales, must go only to in-state residents.
- Do not treat a purchaser's signed residency statement alone as enough to support reasonable belief.