SEC’s Innovation Exemption for Tokenized Stocks: What Changes?

The U.S. Securities and Exchange Commission has announced temporary, conditional exemptions for certain venues and liquidity providers involved in trading tokenized National Market System (NMS) stock. Known as the Innovation Exemption, the relief supports trading through permissioned automated market makers and liquidity pools. The SEC says the exemptions expire five years after publication.

What does the exemption cover?

The order provides two forms of relief under the Securities Exchange Act of 1934:

• Certain Tokenized Securities Venues, or TSVs, receive a conditional exemption from the definition of an exchange.
• Certain liquidity providers, described as Covered Firms, receive a conditional exemption from the definition of a dealer.

These are targeted exemptions. In his accompanying statement, SEC Chairman Paul S. Atkins emphasized that federal securities law provisions addressing fraud and market manipulation continue to apply fully. He also identified requirements for a TSV to be a U.S. person and comply with sanctions administered by the Office of Foreign Assets Control.

Which tokenized securities are included?

The SEC's fact sheet defines the scope of tokenized NMS stock as follows:

• Included: a security tokenized by or on behalf of the underlying issuer, or by an unaffiliated third party.
• Excluded: securities that a third party issues itself to provide synthetic exposure to an underlying stock, such as tokenized linked securities and tokenized security-based swaps.

The liquidity-provider exemption also has a defined scope. Among its conditions, a Covered Firm's securities activities must be confined to activities related to trading tokenized NMS stock in an AMM liquidity pool operating under the TSV exemption.

How does trading access work?

A public blockchain does not mean unrestricted participation in these markets. The SEC describes a structure in which smart contracts operate on a public, permissionless distributed ledger, while the TSV sets access standards for permissioned trading participants. The smart contracts must be public and auditable.

What protections and trading limits apply?

The SEC requires a TSV to verify that a tokenized NMS stock provides holders the same rights and privileges as traditional NMS stock of an equivalent class. Atkins's statement identifies these as including rights to receive dividends and exercise voting rights. 

Trading is subject to limits on symbols and volume. A TSV must also halt trading in a tokenized NMS stock concurrently with a trading stoppage in the underlying stock on its primary listing exchange.

In a separate statement, Commissioner Mark T. Uyeda highlighted conditions covering recordkeeping, technology safeguards and transaction transparency. Publicly available information includes dollar-denominated prices, trade sizes and times, pool addresses, end-of-day pool sizes and daily volume. He described these disclosures as supporting monitoring and study of trading under the exemption.

What happens before a venue begins operating?

Under the order, a TSV must publish a notice prominently on its public website at least 30 calendar days before operating. It must notify the SEC in writing within one business day after publishing that notice.

Before trading third-party-tokenized NMS stock begins, the underlying issuer must receive written notice and an opportunity to object to and prevent that trading. Covered Firms must also notify the SEC and provide applicable public-facing disclosures.

What happens next?

The SEC is seeking public comments on potential changes to the relief and next steps. Uyeda framed the temporary framework as an opportunity to observe how these venues operate and use the resulting evidence to inform longer-term policy.