SEC issues “Innovation Exemption” to facilitate trading of tokenized NMS stock

The relief, which the Commission and its staff have called the “Innovation Exemption,” is designed to facilitate the trading of tokenized NMS stock using automated market makers (AMMs) and liquidity pools (together, AMM Liquidity Pools). Chairman Paul S. Atkins described the order as “a significant step forward, within [the Commission’s] statutory authority, to bring America’s capital markets into the digital age by facilitating onchain trading of certain tokenized stocks,” and stated that the exemption, “while temporary, would allow TSVs to trade tokenized NMS stock in a permissioned environment today while the Commission considers the need for additional action to facilitate onchain trading.”⁴ Jamie Selway, Director of the Division of Trading and Markets, called the order “an important milestone for the Commission’s work to open our capital markets for tokenized securities,” and said the division “stands ready to work with interested parties seeking to operate a TSV and field questions from investors and market participants.”⁵

The order comprises two distinct exemptions: an exemption from the definition of “exchange” for a TSV (TSV Exemption), and an exemption from the definition of “dealer” for certain liquidity providers to an AMM Liquidity Pool (Covered Firm Exemption), each of which is discussed in turn below. The order does not address decentralized trading protocols. Notably, the order does not address the regulatory status or registration obligations of TSV participants, who remain subject to applicable requirements under the federal securities laws and the rules of any self-regulatory organization of which they are a member. For example, registered broker-dealers that transact on a TSV remain subject to existing broker-dealer obligations applicable to OTC securities transactions. 

Both the TSV Exemption and Covered Firm Exemption are set to expire five years after publication. The Commission is simultaneously soliciting comment about potential modifications to the exemptive relief and next steps.

Exemption from the definition of “exchange”

A TSV is an organization, association, or group of persons that brings together buyers and sellers of Tokenized NMS Stock by: (1) providing one or more AMM Liquidity Pool(s) for permissioned participants to interact and agree to terms of a trade; and (2) setting standards for persons to access trading on such AMM Liquidity Pool(s).⁶ “Tokenized NMS Stock” means an NMS stock that is (1) a security tokenized by, or on behalf of, the issuer of the underlying NMS stock, or (2) a security tokenized by a third party that is unaffiliated with the issuer of the underlying NMS stock.⁷ Notably, Tokenized NMS Stock does not include securities where a third party issues a crypto asset⁸ representing its own security providing synthetic exposure to an underlying security, nor does it include rights and warrants.⁹

A TSV may make available for trading only a Tokenized NMS Stock that is trading in a pair with another Tokenized NMS Stock, a non-security crypto asset (such as a payment stablecoin), or a tokenized money market fund. If the TSV will make any non-security crypto asset or tokenized money market fund available for trading, it must be directly paired and traded alongside a Tokenized NMS Stock.

A TSV must meet certain conditions set forth in the exemptive relief to not be considered an exchange for purposes of the Exchange Act. As a result of the Innovation Exemption, exempted TSVs are also not considered a trading center or a market center under Regulation NMS, and thus are not subject to such rules, as otherwise applicable to exchanges, alternative trading systems (ATSs), trading centers, and market centers, nor to the same books and records, examinations and other oversight requirements applicable to national securities exchanges and ATSs.¹⁰ However, a TSV remains subject to anti-fraud and anti-manipulation provisions of the federal securities laws. In order to rely on the exemptive relief, a TSV must satisfy the following conditions:

• Distributed ledger applications: Distributed ledger applications (such as smart contracts) used by the TSV must be “auditable, public, and deployed on a public, permissionless distributed ledger”¹¹ in order to ensure transparency.
• U.S. persons only: The TSV must be a U.S. person, helping to mitigate OFAC or national security related risks.
• Public notices: At least 30 calendar days before operating, a TSV must publish a notice on its website, and within one business day of publication must provide the Commission written notice that it intends to operate pursuant to the TSV Exemption. A TSV must also publish within five business days a revised notice stating that it has commenced or ceased making any Tokenized NMS Stock available for trading (or that it received a timely notice of issuer objection, as discussed below), among other notice requirements set forth in the Innovation Exemption.
• Issuer notification: If the TSV intends to make available for trading a Tokenized NMS Stock that is tokenized by a third party unaffiliated with the issuer of the underlying NMS stock, the TSV must provide written notice to such issuer, giving the issuer 30 calendar days from receipt of such notice to object and prevent the Tokenized NMS Stock from being offered.¹²
• No primary issuance: No primary issuances or initial offerings are permitted on the TSV; the TSV can only facilitate secondary sales of Tokenized NMS Stock.
• Rights of holders: The TSV must ensure that the Tokenized NMS Stock provides holders the same rights and privileges as the traditional NMS stock of an equivalent class, including the same economic interest in the company, the right to receive the same dividends, the right to exercise the same voting rights, and the right to receive the same share of the company’s residual assets upon liquidation. Where a Tokenized NMS Stock is tokenized by a third party unaffiliated with the issuer of the underlying NMS stock, the TSV can only make available for trading such Tokenized NMS Stock if the third party distributes or otherwise makes available to holders of the Tokenized NMS Stock any related proxy materials or other issuer communications at no cost to
  the issuer or such holders.
• Volume limitations: The TSV must comply with specified limitations on the number of symbols and volume traded.¹³
• Transaction transparency: The TSV must make U.S. dollar-denominated transaction data freely and publicly available for all transactions within the past 30 days.
• Stoppage of trading: A TSV must stop trading in a Tokenized NMS Stock if there is a stoppage of trading in the underlying NMS stock, and must immediately notify its participants of such stoppage.
• Significant operational event: A TSV must immediately notify both its participants and the Commission of an event that has a significant impact on the operation of the TSV or on its participants, and must further remedy any known significant operational event as soon as reasonably practicable.
• No leverage: A TSV cannot borrow, whether secured or unsecured, securities or non-security crypto assets on the TSV, cannot directly or indirectly hypothecate or arrange for or permit the hypothecation of any securities or non-security crypto assets on the TSV, and is not permitted to extend credit to users or liquidity providers to purchase a Tokenized NMS Stock on the TSV.
• No misrepresentations and required public disclaimer: A TSV cannot state that it is “registered” with the Commission or that its activities have been “approved” or “endorsed” by the Commission, and must affirmatively disclose in its public notice that it is not registered with the Commission.
• Books and records: A TSV must make and keep current trading records and information related to compliance with the conditions. Such records must be maintained for three years after the exemption is effective.

Exemption from the definition of “dealer”

Recognizing that certain liquidity provider activity could raise questions as to whether such a provider is acting as a “dealer” as defined in Section 3(a)(5) of the Exchange Act, the order also grants an exemption from this definition to Covered Firms (as defined below). This exemption is narrowly tailored to the limited context of AMM Liquidity Pools operating pursuant to the TSV Exemption. A Covered Firm is defined in the Innovation Exemption as a firm that “supplies liquidity in the form of Tokenized NMS Stock using proprietary capital and that may also be engaged in additional activities that are indicia of dealing activity, such as quoting pricing to customers or entering into agreements to provide committed capital.”¹⁴

Key features of this exemption include the following:

• Scope of activities. Among other things, for the exemption to be available, a liquidity provider’s securities activities must be limited to activities related to the trading of Tokenized NMS Stock in an AMM Liquidity Pool operating pursuant to the TSV Exemption; and a Covered Firm cannot hold or custody customer assets.
• Notice to the Commission. A Covered Firm must provide written notice to the Commission of its role as a Covered Firm.
• Public disclosure. A Covered Firm must disclose on any public-facing website certain information, including that it is not a registered broker-dealer and that it may receive incentives for providing liquidity. 

Considerations for public companies

As mentioned above, TSVs that intend to make available for trading a Tokenized NMS Stock (tokenized by a third party unaffiliated with the issuer of the underlying NMS stock) must provide written notice to such issuer and grant the issuer 30 calendar days from receipt of such notice to object and prevent the Tokenized NMS Stock from being made available for trading on the TSV. Once that 30-calendar-day window lapses, the order provides no further opportunity for the issuer to object to trading on that TSV.

Also, an issuer’s objection will not remain private, as the TSV must amend its public notice within five business days to inform the public that it has received an objection and the identity of the issuer that provided the objection.

Companies should also be aware that the objection mechanism appears to operate on a per-TSV basis, which means that an issuer that receives notices from multiple TSVs would likely need to respond to each TSV separately within its own 30 calendar day window. An objection delivered to one TSV does not carry over to a notice received from a different TSV.

The overall impact of tokenization on a public company's NMS stock remains unclear. Some companies may find benefits in the new liquidity pool and extended trading hours that tokenization affords. Others may be more concerned with the loss of control that results from trading on a venue the company did not select, the challenge of maintaining an accurate shareholder register, the risk of price dislocation between exchange and TSV pricing and the potential strain that 24/7 trading places on disclosure controls. In light of these considerations, companies may wish to take the following steps:

• Monitor notice channel. Companies should confirm that the channel a TSV will use to deliver a tokenization notice, which is the address listed on Exchange Act reports, is monitored by individuals who will recognize the notice for what it is. Any TSV notice should be escalated promptly and routed to the teams responsible for responding;
• Consider response to tokenization. Companies should form a view in advance as to whether to object to a TSV notice. An objection does not require a reason and a timely objection will stop a tokenization, but the objection will be publicly disclosed by the TSV; and
• Consider other impacts of tokenization. Companies should review insider trading and disclosure control policies for gaps created by 24/7 trading that can come with tokenization.

Given the short objection period and the uncertainty of the impact, some companies may adopt a practice of objecting to all tokenization notices by default as their interim practice while they watch how the market develops.

Looking ahead

The exemptions described herein will last for five years—this is not a settled regime. The Commission stated that it anticipates that the public comments and the practical application of the exemptions will help inform its future actions in this area, including potential rulemaking. As an initial step, the Commission solicits public comment about possible modifications to the exemptive relief and potential next steps, and the Chairman invited “public comment on all aspects of the Innovation Exemption to help inform the Commission as it considers further changes.”¹⁵ Given the complexity and novelty of the Innovation Exemption, market participants considering operating a TSV or acting as a Covered Firm should carefully evaluate whether their proposed activities and structures satisfy the conditions of the exemptive relief. In addition, public companies whose NMS stock could be tokenized by an unaffiliated third party should begin considering the potential impacts of such tokenization and also establish internal protocols to monitor for and timely respond to issuer notices from TSVs within the 30-calendar-day objection period.

We encourage interested parties to reach out to their A&O Shearman contact or any member of our team to discuss the implications of the Innovation Exemption and to assess potential pathways to compliance. 

Footnotes

1. 17 C.F.R. § 242.600(b)(65) (2025) (“NMS stock means any NMS security other than an option.”). An “NMS security” is defined as “any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options.” Id. § 242.600(b)(64).

2. SEC Release No. 34-106402, available at: https://www.sec.gov/files/rules/exorders/2026/34-106402.pdf.

3. Section 36(a)(1) of the Exchange Act grants the Commission the authority to “conditionally or unconditionally exempt any person, security, or transaction . . . from any provision or provisions of [the Exchange Act] or of any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.”

4. See SEC Press Release No. 2026-90 (Sept. 17, 2026), available at: https://www.sec.gov/newsroom/press-releases/2026-90-sec-issues-innovation-exemption-facilitate-trading-tokenized-nms-stock-request-comment; see also Chairman Paul S. Atkins, Statement on the Innovation Exemption: A Bridge Toward Durable Rulemaking (Sept. 17, 2026), available at: https://www.sec.gov/newsroom/speeches-statements/atkins-innovation-exemption-bridge-toward-durable-rulemaking-091726.

5. See SEC Press Release No. 2026-90 (Sept. 17, 2026), available at: https://www.sec.gov/newsroom/press-releases/2026-90-sec-issues-innovation-exemption-facilitate-trading-tokenized-nms-stock-request-comment.

6. SEC Release No. 34-106402 at 2, 7-11.

7. Id. at 2.

8. A “crypto asset” is any digital representation of value that is recorded on a cryptographically secured distributed ledger. The foregoing definition of “crypto asset” is identical to the definition of “digital asset” in section 2(6) of the GENIUS Act. Id. 

9. Id. at 26. 

10. Id. at 14, 17.

11. Id. at 18-19 (Section II.A).

12. As discussed below, the objection mechanism appears to operate on a per-TSV basis, requiring independent responses to each TSV notice an issuer receives. Also, as the Commission noted in its comment solicitation, the market of the issuer’s underlying NMS stock may be impacted by the effects of “overnight trading,” particularly on market opening and potential reopenings.

13. Tokenized NMS Stock is divided into two tiers corresponding to Tier 1 and Tier 2 of the Limit Up-Limit Down Plan. Tier 1 Tokenized NMS Stock cannot exceed 75 symbols traded and 0.25% of the average daily share volume during the prior month in the relevant NMS stock as reported by an effective transaction reporting plan; Tier 2 Tokenized NMS Stock cannot exceed 250 symbols traded and 2.5% of that volume. A TSV must aggregate its volume and symbol counts with those of its affiliated TSVs. After the first breach of a volume threshold in a given Tokenized NMS Stock, each subsequent breach requires the TSV to immediately pause trading in that stock for three months; exceeding the symbol number thresholds means the TSV does not meet the conditions of the exemption. See SEC Release No. 34-106402 at 24-28 (Section II.F).

14. Id. at 4.

15. See Chairman Paul S. Atkins, Statement on the Innovation Exemption: A Bridge Toward Durable Rulemaking (Sept. 17, 2026), available at: https://www.sec.gov/newsroom/speeches-statements/atkins-innovation-exemption-bridge-toward-durable-rulemaking-091726; see also SEC Press Release No. 2026-90 (Sept. 17, 2026).