Key Highlights
- The SEC’s Innovation Exemption creates targeted relief for certain tokenized securities venues and liquidity providers.
- The exemption covers Tokenized NMS Stock carrying the same dividend, voting, and liquidation rights as the underlying share.
- Permissioned automated market makers and liquidity pools face defined symbol and trading-volume limits.
The U.S. Securities and Exchange Commission’s (SEC) Innovation Exemption establishes conditions under which certain tokenized U.S. stocks can trade through permissioned automated market makers (AMMs) and liquidity pools.
In a September 23 post, Securitize President Carlos Domingo described the exemption as a limited framework for tokenized securities venues operating under specific requirements.
The exemption provides two forms of relief under Section 36(a)(1) of the Exchange Act as Chairman Paul Atkins outlined in his statement.One applies to a Tokenized Securities Venue (TSV) operating permissioned AMM liquidity pools, while the other covers certain liquidity providers classified as Covered Firms. The exemptions are set to expire five years after publication.
Exemption covers specific tokenized stocks
The relief applies only to Tokenized NMS Stock.
Under the SEC’s order, this refers to an NMS-listed stock tokenized by or on behalf of the issuer, or by an unaffiliated third party, provided the token gives holders the same rights and privileges as the corresponding traditional stock. This includes rights such as receiving dividends and exercising voting rights. Synthetic instruments, including tokenized security-based swaps, are excluded.
The exemption applies to secondary-market trading and does not permit primary issuance of tokenized securities under this framework.
Trading limits apply to tokenized securities venues
The framework establishes different limits based on the type of security.
Tier 1 covers stocks in the S&P 500 and Russell 1000, along with certain eligible exchange-traded products. These securities are subject to a limit of 75 symbols and 0.25% of the prior month’s average daily volume.
Tier 2 covers other eligible securities and is limited to 250 symbols and 2.5% of average daily volume.
Trading volume is aggregated across affiliated TSVs to prevent related entities from avoiding the limits.
The first time a security exceeds its applicable volume threshold does not require a trading pause. Each subsequent exceedance requires an immediate three-month pause for that security.
The SEC’s request for comment specifically asks whether the two-tier structure and its symbol and volume limits are appropriately calibrated.
Tokenized venues face operating conditions
TSVs must use public and auditable smart contracts deployed on a public, permissionless distributed ledger.
They must halt trading in a tokenized stock when trading in the underlying stock is halted on its primary listing exchange. TSVs must also set standards governing participant access and provide public disclosures about their operations and trading activities.
The exemption also includes conditions covering sanctions compliance, books and records, technology safeguards, and transparency. Anti-fraud and anti-manipulation provisions of the federal securities laws continue to apply.
Compliance controls can be encoded into tokens
Another part of the framework concerns how access restrictions are enforced.
According to Securitize, the SEC order allows permissioning criteria to be encoded directly into a token rather than relying entirely on the venue or liquidity pool to control access.
Securitize said, “Compliance enforced at the token level, rather than bolted on at the interface, is what makes a digital security behave like a security everywhere it goes.”
The company said this approach is consistent with the design of its own tokenization model.
Issuers can object to third-party tokenization
The framework establishes a separate process for stocks tokenized by third parties that are not affiliated with the issuer.
Before a TSV can list such a tokenized stock, it must provide the issuer with written notice. Trading cannot begin until at least 30 calendar days after the issuer receives the notice. The issuer can submit a written objection at any point during that period.
A timely objection prevents the venue from listing the token. If no objection is submitted within the 30 days, trading can proceed under the exemption’s other conditions.
The process does not apply to tokens created by the issuer itself.
Verification requirements leave some questions open
The framework requires a TSV to verify that a tokenized stock carries rights equivalent to the corresponding traditional share and disclose the steps taken to conduct that verification.
Securitize noted that the order does not require an independent third-party audit of that process. The company also pointed to the absence of requirements for a qualified custodian, transfer-agent verification, or proof of reserves to confirm that a third-party tokenizer holds the underlying shares backing the tokens.
Securitize said, “Given that the SEC is directly asking the public whether additional conditions are warranted, this looks less like an oversight than a question deliberately left open.”
That assessment reflects Securitize’s interpretation of the SEC’s order rather than a finding by the agency.
Other legal analysts have also pointed to open questions for operators. Sidley Austin noted that the exemption removes a TSV from the definition of an exchange but does not separately exempt it from Section 15(a) of the Exchange Act, so operators must reach their own conclusion on broker-dealer status.
The firm also said TSVs must publish a public filing at least 30 calendar days before operating, covering 30 disclosure items such as governance, access, fees, and risks.
SEC seeks public comment
The exemption provides five-year interim relief rather than establishing a permanent framework. The SEC has asked the public to comment on 10 questions concerning the exemption.
The questions include whether the relief should become permanent, whether the trading and symbol limits are appropriately calibrated, whether the framework should extend beyond NMS stocks, and whether Reg NMS relief should apply to broker-dealers trading on a TSV. Under the current structure, broker-dealers remain subject to Reg NMS in their own capacity.
The SEC said the temporary structure is intended to allow the agency to observe how tokenized stocks are traded on TSVs and use the resulting data to inform longer-term policymaking.
Recent SEC tokenization actions
The Innovation Exemption follows other recent SEC actions involving tokenized securities.
On September 17, the SEC granted a five-year exemption for tokenized U.S. stock trading, providing blockchain-based venues with a framework for trading tokenized equities while the agency considers a longer-term regulatory approach.
The SEC has also approved a tokenized share class for ARK Venture Fund, subject to conditions including approved wallets and daily NAV disclosure.
Separately, the SEC’s proposed crypto custody rules were reportedly under White House review as of September 22, before a formal rulemaking process could begin.
These developments involve different regulatory questions but provide context for the SEC’s recent work on tokenized financial products.
What the five-year framework means
The Innovation Exemption provides defined conditions for certain tokenized U.S. stocks to trade through permissioned venues.
The framework sets limits on the number of securities and trading volumes, establishes an issuer objection process for third-party tokenization, and requires venues to follow specific operating and disclosure conditions.
The relief is currently temporary. The SEC is seeking public input on whether the conditions should be changed or expanded before deciding on a longer-term framework.
Also Read: SEC’s Uyeda Explains Why Agency Dropped Some Crypto Cases
