SEC Issues “Innovation Exemption” to Facilitate Trading of Tokenized NMS Stock

Background

On September 17, 2026, the SEC issued its highly anticipated “innovation exemption,” granting temporary, conditional exemptive relief that allows certain automated market makers (AMMs) and liquidity pools (together, AMM Liquidity Pools) to trade tokenized securities on a permissioned basis.¹ The Order grants two complementary, five-year exemptions: (i) for so-called “tokenized securities venues” (TSVs) from the definition of “exchange” under the Exchange Act; and (ii) for certain liquidity providers that supply liquidity to these venues from the definition of “dealer” under the Exchange Act.

An AMM is a smart contract-based mechanism that sets prices and executes trades automatically based on the ratio of two assets (often referred to as a pair) held in an associated liquidity pool, rather than by matching individual buy and sell orders.² Especially relevant here, the pricing used in an AMM is typically based on the ratio of the paired assets in the associated liquidity pool, rather than on any external market pricing or bids and asks. A liquidity pool is the underlying portfolio of assets – contributed by liquidity providers – against which those trades are executed. As participants trade against a liquidity pool, or as liquidity providers supply or remove assets to or from the liquidity pool, the AMM’s smart contract automatically rebalances asset prices. Given these unique trading characteristics, tokenized trading venues that rely on AMM Liquidity Pools may face substantial challenges operating in compliance with Regulation NMS.

The Order applies to “Tokenized NMS Stocks,” which is an NMS Stock³ that is (i) tokenized by, or on behalf of, the issuer of the underlying NMS Stock; or (ii) tokenized by a third party that is unaffiliated with the issuer of the underlying NMS Stock. Under the Order, TSVs will be permitted to bring together buyers and sellers of Tokenized NMS Stock by (i) providing one or more AMM Liquidity Pool(s) for permissioned participants to interact and agree to trading terms; and (ii) setting standards for who may access trading on those AMM Liquidity Pool(s). Qualifying TSVs will not be required to register as “national securities exchanges” or rely on the exemption available to “alternative trading systems” (ATSs). In addition, qualifying liquidity providers will be permitted to supply liquidity to AMM Liquidity Pools in the form of Tokenized NMS Stock without registering as “dealers.”

The exemptive relief is subject to several conditions. The Order explains that the conditions are designed to mitigate risks that could arise from a TSV performing exchange-like activities outside the protections of the exchange regulatory framework and the national market system. Because a qualifying TSV is not subject to the same examination and oversight requirements as registered exchanges and ATSs, the SEC noted that without appropriate safeguards, the exemption could otherwise result in uneven transparency for participants; undisclosed cybersecurity and manipulation risks tied to distributed ledger technology; and disruptions to fair and orderly markets if a TSV continued trading during a stoppage in the underlying security.

Key Conditions of the Order

No “Synthetic” Third Party-Sponsored Tokenized Securities

As defined in the Order, Tokenized NMS Stocks do not include third party-sponsored tokenized stocks where the crypto asset issued by the third party represents only a synthetic exposure to the underlying security, such as a tokenized linked security or a tokenized security-based swap.⁴ Therefore, to be traded on a TSV, a third party-sponsored Tokenized NMS Stock must represent an entitlement to the underlying security. Prior to making a Tokenized NMS Stock available for trading, a TSV must verify that the Tokenized NMS Stock provides holders with the same rights and privileges of the underlying security, such as rights to receive dividends, exercise voting rights, and receive proceeds in liquidation.

Notice and Opportunity to Object for Third-Party Tokenized NMS Stocks

For third party-sponsored tokenized stocks where the crypto asset is a custodial entitlement to the interests of the underlying security and therefore is permitted to trade on a TSV, the SEC has added an issuer notice requirement and right to object. Before making a third-party Tokenized NMS Stock available for trading, a TSV must provide 30-day written notice to the issuer of the underlying NMS Stock. If the issuer provides a written notice to the TSV that it objects to that third-party Tokenized NMS Stock, the TSV cannot make the third-party Tokenized NMS Stock available for trading. However, if the issuer does not object within 30 days, the TSV can permit the third-party Tokenized NMS Stock to begin trading. If trading is approved, the third party must ensure that, in keeping with the one-for-one entitlement with the underlying NMS Stock, the holders of the Tokenized NMS Stock receive any related proxy materials or other issuer communications as holders of the underlying stock would receive, at no cost to the issuer or the shareholders.

Volume and Symbol Limitations

To limit broader market exposure, trading volume will be limited to 0.25% of average daily trading volume during the prior month for “Tier 1 securities” (NMS Stocks in S&P 500 Index, Russell 1000, and certain ETPs), capped at 75 symbols, and 2.5% of average daily trading volume for “Tier 2 securities” (not Tier 1 securities and not rights and warrants), capped at 250 symbols. If a TSV exceeds the daily trading volume limit with respect to a Tokenized NMS Stock, it may be required to pause trading in that Tokenized NMS Stock for a period of three months.

Trading Pairs Only

A TSV can only make available for trading a Tokenized NMS Stock that is trading in a pair with another Tokenized NMS Stock, a non-security crypto asset (e.g., a payment stablecoin), or shares of a tokenized money market fund. The pair represents an asset that a liquidity provider has contributed to an AMM Liquidity Pool that is not necessarily required to itself be independently eligible for trading on a TSV. For example, shares of a tokenized money market fund are not themselves eligible for trading on a TSV independently, but can be paired with a corresponding Tokenized NMS Stock to facilitate trading. However, a non-security crypto asset, such as Bitcoin, cannot be paired with a money market fund share as a trading pair. Once a Tokenized NMS Stock is paired with another asset, a TSV can complete the necessary steps to facilitate trading.

Transparency Requirements

The Order creates transparency requirements TSVs must follow, including a requirement to make certain transaction data publicly available within ten minutes of a transaction occurring. Also, distributed ledger applications used by a TSV must be auditable, public, and deployed on a permissionless distributed ledger.

No Primary Issuances

No initial offerings of securities are permitted on a TSV. All offers or sales must be registered or exempt under the Securities Act. That is, only secondary market transactions can take place on TSVs under the Order.

Public Notice and U.S. Person Requirements for TSVs

TSVs must publish a notice at least 30 days before operating. Within one business day of the notice, the TSV must also provide the SEC with written notice that it intends to operate pursuant to the TSV exemption. The notice is required to include information in several broad categories, including information about the tokenized security, the distributed ledger technology used in tokenization, the pairs that can be traded, TSV participants and the access rules, the procedures under which traders can interact with other trading interest and AMM Liquidity Pools, the trading activity of the TSV and its affiliates, and the TSV’s fee structures, among others. The notice in effect substitutes a disclosure regime for many of the substantive regulatory requirements of the exchange regulatory framework.

In addition, a TSV must be a U.S. person, which the Commission takes care to note means that U.S. sanctions obligations will apply to the TSV. As a consequence, TSVs will be required to control who may use their AMMs.

Stoppage of Trading

A TSV must stop trading in a Tokenized NMS Stock concurrently with any stoppage of trading in the underlying NMS Stock on the primary listing exchange, including halts and suspensions. Following any stoppage, a TSV must immediately notify its participants through its regular means of communication.

No Leverage

A TSV cannot engage in financing activities. Specifically, a TSV cannot borrow securities or non-security crypto assets, directly or indirectly hypothecate or arrange for the hypothecation of any securities or non-security crypto assets, or extend credit to a participant for the purpose of purchasing a Tokenized NMS Stock on the TSV.

Significant Operational Events

A TSV must immediately notify its participants, and promptly notify the SEC, of any event that has a significant impact on the operation of the TSV or on its participants, such as system intrusions or disruptions. The TSV must remedy any known significant operational events as soon as reasonably practicable.

Books and Records

A TSV must make and keep current trading records and information related to compliance with the conditions of the exemption, including information regarding trading interest, transactions, permissioning methods, fees, stoppages of trading, daily trading volume, and all notices. A TSV must preserve all such books and records while the exemption is effective and for a period of three years thereafter, maintain such records in the United States, and make them promptly available to the SEC upon request. The TSV must also consent to examinations of its books and records by SEC staff at any time.

Implications

Big Picture

The Order represents a novel and notable departure from the exchange regulatory framework and the national market system. TSVs and AMM Liquidity Pools operating under the Order will operate under a regulatory framework that to a significant degree substitutes a disclosure-based regime for certain exchange and broker-dealer rules and regulations.

Impact on ETFs

Although shares of registered ETFs are “NMS Stock,” the Order does not provide any exemptions from the Investment Company Act.⁵ The Order itself acknowledges that “[a]ctivities related to tokenized investment companies may raise issues under the Investment Company Act, such as multi-class issues under Section 18 of the Investment Company Act and the application of Section 22(d) and Rule 22c-1.” The SEC staff also could raise other issues. As a result, it remains unclear when and under what circumstances the Order effectively enables tokenized ETF shares to trade on TSVs through AMM Liquidity Pools. Nonetheless, the policy statements in the Order suggest that the SEC and staff would be willing to discuss resolutions to such issues. In addition, the Order provides an important safeguard for ETF sponsors that may wish to limit – whether broadly across TSVs or with respect to particular TSVs – the trading of their tokenized ETF shares created without their permission, by giving sponsors a mechanism to object to a TSV making tokenized shares created by unaffiliated third parties available for trading on its AMM Liquidity Pools.

Impact on Broker-Dealers

Finally, broker-dealers that facilitate trades on TSVs should continue to be mindful of compliance risks as they will continue to be subject to applicable broker-dealer regulations, such as those governing custody of tokenized assets as well as compliance with the net capital and customer protection rules. The SEC has requested comments about whether to provide relief from the requirements of Regulation NMS to TSV participants that are registered broker-dealers. However, entities performing certain dealer-like activities may also be able to use the “dealer” exemption to participate in the TSV market in a market making or liquidity provision capacity, provided they trade solely for their own account using proprietary capital and do not hold or custody customer assets.

Timing and Next Steps

Both exemptions run five years from September 17, 2026, through September 17, 2031, and the Commission is requesting comments on the conditions and the scope of the exemption.

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