The Innovation Exemption offered by the SEC enables some blockchain platforms to trade tokenized stocks without having to register as stock exchanges. Additionally, some of the companies that provide the assets for this kind of trading may also be eligible for an exemption from having to register as dealers. However, both exemptions are subject to certain conditions.

The order came into force on September 17, 2026, and remains in effect until September 17, 2031, unless the SEC alters it. Even though the SEC is asking for public comments, the exemption is already in force. Platforms have to give the required notices and fulfill the other conditions before they begin.

This is not an endorsement by the SEC of a platform or an investment. A company must determine whether its service conforms to the trading model referred to in the order. The fact that a business uses blockchain technology does not in itself entitle it to the exemption.

What is tokenized NMS stock?

A tokenized stock is a digital form of a stock that is recorded on a blockchain (or on another shared electronic record); the order pertains to tokenized NMS stock. NMS stands for the National Market System and this category comprises qualifying U.S. exchange-listed shares as well as other eligible exchange-traded investments. It does not include every type of security and options are excluded.

A company can choose to have its shares tokenized or it can ask someone else to do so; an entirely independent third party can also be involved in the tokenization. In all these situations, the platform has to make sure that token holders have the same rights as the holders of the corresponding conventional shares of the same class.

The token holders have the same degree of interest in the company, are entitled to the same dividends, have the same voting rights and receive the same share of any assets that remain when the company is wound up. If a third party not connected with the company tokenizes the shares, it must also make available to token holders voting documents and other communications from the company. Neither the company nor its shareholders may be charged for this.

A product which simply follows the share price is different in that it may go up or down with the stock without conferring on the holder the same shareholder rights. Those third-party products which offer what the SEC refers to as synthetic exposure are excluded, as are rights and warrants to buy shares. Whether or not a product qualifies is not determined by its name.

How does the process of trading via a liquidity pool function?

A liquidity pool contains the assets provided by individuals or companies referred to as liquidity providers. Instead of having to wait to find a specific buyer or seller, a user is able to buy from or sell into the pool. An automated market maker, or AMM, is the software that determines the prices and carries out the transactions.

For instance, a pool could contain stock tokens and an eligible payment stablecoin; the buyer makes the payment using the stablecoin and then obtains the stock tokens from the pool. The order also permits eligible stock tokens to be traded against other eligible stock tokens, against crypto assets that are not securities, or against tokenized money market funds. However, those other assets have to be traded together with tokenized NMS stock and not in a separate market under this exemption.

The SEC refers to the platform as a Tokenized Securities Venue or TSV. It provides the pools and defines the criteria that users must meet in order to take part. The blockchain has to be public and open, but trading is only available to those who satisfy the platform’s requirements; the order describes this as ‘permissioned’ trading.

The prices in pools are usually based on the ratio of assets they contain rather than on the prices on stock exchanges. It is therefore possible for a token’s price to differ from the conventional share price. According to the SEC, the benefits for investors may include 24-hour trading, the ability to buy fractions of shares, holding the tokens in their own wallets and having trades completed more quickly. However, a specific platform might not provide all of these features.

What is required of a platform before it opens?

In order to qualify, the operator must be considered a U.S. person and one example of such a company is one that has been set up under U.S. law. There are some legal disqualifications which can stop an operator qualifying. The smart contracts (the software which carries out the blockchain transactions) must be public and open for audit and they must operate on a public, permissionless blockchain that is accessible by anyone.

The platform must publish a clear notice prominently on its publicly available website at least 30 calendar days prior to beginning. It must then inform the SEC within one business day of the publication that it intends to make use of the exemption, and it also has to give its contact details along with a link to the notice.

The notice must be written in plain English and set out who operates the platform, who is allowed to trade, what items can be traded, and how prices and fees function. It also has to explain the process by which trades are carried out, name the external firms involved, mention the significant risks and state whether the operator or any of its associated companies trade on the platform.

Users are advised to read this notice carefully. In some cases the platform is required only to explain the measures it has in place, not to adopt any specific measure. For instance, a platform that does not have a procedure for handling complaints or that does not carry out monitoring of abusive trading must state this fact. The fact that the notice is detailed does not mean that all the protections are actually in place.

The notice has to be up to date; most significant changes will need 20 calendar days’ advance notice, while other updates and corrections have their own deadlines and the previous versions must continue to be available online. The platform also has to state that it is not registered with the SEC for the exempt activities and it must not say that the SEC has approved or endorsed them.

A company has 30 days to object

A company might find out that a business which has no connection with it intends to tokenize its shares for trading on a TSV. The platform must send the company a written notice before it offers the tokens for trading, and trading will not be able to start until at least 30 calendar days have passed since the company has received the notice.

If the company sends its objection in writing by the end of that period, the platform will not be able to offer the tokens for trading and must amend its public notice within five business days to state the objection. This right applies only to the trading of the tokens on that platform pursuant to this order and does not constitute a general right to halt all forms of tokenization.

Managers and the board have the opportunity provided by the response period to look over the arrangement. It should be examined in advance of the response deadline when matters such as how dividends will get to the token holders, how voting will function, who will be responsible for sending out company communications, and whether the platform’s trading will have an effect on the traditional shares are considered.

Trading limits and when trading must stop

The rules specify the maximum number of different stock symbols that a platform can provide and the amount of trading it can manage. They make use of two stock groups which are already part of the U.S. market’s Limit Up-Limit Down scheme, a measure designed to deal with large price movements. Tier 1 consists of the S&P 500 and Russell 1000 stocks together with certain exchange-traded products, while Tier 2 includes the other eligible NMS stocks.

The percentages are calculated by comparing the platform’s average daily share volume for each stock token with that of the conventional stock from the previous month. Operators are required to adhere to the method used for the calculation. A platform is obliged to combine its trading volumes and symbol counts with those of platforms which it controls, which control it, or which are held under common control.

A trading pause is not necessary when a particular stock exceeds the volume limit for the first time, but the platform must stop further such breaches. However, each subsequent breach has to be followed immediately by a three-month pause for that stock, on both the relevant platform and any affiliated ones. This initial breach exemption does not apply if the number of symbols permitted is exceeded.

A platform is also required to cease trading in a tokenized stock whenever trading of the traditional stock is halted or suspended on its primary listing exchange and it must immediately inform its users; it cannot ignore such a halt if it offers 24-hour trading.

The trade data must be made freely available to the public, presented in U.S. dollars and given in a format that is readable by software; each trade has to be published within ten minutes and the past 30 days’ trades must be available as well. The information that is required includes the symbols of both assets, the price, the quantity, the time and the assets which were placed into and removed from the pool.

Then there is the question of companies which provide assets to the pools

The SEC states that simply providing liquidity is not enough to qualify someone as a dealer; this issue may come up when a firm carries out additional actions, for example by giving customers price quotations or by agreeing to commit capital to a pool.

The order includes a specific exemption for qualifying liquidity providers. In order to use this exemption, a firm must provide tokenized NMS stock using its own capital, carry out trading only in its own account and not hold any customer assets, and its securities activities must be restricted to those relating to trading of tokenized NMS stock in the AMM pools which are covered by the platform exemption.

The company is required to inform the SEC and to maintain records of its financial circumstances, of the assets supplied to the pools, of the liquidity agreements and of any payments or incentives it has received. On any website it has that is available to the public, it must state that it is not a registered broker-dealer and must give an explanation of the relevant arrangements and incentives. Legal disqualifications involving the firm or other firms affiliated with it may also stop it from qualifying. Furthermore, the exemption is unavailable if the firm’s securities activities extend beyond those limits.

Which rules still apply?

The order applies to trading only and does not introduce a new method of raising funds. It does not allow new securities to be issued or initial public offerings to occur on a TSV under this exemption. As before, offers and sales must still be registered under the Securities Act or qualify for a separate exemption from that requirement.

The laws concerning fraud and market manipulation are still in force; the order does not provide an exemption from the Investment Company Act, which is the legislation that applies to investment funds. Users of the platform must also ensure that they meet their own regulatory responsibilities. A broker-dealer does not cease to have its obligations merely because it carries out trading on a TSV. Any registered securities activities that are carried out outside of the platform must stay separate from the exempt operation.

The platform is not required to comply with the special rules applicable to an alternative trading system (ATS) for the activities included in the order; it falls outside the scope of Regulation NMS, which is a central group of rules governing U.S. stock trading. Moreover, the rules concerning fair access applicable to exchanges and certain ATSs do not apply to it either. It is necessary to explain these differences in a public notice.

The platform is not allowed to provide credit to users so that they can buy stock tokens on the platform, or to borrow or pledge securities or crypto assets on the platform or allow those assets to be pledged. It has to inform users straightaway if there are serious operational problems and must promptly notify the SEC. It must deal with such problems as soon as is reasonably possible, inform users once they have been resolved and must also keep records in the United States, accessible for review by the SEC, both during the period of exemption and for three years after the exemption has ended.

What ought businesses to check at this stage?

The operator in question should, before fixing a launch date, compare its business plan with the order to make sure they are in agreement. It should determine which assets will be traded, who will be allowed to use the service, what rights token holders will have and who will provide the pools. It should also allow sufficient time for the issuance of notices and for the systems that are meant to enforce trading limits, deal with halts and maintain records.

When a company receives a TSV notice about third-party tokenization, it should examine the rights of shareholders and determine if it objects within the time allowed for response. An investor should look at the notice issued by the platform, in particular regarding the fees, any conflicts of interest, the security risks and the methods available for leaving the platform. The nature of the questions will vary according to the reader’s role.

The fact sheet from the SEC offers a brief summary; the agency is at the same time calling for comments regarding the terms of the exemption and any possible amendments under File No. 4-927. Companies should expect the arrangement to be temporary and should not assume that it will continue beyond September 17, 2031.

If you’re thinking of using a tokenized-stock trading service or considering a company notice, please get in touch with the Ishimbayev Law Firm, P.C. to find out which requirements apply and what needs to be done before moving forward.

The article should not be regarded as legal or investment advice.