SEC’s Innovation Exemption sets strict conditions for venues trading tokenized US stocks

SEC’s Innovation Exemption sets strict conditions for venues trading tokenized US stocks

Qualified venues may trade tokenized US-listed stocks for five years without registering as exchanges, but only if they meet a list of conditions on issuer consent, trading halts and public disclosure, the SEC said in an order issued September 17.

The relief, which the SEC calls the Innovation Exemption, exempts Tokenized Securities Venues (TSVs) from the “exchange” definition in the Securities Exchange Act of 1934 so they can trade tokenized National Market System (NMS) stock through permissioned AMM Liquidity Pools. Liquidity providers supplying tokenized stock with their own capital also get conditional relief from the “dealer” definition under section 3(a)(5). The exemptions expire five years after publication in the Federal Register, a date not yet set. The agency announced the order and asked for public comment on possible changes.

The conditions are detailed. A TSV must verify that a tokenized stock gives holders the same rights and privileges as the traditional share of an equivalent class, including dividends and voting. Synthetic or derivative tokens that only track a price without conveying ownership are excluded. Smart contracts used by the venue must be auditable, public and deployed on a public, permissionless distributed ledger, with permissioned participants. The venue must also mirror any trading halt in the underlying stock on its primary listing exchange, halting the token concurrently.

Issuers get a say before their shares are tokenized. Before making available stock tokenized by an unaffiliated third party, a venue must give the issuing company written notice and an opportunity to object, and an objection can be as simple as the company saying it objects, an SEC official said. That official also described a 30-day notice period, a detail that appears in press accounts of the order rather than in the SEC’s release.

Trading is subject to limits on the number of symbols and the volume traded, though the release does not give the caps. Commissioner Mark T. Uyeda, in a statement supporting the order, said the exemption is designed to be controlled and that the limits will give the SEC data to inform future rules.

Transparency obligations are explicit. A TSV must publish public notice about its operations and trading activities, including those of its affiliates, and regularly report transaction data in US dollars, covering prices, trade sizes, timestamps, pool addresses, end-of-day pool sizes and daily volumes.

Entry is deliberately light: a platform that believes it meets the definition and can comply with the conditions only needs to give notice before opening, according to the agency, with no formal SEC designation required. No venue has been named as first in line.