A five-year exemptive order permits limited on-chain trading for US-listed equities through qualifying venues for the first time, subject to limits, disclosure, and issuer-notice conditions.

By Jenny Cieplak, Paul M. Dudek, Zachary Fallon, Dan Gibbons, Stephen P. Wink, Daphne Lambadariou, Dylan H. Lojac, and Deric Behar

Key Points:

  • The Innovation Exemption provides time-limited, conditional relief from exchange registration for qualifying tokenized securities venues and from dealer registration for certain liquidity providers, subject to conditions, including volume caps, symbol limits, disclosure, recordkeeping, and other operational obligations.
  • Before a TSV may make shares available for trading that were tokenized by anyone other than the issuer or a person acting on the issuer’s behalf, it must notify the issuer and wait 30 calendar days, during which the issuer may object.
  • The Order was issued the same week the CLARITY Act failed to advance in the Senate, and the SEC has framed the exemption as an interim step toward permanent rulemaking.

Background

On September 17, 2026, the Securities and Exchange Commission (SEC or Commission) issued an order granting temporary,1 conditional exemptive relief under Sections 36(a)(1) and 36(a)(5) of the Securities Exchange Act of 1934 (Exchange Act) to facilitate on-chain trading of tokenized National Market System (NMS) stocks2 (the Order, or Innovation Exemption). The Order exempts tokenized securities venues (TSVs) from the “exchange” definition in Section 3(a)(1), and certain liquidity providers to TSVs (Covered Firms) from the “dealer” definition in Section 3(a)(5).

The Innovation Exemption came two days after the Senate declined to advance the CLARITY Act, which would have established a comprehensive federal regulatory digital asset framework; the cloture motion failed 49-50, 11 votes short of the 60 required. SEC Chairman Paul Atkins acknowledged that with Congress “unsuccessful in advancing the CLARITY Act despite the tireless efforts of many,” the SEC was “taking a significant step forward, within its statutory authority, to bring America’s capital markets into the digital age.” The legislative context helps explain the Commission’s use of exemptive authority, but the Order should be assessed on its own terms: It is an agency order of limited duration and scope, not a comprehensive allocation of jurisdiction or a substitute for legislation or rulemaking.

The Innovation Exemption is part of Project Crypto,3 the Commission-wide initiative launched in July 2025, and draws on input from the Crypto Task Force’s roundtables, written submissions, and stakeholder meetings.

The TSV Exemption

The Order defines a TSV as “an organization, association, or group of persons that brings together buyers and sellers of Tokenized NMS Stock” by (i) providing one or more automated market maker (AMM) liquidity pools for permissioned participants, and (ii) setting standards for who can access them.4 An AMM liquidity pool is an on-chain smart contract that holds paired assets, such as tokenized NMS stock and a permitted payment stablecoin, and allows users to swap against assets supplied by liquidity providers. Prices update automatically according to the pool’s algorithm as trades change the relative amounts of each asset in the pool. A TSV “provides” an AMM liquidity pool either by selecting and designating it as the means and location for participants to trade, or by exercising control over it, for example, by deploying the AMM smart contract, setting or altering the pool’s rules, parameters or fees, or having the ability to pause trading in it.5

Tokenized NMS stock includes stock tokenized by or on behalf of the issuer, or by a third party unaffiliated with the issuer (which could be the TSV itself or an affiliate). Tokenized NMS stock does not include synthetic instruments, where a third party issues a cryptoasset representing its own security that provides synthetic exposure to an underlying security and “confers no rights or benefits from the issuer of the referenced security.” The Order contemplates that third-party non-issuers, including a TSV, may tokenize what the TSV makes available for trading.

The Order does not prescribe how tokenization must be accomplished. It defines tokenization only as creating a digital representation of an asset using distributed ledger technology, and addresses information about the tokenization process through the TSV’s public notice disclosure.6 A TSV may make a tokenized NMS stock available for trading only if it trades in a pair with another tokenized NMS stock, a non-security crypto asset (such as a payment stablecoin issued by a permitted payment stablecoin issuer), or a tokenized money market fund.

The Order does not prescribe a single pricing methodology, acknowledging that “AMM Liquidity Pool business models and pricing mechanisms vary, generally depending on the protocol from which they are derived.”

TSVs seeking the exemption are subject to the following conditions:

  • Smart contract transparency. All distributed ledger applications (i.e., smart contracts) used by a TSV must be “auditable, public, and deployed on a public, permissionless distributed ledger.” This allows participants to evaluate trade execution and potential risks of the TSV, and supports third-party auditing and reporting of TSV vulnerabilities.
  • Permissioned access. TSVs must control who can trade on their venues to screen out sanctioned persons and mitigate illicit finance risks. A TSV must set standards for permissioned access through mechanisms such as wallet address whitelisting or credentialing, either on-chain or off-chain. Permissioned access does not require a private chain or closed protocol: A TSV can layer a permissioned participant set on public, permissionless infrastructure by combining off-chain identity, sanctions, anti-money laundering/countering the financing of terrorism, or eligibility checks with on-chain attestations, credentials, or wallet allowlists enforced by smart contracts. In that model, the verification layer controls who may access the pool, while the underlying protocol can continue to execute trades according to its pre-established on-chain rules. If a third party performs permissioning or verification services at the TSV’s direction or on its behalf, the TSV, not the service provider, remains responsible for compliance with the exemption’s conditions.
  • Public notice. At least 30 calendar days before it begins operating, a TSV must publish a detailed public notice on its website. No separate EDGAR filing or other filing with the Commission is required, however the TSV must notify the Commission via email within one business day of that publication. The 30-day period runs from publication to the start of the TSV’s operations, not to the launch of each individual liquidity pool. The notice must state that the TSV is not registered with the Commission and that its activities have not been approved or endorsed. It must also describe the TSV’s structure, governance, permissioning criteria, eligibility standards, fees, trading procedures, risk disclosures, and system safeguards. The TSV must update the notice for new or discontinued trading, material operational changes, and materially inaccurate or incomplete information.
  • Issuer notice and objection. Before a TSV can make available for trading a tokenized NMS stock created by a third party unaffiliated with the issuer, it must notify the issuer and wait 30 calendar days. If the issuer objects within that window, the TSV cannot make the token available for trading. Issuer silence operates as a non-objection.7
  • Holder rights equivalence. A TSV must verify that the tokenized stock “provides holders the same rights and privileges as does traditional NMS stock of an equivalent class.” That means it must convey the same interest in the company, dividend rights, voting rights, and claims to residual assets in liquidation as those conveyed to holders of the underlying NMS stock. Where the token was created by a third party unaffiliated with the issuer, that third party must also distribute or otherwise make available any related proxy materials and other issuer communications to token holders at no cost to the issuer or its shareholders.8 The Order does not prescribe any specific method for the TSV to satisfy its verification requirement.
  • No primary issuance. TSVs are secondary-market-only venues. The Order states that all offers and sales of tokenized NMS stock under the TSV Exemption must be registered under the Securities Act of 1933 (Securities Act) or conducted pursuant to an exemption from the Securities Act’s registration requirements. No primary issuance or initial offering of securities is permitted on a TSV.
  • Volume and symbol limits. The Order does not impose constraints on how TSVs and AMMs can price transactions in relation to the national best bid and offer or otherwise. However, to limit price dislocations and market-quality effects resulting from the permitted activity, the Order caps both the number of symbols and tokenized trading volume that can be traded on TSVs. Tier 1 stocks (S&P 500 and Russell 1000 constituents, plus certain high-volume exchange-traded products) are limited to 75 symbols and 0.25% of the prior month’s average daily share volume; Tier 2 stocks (all other NMS stocks, excluding rights and warrants) are limited to 250 symbols and 2.5%. Volume and symbol counts apply on a per-TSV basis and must be aggregated with affiliated TSVs. Exceeding a symbol limit places the TSV outside the exemption; after one volume breach in a given stock, later breaches trigger a three-month trading pause in that stock.
  • Transaction transparency. TSVs must make US dollar-denominated transaction data freely available in a machine-readable format, updated within 10 minutes of each transaction, and covering pricing, volume, timing, and pool composition for all transactions within the past 30 days.
  • Trading stoppages and operational events. In the event of any stoppage of trading (meaning a halt or a suspension) in the underlying security on the primary listing exchange, a TSV must halt trading in a tokenized NMS stock, immediately notify participants of the stoppage and of any significant operational event affecting the TSV or its participants, promptly notify the SEC of any such operational event, and remedy the event “as soon as reasonably practicable.” The Order otherwise contemplates the potential for TSVs to provide for up to 24/7 continuous trading.
  • No leverage. A TSV cannot engage in financing activities, including lending, borrowing, hypothecating securities, or extending credit to participants.
  • Separation of registered activity / statutory disqualification. Registered activity — such as that by a registered exchange or broker-dealer — must be operated separately from the TSV. A TSV cannot rely on the exemption if any organization, association, or person within the group comprising the TSV is subject to a statutory disqualification under Section 3(a)(39) of the Exchange Act, unless the Commission or the relevant self-regulatory organization has permitted that person to continue its membership, participation, or association notwithstanding the disqualification.9
  • Books and records. A TSV must maintain detailed records of trading interest, transactions, permissioning methods, fees, trading stoppages, daily volume, operational events, and notices to the public, the Commission, issuers, and participants. The TSV must preserve those records for the life of the exemption plus three years, keep them in the United States, make them available to Commission staff in human-readable and electronic form, and consent to examination at any time.
  • Anti-fraud and anti-manipulation. The Order expressly preserves the anti-fraud and anti-manipulation provisions of the federal securities laws, including Section 10(b) and Rule 10b-5 of the Exchange Act. The exemption creates no safe harbor from these provisions. As Chairman Atkins emphasized, the anti-fraud and anti-manipulation provisions “apply in full to all securities activities in these markets.”
  • Sanctions compliance. Because a TSV must be a US person, it must comply with economic and trade sanctions programs administered and enforced by the Office of Foreign Assets Control (OFAC).

The Covered Firm Exemption

The Order also exempts certain liquidity providers to TSVs from the definition of “dealer” under Section 3(a)(5) of the Exchange Act. A Covered Firm supplies proprietary capital to an AMM liquidity pool in the form of tokenized NMS stock and may also engage in activities carrying indicia of dealing, such as quoting prices to customers or entering agreements to commit capital. Covered Firms seeking the exemption are subject to the following conditions:

  • TSV-only activity. A Covered Firm’s securities activities must be limited to the trading of tokenized NMS stock in an AMM liquidity pool operating under the TSV Exemption (though a Covered Firm may engage in such trading on more than one TSV). The exemption does not limit a Covered Firm’s non-securities activities, “such as activity related to payment stablecoins.”
  • Proprietary accounts only. A Covered Firm must trade solely for its own account and may not hold or custody customer assets.
  • Recordkeeping. A Covered Firm must maintain records of its ability to cover potential trading losses (including financial statements), all liquidity supplied to AMM pools, any agreements or arrangements with a TSV to provide liquidity or market-making services, and any fees, tokens, or other incentives received for liquidity provision.
  • Public disclosure. A Covered Firm must prominently disclose on any public-facing website that it is not registered as a broker-dealer, that it may enter into liquidity provision or market-making agreements with a TSV, and that it may receive fees, tokens, or other incentives for providing liquidity or meeting volume thresholds.
  • Commission notification. A Covered Firm must notify the Commission in writing of its role, including its name, business model, risk controls, regulatory contact, any liquidity provision agreements, any compensation arrangements, an acknowledgment that neither the firm nor its affiliates are subject to statutory disqualification, and consent to SEC information requests. A Covered Firm must also acknowledge that use of the exemption is subject to Commission oversight and that operating inconsistently with the Covered Firm Exemption could result in a Commission enforcement action.
  • No statutory disqualification. The Covered Firm Exemption cannot be relied upon if the Covered Firm or any of its affiliates are subject to a statutory disqualification as defined in Section 3(a)(39) of the Exchange Act, unless the Covered Firm or affiliate has been permitted by the Commission or a relevant self-regulatory organization to continue notwithstanding the disqualification. Notably, this provision is broader than the analogous condition for the TSV Exemption, which applies only to the organizations, associations, or persons that comprise the TSV itself and does not extend to affiliates.
  • Anti-fraud. Covered Firms remain subject to the anti-fraud and anti-manipulation provisions of the federal securities laws.

The Issuer Notice and Objection Condition

Before a TSV makes available for trading a tokenized NMS stock created by a third party unaffiliated with the issuer of that stock, the TSV must send written notice to the issuer of the underlying NMS stock at the physical or email address for the issuer’s principal executive offices listed on the cover page of the issuer’s Exchange Act reports. Trading cannot begin until at least 30 calendar days from the date the issuer receives the notice, and a written objection delivered on or before the 30th calendar day following receipt bars the TSV from making such tokenized securities available for trading. The TSV must then amend its public notice within five business days to identify the objecting issuer.

No issuer notice is required where the issuer tokenizes its own stock or has it tokenized on its behalf, and a TSV may make those tokens available for trading once it satisfies the Order’s other conditions. For companies that want a more active role, issuer-led tokenization may allow greater influence over the trading arrangements, wrapper, and disclosure, while third-party tokenization can help create the market experience and data that may inform later issuer-led approaches.

Regardless of whether they have a dedicated tokenization strategy, the Order matters for all public companies because it creates a notice-and-objection process for third-party tokenized shares, while otherwise permitting rights-equivalent tokenized NMS stock to trade in a capped, transparent framework. Public companies should consider developing a response framework before a TSV notice arrives. The 30-day period begins upon receipt and may not align with ordinary board or committee calendars; as such, companies would need to confirm monitored delivery channels, identify decision-makers and outside advisers, and establish a process for requesting information promptly from the TSV or tokenizer.

Where the Relief Stops

The relief is narrowly drawn. The limits below determine which products and which clients it reaches.

  • Only fully fungible tokenized listed equities. The relief covers tokenized NMS stock carrying the same rights and privileges as the underlying class. Synthetic instruments, including tokenized linked securities and tokenized security-based swaps, fall outside it, as do rights and warrants.
  • No private company shares. Because the relief reaches only NMS stock, shares of private and pre-IPO companies fall outside it, and a TSV cannot make private or restricted securities available for trading.
  • Secondary market only. Under the Order, no primary issuance or initial offering of securities may occur on a TSV, and all offers and sales of tokenized NMS stock must be registered under the Securities Act or made pursuant to an exemption from registration.
  • No Investment Company Act relief. The Order expressly provides no exemption under the Investment Company Act, and the Commission flagged that activities involving tokenized investment companies may raise multi-class issues under Section 18 and questions under Section 22(d) and Rule 22c-1.
  • Nothing outside the venue. The TSV Exemption reaches only activity performed through the functionalities and systems the TSV provides. It does not reach securities activity conducted outside the TSV, and it does not address the registration status of TSV participants. A broker-dealer that trades on a TSV remains a broker-dealer, and the Order does not provide relief from broker-dealer registration requirements. In addition, the Order does not prescribe how tokens move outside a TSV, but the permissioning model a TSV chooses has implications for off-venue transferability. A TSV must set access standards for its pools, and the Order identifies two ways to do so:
    1. The AMM liquidity pool “may be encoded with criteria or a list of persons to ensure that only certain ‘white-listed’ or ‘allow-listed’ crypto asset wallet participant addresses (i.e., wallet addresses that meet certain credentialing requirements) gain access to trading in the TSV.”
    2. The Tokenized NMS Stock “could be encoded with criteria to only allow transfers of the Tokenized NMS Stock to crypto wallet addresses of persons that meet the TSV’s credentialing requirements.”

    Where access is controlled at the pool, the Order does not foreclose the ability of a token holder to move the token off a given TSV to another TSV or wallet.

    The Commission has put the boundary of the exemption itself out for comment, asking whether a TSV should be permitted to trade securities other than tokenized NMS stock and which types. Confining the relief to securities the Commission already surveils is a cautious design, though it also leaves synthetics, the fastest-growing segment of tokenized equities, outside the framework.

    Market Structure and Access Standards

    Under the Order, a TSV complying with the conditions shall be exempt from the Exchange Act definition of an exchange. Further, a TSV meeting the conditions would not be considered a trading center or market center under Regulation NMS. The Regulation NMS rules that apply to trading centers and market centers therefore do not apply to a TSV, and the Order requires the TSV to disclose in its public notice that it is not subject to Regulation NMS.10

    Fair access is the other principal difference. An ATS subject to Rule 301(b)(5) of Regulation ATS must maintain reasonable written access standards and apply them fairly and without discrimination. A TSV has no comparable obligation, and must disclose in its public notice that it is not subject to fair access requirements and that unfair or unreasonably discriminatory denials or limitations of participant access are not subject to SEC review. Whether this disclosure-based approach is sufficient, or should be supplemented in a permanent framework, is one of the questions the comment file will address.

    Reliance on either exemption creates no presumption that the relying party is an “exchange” or a “dealer” under the Exchange Act, since both determinations depend on facts and circumstances.11 On dealer status, the Commission went further, stating that liquidity provision alone is not dealer activity and that, absent other indicia, an AMM pool liquidity provider would typically be a trader. The exemption covers the narrower case of a firm that quotes prices to customers (presumably this refers to prices quoted to customers outside of the liquidity pool) or has an agreement or other arrangement with a TSV to commit capital to an AMM pool.

    Price Formation and Reference Price Implications

    Because a TSV is outside the Regulation NMS framework described above, firms should not assume that on-chain prices will be protected quotations, consolidated-market prices, or appropriate benchmarks for valuation, disclosure, transaction pricing, or fiduciary determinations. Issuers, boards, underwriters, dealers, and investment advisers should identify in advance which market data will govern repurchases, equity awards, collateral, NAV calculations, fairness analyses, conversion, or exchange mechanics and other instruments that refer to “market price,” “closing price,” or similar concepts.

    Open Questions for the Comment Period and Beyond

    • Private securities and Regulation Crypto Assets. Private and restricted securities fall outside the Order. The Commission’s pending Regulation Crypto Assets proposal,12 covering offering exemptions for cryptoasset issuers, is the more likely vehicle if on-chain secondary liquidity is to extend beyond listed equities. Comments on that proposal are open until October 20.
    • 24/7 trading impact. The Commission identified around-the-clock trading as a potential benefit of the technology and has also asked how continuous trading may affect price discovery and market quality in the underlying stock. The Order references several mitigants, including concurrent halts with the primary listing exchange, the volume caps, 10-minute public data, and required disclosure of any circuit breakers, reference price bands, or procedures for volatility and corporate actions arising while the underlying market is closed.
    • Clearing and settlement. A TSV must describe any procedures or material arrangements undertaken to facilitate clearance and settlement of transactions on the TSV, including a description of any requirements applied to TSV participants related to such procedures or material arrangements. The disclosure requirement is designed to surface useful information for market participants considering whether to trade on the TSV, such as when trades will settle, but does not establish a regulatory framework. Participants will need to perform diligence and contract for these arrangements themselves.
    • Regulated participants. Registered broker-dealers may trade on a TSV, but the Order does not address whether there may be particular challenges for broker-dealers engaging with a TSV. The Commission has asked whether broker-dealer participants need relief from Regulation NMS and, if so, from which provisions.
    • Custody. The Order identifies investor self-custody as a benefit of the technology and requires a Covered Firm to trade solely for its own account without holding or custodying customer assets. Custody otherwise appears as a disclosure topic: A TSV must describe the wallets and related applications used with the venue, the safeguards protecting participant information held through them, and risks such as loss of private keys and compromised wallets. The Order sets no custody standard and grants no relief from the custody requirements applicable to registered intermediaries. It also does not provide a framework regarding custody of the underlying securities or how tokenized NMS stock relates to the existing indirect holding system and Depository Trust Company infrastructure.
    • The shareholder register. The Commission identified the difficulty of maintaining the shareholder register in light of on-chain transfers as a legitimate issuer risk, but addressed it through the objection right and rights-equivalence conditions rather than substantive reconciliation requirements. Reconciling on-chain ownership records against the official register, and allocating responsibility for discrepancies, is left to issuers, transfer agents, and tokenizers to perform diligence and resolve by agreement.
    • On-chain-specific risk. The public notice must catalogue material risks, including artificial intelligence exploits, loss of private keys, compromised wallets, smart contract coding errors, access control failures, reentrancy and denial-of-service attacks, congestion, impermanent loss, abusive maximal extractable value activity (such as front-running, back-running, and sandwich attacks), oracle manipulation, network cyber-attacks, and phishing, together with the venue’s mitigation measures. The list is granular enough to serve as a possible diligence checklist for boards and investment committees of public companies, as well as other market participants evaluating a TSV.

    Capital Markets Transaction Implications

    Issuers and underwriters will need to consider how tokenized trading may interact with offering timetables, Regulation M restricted periods, stabilization, stock lending, hedging, lock-ups, equity-linked transactions, repurchases, and tender offers. Even at low volumes, a separate on-chain market may complicate monitoring of trading activity, communications, and reference prices. Engagement letters, underwriting agreements, lock-ups, hedging documentation, and disclosure questionnaires may need to capture TSV activity and third-party tokenization.

    Transaction-Based Compensation

    The release does not expressly address the issue of whether a TSV can charge securities-transaction-based compensation. In this regard, it can be distinguished from the Commission’s Covered User Interface staff statement, which expressly permitted such interfaces to charge users on a per-transaction basis (either flat fee or fixed percentage of the transaction).13

    The Commissioners Weigh In

    Chairman Atkins described the exemption as “a bridge toward durable rulemaking” and emphasized that “this interim measure must be followed by durable rulemaking to ensure that onchain markets remain a viable pathway as our capital markets continue to evolve.”

    Commissioner Hester Peirce noted that the exemptions are available to both incumbents and new entrants, and are “a major step forward in allowing individuals greater personal autonomy to own and trade their own assets without the need for unnecessary intermediaries.” She also observed that the exemptions are “intended to provide the Commission and market participants with an opportunity to observe how tokenized NMS stocks are used and traded in different onchain contexts and how onchain and traditional markets interact with one another.”

    Commissioner Mark Uyeda situated the Order within the Commission’s broader tradition of using scoped exemptive relief to facilitate innovation, describing it as “a well-trod path” and citing money market funds, index funds, and exchange-traded funds as products that grew from the SEC’s initial use of exemptive authority. He emphasized the data-driven rationale, noting that publicly available transaction data would “reduce information asymmetries, support monitoring, and allow for study of securities trading using the exemption.”

    Conclusion and Practical Implications

    The Innovation Exemption accommodates blockchain-based equity trading within the existing federal securities framework by creating a tailored alternative to exchange or ATS registration for a specific, capped category of activity. The volume and symbol caps constrain what TSVs can do in the near term, but the relief opens a defined pathway for on-chain equity trading where none previously existed and gives the Commission and market participants a controlled environment in which to observe how tokenized equities interact with traditional markets.

    The Commission has solicited comment on ten detailed questions, including whether to make the exemptions permanent, how to address potential market fragmentation, whether the relief should extend beyond tokenized NMS stock, and whether regulated participants need additional Regulation NMS relief. The comment process will likely surface substantive disagreement among technology platforms, issuers, intermediaries, investor advocates, and traditional market participants. The comment process and five-year window together will determine whether this model becomes the foundation for a permanent framework.

    Because the Order is an agency action, not legislation, the durability of the framework depends on the composition of the Commission that granted it, which bears directly on how much weight a business can put on it. As a practical matter, however, unwinding the Order would become progressively harder if capital and infrastructure accumulate behind compliant venues during the five-year window.

    Follow this and other critical developments on Latham’s US Crypto Policy Tracker.