On September 17, the SEC issued a five-year exemptive order, dubbed the “Innovation Exemption,” granting temporary, conditional relief to facilitate the permissioned trading of tokenized National Market System (NMS) stock using automated market maker liquidity pools on public permissionless blockchains. The order noted the technology can potentially enable investor self-custody, around-the-clock trading, fractional ownership of shares, and near-instantaneous settlement. The relief covers only secondary trading and excludes synthetic tokenized securities such as third-party tokens providing exposure to an underlying security without representing the security itself.

The order provides two exemptions, both expiring September 17, 2031. First, it exempts entities known as “Tokenized Securities Venues” from the definition of “exchange” under Section 3(a)(1) of the Exchange Act; qualifying venues would not be subject to Regulation NMS. Venues must be U.S. persons subject to OFAC sanctions compliance. Second, the order exempts qualifying liquidity providers, termed “Covered Firms,” from the definition of “dealer” under Section 3(a)(5) of the Exchange Act. To qualify, a Covered Firm must supply tokenized NMS stock using proprietary capital, trade solely for its own account, and not hold or custody customer assets. Anti-fraud and anti-manipulation provisions of the federal securities laws continue to apply to all participants.

The order imposes tiered trading limits: venues trading Tier 1 tokenized NMS stock — comprising securities in the S&P 500 Index, Russell 1000 Index, and certain exchange-traded products — cannot exceed 75 symbols and 0.25 percent of the prior month’s average daily share volume, while Tier 2 tokenized NMS stock cannot exceed 250 symbols and 2.5 percent of such volume. Additional conditions require: (i) that smart contracts used by a venue be auditable, public, and deployed on a public permissionless distributed ledger; (ii) that a venue verify tokenized stock provides holders the same rights and privileges as traditional NMS stock of an equivalent class; (iii) that a venue provide written notice and a 30-day objection window to the issuer of the underlying NMS stock before trading third-party tokenized securities; (iv) that a venue halt trading concurrently with any stoppage on the primary listing exchange; and (v) that a venue provide public notice about its operations, trading activities, and the trading activities of its affiliates. The order solicits public comment on all aspects of the exemptive relief, including whether the exemptions should be made permanent.