SEC Issues “Innovation Exemption” for On-chain Trading of Tokenized U.S.-Listed Stocks

Effective as of September 17, 2026, the U.S. Securities and Exchange Commission (SEC or the Commission) issued a five-year, conditional exemptive order (the Innovation Exemption) that permits National Market System (NMS) stock (generally including any stock trading on national securities exchanges) to be tokenized and traded on-chain through automated market makers and liquidity pools (together, AMM Liquidity Pools).¹ The Innovation Exemption, a highly anticipated component of SEC Chairman Paul S. Atkins’s Project Crypto agenda, exempts qualifying tokenized securities venues (TSVs) from the definition of “exchange” (the TSV Exemption) and qualifying liquidity providers, defined as Covered Firms, from the definition of “dealer” (the Covered Firm Exemption), in each case through September 17, 2031.² A TSV therefore may operate outside the national securities exchange and alternative trading system (ATS) framework and outside Regulation NMS, subject to the conditions and caps described below.

The Innovation Exemption reaches every issuer of a stock traded on a national securities exchange, including U.S. public companies, not only firms active in digital asset markets. An NMS stock may be tokenized (1) by or on behalf of the issuer or (2) by an unaffiliated third party (collectively, Tokenized NMS Stock)³ and made available for trading on a TSV. Where a third party tokenizes an unrelated issuer’s security, the TSV must give the issuer written notice and 30 calendar days to object before trading begins. Institutional and retail investors alike may trade on a TSV, with self-custody,⁴ 24/7 trading, fractional shares, and near-instantaneous settlement. The conditions the Commission has attached to the Innovation Exemption include ensuring identical economic and voting rights to the underlying shares, significant public disclosures and updates to the SEC, issuer notice and objection, public transaction data, coordinated trading halts, symbol and volume caps, and a prohibition on leverage. The Commission describes the relief as an interim measure pending rulemaking.

What This Means for Issuers

Two paths to tokenization. A public company (or other issuer of NMS stock) may tokenize its own shares (directly or through an agent) for trading on a TSV, or an unaffiliated third party may tokenize the issuer’s shares without the issuer’s involvement. The Innovation Exemption grants no relief to the entity doing the tokenizing, but provides relief to TSVs and liquidity providers.

Issuer Notice and the 30-day objection window. Before a TSV makes third-party-tokenized stock available for trading, it must send written notice to the issuer at the physical or email address of the issuer’s principal executive offices as listed on the cover page of its Exchange Act reports. Trading may not begin until at least 30 calendar days after the issuer receives the notice, and the issuer has until the 30th calendar day after receipt to object in writing to the TSV. A timely objection bars that TSV from making the third-party-tokenized stock available for trading, and the TSV must disclose the objection in its public filing (the TSV Public Filing). If the issuer does not object, trading in its tokenized stock may proceed. The Innovation Exemption does not contemplate a means of objecting after the 30 days have elapsed and a TSV is not required to provide notice where the issuer has sponsored the tokenization itself.

Shareholder rights and market safeguards. The TSV must verify that each Tokenized NMS Stock carries the same economic and voting rights as the underlying stock, and a third-party tokenization agent must pass through dividends and voting rights and distribute proxy materials to holders at no cost to the issuer. The Commission identifies the risk of maintaining the shareholder register given on-chain transfers, and potential price dislocation or other adverse effects on the price of the underlying stock from AMM pricing, as considerations an issuer may consider in deciding whether to object to the notice. On-chain trading in any one stock is capped at a small fraction of exchange volume, a TSV must halt trading whenever the primary listing exchange halts the associated stock, and TSV volume is not reported to the consolidated tape.⁵

What public companies and other NMS stock issuers may wish to do now:

• Confirm the notice channel is monitored. The 30-day clock runs from receipt at the principal executive office address, physical or email, shown on the cover page of the company’s Exchange Act reports. Issuers should confirm who receives mail and email at that address and that any TSV notice is escalated promptly to the legal department or corporate secretary.
• Form a view before a notice arrives. Because the objection operates against the notifying TSV, an issuer may receive notices from more than one venue and should be prepared to respond consistently. An objection is not private as the TSV must disclose it in its TSV Public Filing. Because the Innovation Exemption gives an issuer no right to information from a requesting venue beyond the TSV’s Public Filing, issuers may wish to prepare diligence questions in advance. Relevant considerations may include shareholder register maintenance, the potential for on-chain prices to diverge from exchange prices, investor relations, shareholder activism issues, and the company’s broader posture toward digital asset markets.
• Prepare for stockholder and market questions. Issuers whose stock begins trading on a TSV should expect questions from stockholders, analysts, and proxy advisors about voting, dividends, and record ownership and may wish to consider whether on-chain trading of their stock merits attention in their periodic disclosures.
• Assess the impact of 24/7 trading on compliance. Because a TSV may trade around the clock while the primary listing exchange does not, issuers should consider the implications for their insider trading, Regulation FD, and disclosure control policies and for their ability to manage the disclosure of material news, such as a significant M&A transaction.
• Consider briefing the board. Given the implications for investor relations, trading, and compliance, the Innovation Exemption and the company’s intended approach may be an appropriate item on which to advise the board.
• Consider commenting. The Commission has asked 10 questions, including whether the exemptions should be made permanent and whether the symbol and volume caps are correctly calibrated, and has not set a comment deadline.⁶

What This Means for Other Market Participants

• Investors and investment advisers. The Innovation Exemption opens a new source of liquidity in U.S.-listed stock to any investor that satisfies a TSV’s access standards, including sanctions and illicit-finance screening. Participants will typically hold Tokenized NMS Stock in their own blockchain wallets and will be able to trade around the clock and in fractional amounts. Advisers seeking this access for client accounts will need to work through how the custody rule under the Investment Advisers Act applies to self-custodied tokens, how to satisfy best execution on a venue whose prices are set by pool ratios rather than by reference to consolidated quotations, and how to value positions held in tokenized form. The Innovation Exemption does not address these questions.
• Broker-dealers, exchanges, and ATSs. The Innovation Exemption creates a path to operate an on-chain venue for NMS stock that does not require national securities exchange or ATS registration or compliance, including Regulation NMS and the fair access requirements of Rule 301(b)(5) of Regulation ATS, within the symbol and volume caps. An entity registered with the Commission for unrelated securities activity may operate a TSV, for example through an affiliate, but must keep the TSV’s operation separate from its registered activity. Registered broker-dealers may trade on a TSV as participants, but the relief does not extend to them. Broker-dealers remain subject to certain Regulation NMS rules, including the Vendor Display Rule (Rule 603), Trade Through Rule (Rule 611), Sub-Penny Rule (Rule 612), Consolidated Audit Trail reporting (Rule 613), and to FINRA Rule 6110 reporting for transactions effected otherwise than on an exchange.⁷ Comment question 7 asks whether relief for broker-dealer participants is warranted.
• Market makers and liquidity providers. The Commission states that liquidity provision alone does not constitute dealer activity and anticipates that absent other indicia of dealer activity, AMM liquidity providers typically would be traders rather than dealers. The Covered Firm Exemption extends to firms that also quote pricing to customers or commit capital under arrangements with a venue. However, a Covered Firm’s securities activities must be limited to trading Tokenized NMS Stock in an AMM Liquidity Pool operating under the TSV Exemption, so a firm with other securities business, including a registered broker-dealer, cannot itself qualify. A Covered Firm must trade solely for its own account, hold no customer assets, keep records of its financial capacity and its liquidity arrangements and compensation (including any fees, tokens, or incentives received for reaching volume thresholds), disclose on any public website that it is not a registered broker-dealer, and notify the Commission of its business model, risk controls, and arrangements. Neither the firm nor any affiliate may be subject to statutory disqualification.
• Prospective TSV operators. A TSV may operate for five years without registering as an exchange or ATS if it meets the conditions summarized under “Key Conditions” below. The principal undertaking is the TSV Public Filing, published at least 30 calendar days before operating, that covers 30 disclosure items spanning governance, access, ledger architecture, upgrade authority, fees, Maximal Extractable Value (MEV), systems safeguards, clearing arrangements, and risks and that must be kept current on a defined cadence.⁸ Operators will also need to reach their own conclusion on broker-dealer status — the TSV Exemption removes a TSV from the “exchange” definition but does not separately exempt it from Section 15(a) of the Exchange Act. The Commission characterizes TSV functions as exchange rather than brokerage activities and contemplates that a compliant TSV may operate without registration for the activities covered by the TSV Exemption, but the Innovation Exemption preserves “any other applicable laws,” and a TSV whose activities extend beyond venue functions (e.g., soliciting transactions, handling participant orders or assets, or routing) would need to evaluate broker status independently.
• Fund sponsors and stablecoin issuers. Tokenized money market funds and non security crypto assets, including payment stablecoins issued under the GENIUS Act, are permitted trading pairs on a TSV for Tokenized NMS Stock. The Innovation Exemption provides no relief under the Investment Company Act and flags Section 18, Section 22(d), and Rule 22c-1 as potential issues for tokenized funds.⁹
• Tokenization agents, custodians, and transfer agents. The relief runs to venues and liquidity providers only. An entity that tokenizes an NMS stock, whether on behalf of the issuer or as an unaffiliated third party, takes no benefit from the Innovation Exemption and remains subject to the analysis in the January 2026 SEC staff Statement on Tokenized Securities.¹⁰ Clearing agency and transfer agent status are not addressed.

Key Conditions and Limits

Symbol and volume caps. For Tier 1 stocks under the Limit Up–Limit Down Plan (LULD Plan) (principally S&P 500 and Russell 1000 constituents), a TSV may trade no more than 75 symbols, and its volume in any one stock may not exceed 0.25% of that stock’s prior-month average daily volume as reported to the consolidated tape. For Tier 2 stocks, the limits are 250 symbols and 2.5%.¹¹ Both counts aggregate across affiliated TSVs. A first breach of a volume cap in a Tokenized NMS Stock requires only going-forward compliance; each subsequent breach requires a three-month pause in that Tokenized NMS Stock. Symbol caps carry no comparable grace and therefore a TSV that breaches a symbol cap can no longer rely on the Innovation Exemption.

TSV conditions. A TSV must be a U.S. person, and no person in its group may be subject to statutory disqualification. As a U.S. person, a TSV must comply with the economic and trade sanctions programs administered by the Office of Foreign Assets Control (OFAC), including the prohibition on transacting with persons on the SDN List and implementing a permissioned screening process for all TSV trading participants. Each TSV’s smart contracts must be auditable, public, and deployed on a public, permissionless ledger. A TSV may not conduct primary issuance, and all offers and sales of Tokenized NMS Stock must be registered or exempt. A TSV must publish U.S. dollar-denominated transaction data within 10 minutes of each trade; halt trading when the primary listing exchange halts the underlying stock; notify participants and the Commission of significant operational events; refrain from any lending, hypothecation, or extension of credit; disclaim SEC registration; and keep books and records in the United States, preserved for three years after the exemption ends, with consent to Commission examination. The TSV Public Filing must describe any policies addressing MEV or state that there are none, but the Commission does not prescribe MEV mitigation measures.

Regulation NMS. Because a TSV is exempt from the “exchange” definition, it is not a trading center or market center for Regulation NMS purposes, and Rules 605, 610, 611, 612, and 613 do not apply to it. The Commission’s stated rationale is that AMM pricing, which derives from the ratio of assets in a pool without reference to external quotations, is difficult to reconcile with the trade-through, quotation dissemination, and minimum pricing increment rules.¹² Reliance on either exemption gives rise to no presumption that the TSV is an exchange or that the liquidity provider is a dealer.

Next Steps

The Commission describes the Innovation Exemption as an “interim, targeted measure,” and Chairman Atkins has stated that it “must be followed by durable rulemaking.”¹³ Sidley will continue to monitor developments and will issue further updates as the Commission acts on the comment file.

Please contact us if you would like assistance in evaluating or planning for a notice received as the issuer of an NMS stock, in assessing whether a contemplated venue or liquidity provision model fits within the exemptions, in analyzing how the exemptions intersect with an SEC-registered entity’s existing obligations under the Exchange Act and Regulation NMS, or in preparing a comment letter on any of these or other open questions the Commission has identified.

Knowledge management lawyer Daniel Engoren contributed to this Sidley Update.