Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

SEC’s Innovation Exemption Establishes a New Framework for Trading Tokenized Stocks

Skadden Publication / The Distributed Ledger: Blockchain, Digital Assets and Smart Contracts

Aaron K. Washington Alexander C. Drylewski Stuart D. Levi Daniel Michael

Executive Summary

  • What’s new: On September 17, 2026, the SEC approved a temporary, conditional exemption — the Innovation Exemption — to allow limited trading of tokenized stocks on Tokenized Securities Venues (TSVs). The Innovation Exemption also includes tailored relief for certain liquidity providers that provide liquidity in tokenized stocks.
  • Why it matters: The exemption provides time-limited regulatory certainty for TSVs looking to facilitate trading in certain tokenized securities and offer benefits to market participants, including enabling investor self-custody, around-the-clock trading, fractional ownership of shares, and near-instantaneous settlement.
  • What to do next: The SEC is actively soliciting public comments on all aspects of the order, including whether to make the relief permanent. Market participants should consider evaluating how the Innovation Exemption may affect their business models, product offerings or competitive positions.

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On September 17, 2026, the U.S. Securities and Exchange Commission (SEC) took a significant step toward integrating tokenized securities into the U.S. equities market by issuing the long-awaited “Innovation Exemption.” The exemption creates a temporary framework that allows certain tokenized National Market System (NMS) securities listed on U.S. national securities exchanges to trade on-chain through automated market makers on Tokenized Securities Venues (TSVs). TSVs would be allowed to operate permissioned automated market makers and liquidity pools without registering as national securities exchanges or alternative trading systems. The SEC also provided relief to firms that supply liquidity to these markets and might otherwise need to register as broker-dealers.

Tokenized Securities Venues

The Innovation Exemption is centered on TSVs. These trading venues bring together buyers and sellers of stock tokenized by or on behalf of the issuer, or by an unaffiliated third party (a tokenized NMS stock) through one or more automated market maker (AMM) liquidity pools. The exemption from the definition of “exchange” for TSVs is subject to a number of conditions designed to ensure the exemptive relief is in the public interest and consistent with the protection of investors. TSVs must be U.S. persons, comply with Office of Foreign Assets Control (OFAC) sanctions, maintain books and records for the exemption period plus three years, consent to SEC examinations and provide 30 days’ public notice before commencing operations.

Trading tokenized NMS stocks on a TSV is restricted by tight symbol and volume caps divided into two tiers. For Tier 1 stocks — which are constituents of the S&P 500 and Russell 1000 indexes as well as specific exchange-traded products — a TSV is restricted to 75 symbols and a volume cap of 0.25% of the asset’s average daily share volume from the previous month. Conversely, Tier 2 stocks cover all other eligible NMS securities (excluding rights and warrants). These are permitted up to 250 symbols and a higher volume cap of 2.5% of the prior month’s average daily share volume as recorded by an effective transaction reporting plan.

The TSV also must verify that any tokenized NMS stock made available for trading provides holders the same rights and privileges as traditional NMS stock of an equivalent class. Additionally, before making available for trading a tokenized NMS stock that is tokenized by a party other than the issuer, the TSV must provide written notice and an opportunity to object to the issuer of the underlying NMS stock.

The conditions also impose transparency and operational requirements on TSVs. Smart contracts used by a TSV must be auditable, public and deployed on a public, permissionless distributed ledger. A TSV also must stop trading in a tokenized NMS stock concurrently with any stoppage of trading in the underlying NMS stock on the primary listing exchange, ensuring that trading halts and other regulatory actions applicable to the underlying security are effectively mirrored in the tokenized market.

Finally, a TSV must provide public notice about its operations and trading activities, and the trading activities of its affiliates on the TSV. Taken together, these conditions are intended to promote market integrity and investor protection by ensuring that tokenized securities trading venues operate with a level of transparency and regulatory oversight comparable to that of traditional exchanges.

Notably, because TSVs that meet the conditions of the exemption are exempt from the definition of “exchange,” they would not be required to register as a national securities exchange or operate under the alternative trading system (ATS) exemption from registration. As a result, a TSV would not be considered a trading center or market center under Regulation NMS and would not be subject to the Regulation NMS rules that apply to exchanges, ATSs, trading centers or market centers.

Relief for Liquidity Providers

The Securities Exchange Act of 1934 defines a “dealer” as any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise. Depending on the facts and circumstances, certain liquidity-provider activity could constitute dealer activity, as opposed to trader activity, under Section 3(a)(5) of the Exchange Act. To address this uncertainty, the order includes a Covered Firm Exemption that exempts certain liquidity providers (Covered Firms) from the definition of “dealer” under the Exchange Act.

A Covered Firm’s securities activities must be limited to activities related to the trading of tokenized NMS stock in an AMM liquidity pool operating pursuant to the TSV Exemption. A Covered Firm must provide liquidity through a TSV, and trade solely for its own proprietary accounts. It is not permitted to hold or have custody of customer assets. It also must maintain records of liquidity provision, agreements and fees, and notify the SEC in writing of its role as a Covered Firm. A Covered Firm must prominently disclose on its website, if applicable, that it is not registered as a broker-dealer with the Commission; that it may enter into liquidity provision, including market making, agreements or arrangements with a TSV to provide liquidity to an AMM liquidity pool; and that it may receive fees, tokens or other incentives for providing liquidity or achieving certain volume thresholds.

Practical Implications of the Innovation Exemption

  • While many will welcome the exemption, market participants should carefully consider how it will impact their businesses. The exemption is intentionally narrow, which will allow the Commission to observe emerging venues and market participants as it considers long-term rules.
  • The limited nature and scope of the exemption, books and records, and public notice requirements, and trading volume caps, may address the regulatory asymmetry concerns many market participants feared the exemption would create.
  • Issuers should be aware that their securities may be tokenized by unaffiliated third parties, subject to a notice-and-objection process. Issuers may wish to develop internal policies regarding third-party tokenization of their stock.
  • Liquidity providers operating exclusively within AMM pools on qualifying TSVs may benefit from the Covered Firm Exemption, potentially avoiding broker-dealer registration. However, the exemption’s conditions are narrow, and firms should carefully assess eligibility.
  • Unless the SEC extends the relief or adopts permanent rules, the exemption can be relied on only for the next five years. TSVs and Covered Firms should consider having contingency plans in place in the event that the SEC does not come up with a permanent solution.

Conclusion

The Innovation Exemption represents a landmark step in the Commission’s broader “Project Crypto” initiative and responds to Congress’ inability to advance the CLARITY Act. By acting within its existing statutory authority, the SEC is seeking to bridge the gap between traditional capital markets infrastructure and emerging distributed ledger technology, while maintaining core investor protections. The next five years may help determine whether AMM-based trading of tokenized stocks is viable, and which elements of today’s market structure remain necessary when securities can be issued, traded, held and transferred online.

Related Reading

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.

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