SEC Issues Innovation Exemption for On-Chain Trading of Tokenized NMS Stocks

On September 17, 2026, the U.S. Securities and Exchange Commission (the SEC or the “Commission”) issued an order establishing a temporary “Innovation Exemption” intended to facilitate on-chain trading of tokenized National Market System (NMS) stocks.[1] The Order provides two forms of conditional relief under the Securities Exchange Act of 1934 (the “Exchange Act”): an exemption from the definition of “exchange” for certain Tokenized Securities Venues (TSVs) and an exemption from the definition of “dealer” for certain firms providing liquidity to those venues, thus allowing TSVs to operate without registering with the SEC as an exchange or a dealer.

The Commission framed the Innovation Exemption as an opportunity to allow market participants to experiment with on-chain securities trading while giving the SEC a chance to observe how those markets develop and consider whether broader rulemaking is appropriate. In particular, the Order allows qualifying venues to use automated market makers and liquidity pools (“AMM Liquidity Pools”) to trade tokenized NMS stocks without having to fit those systems into rules designed primarily for traditional securities exchanges and order-book markets. The exemptions took effect on September 17 and are scheduled to expire after five years. The SEC is also seeking comment on possible changes to the exemptions and potential next steps as it considers a longer-term framework for on-chain securities trading.

Exemption for Tokenized Securities Venues

The first part of the Innovation Exemption addresses the regulatory treatment of the trading venue itself. A TSV generally is a venue that brings together buyers and sellers of tokenized NMS stocks through one or more AMM Liquidity Pools and sets standards governing who may participate.

Pursuant to the Order, a qualifying TSV is exempt from the Exchange Act definition of an “exchange.” As a result, the TSV does not need to register as a national securities exchange or rely on the alternative trading system (ATS) framework under Regulation ATS. The Regulation NMS requirements that apply to exchanges, ATSs, trading centers, and market centers likewise generally do not apply to trading covered by the exemption.

The relief reflects the Commission’s recognition that some existing market structure requirements do not translate cleanly to AMM-based trading. Unlike a traditional exchange, where buyers and sellers post competing bids and offers, an AMM may determine prices algorithmically based on the assets available in a liquidity pool. Requirements built around protected quotations, order books, and trade-throughs therefore can be difficult to apply without overhauling the underlying AMM model.

What Can Trade on a TSV?

The Order covers tokenized NMS stocks, generally defined as tokenized versions of exchange-listed stocks that are created either by or on behalf of the issuer or by an unaffiliated third party. The tokenized stock must give its holder the same rights and privileges as the corresponding traditional stock, including applicable voting, dividend, and liquidation rights.

The exemption does not extend to synthetic instruments that merely provide economic exposure to an NMS stock. A qualifying tokenized NMS stock may trade against another tokenized NMS stock, certain non-security crypto assets, including qualifying payment stablecoins, or tokenized money market funds.

The exemption is also limited to secondary-market trading. It does not provide separate relief for primary issuances or initial offerings of tokenized securities.

Key Conditions

The Order pairs the exchange exemption with a number of conditions intended to preserve basic investor protections, transparency, and SEC oversight. Among the principal requirements are:

• Public blockchain and permissioned access. The TSV’s smart contracts must be public, auditable, and deployed on a public, permissionless distributed ledger, while access to trading remains limited to participants that meet the TSV’s standards.
  
• Notice and disclosure. TSVs must provide advance public notice before beginning operations and disclose key information about their trading model, access standards, fees, conflicts, technology, and risks.
  
• Issuer protections. A tokenized stock must provide the same shareholder rights as the corresponding traditional stock. If an unaffiliated third party tokenizes the stock, the issuer must receive advance notice and an opportunity to object to trading on the TSV.
  
• Trading limits. The Order limits both the number of NMS stocks that a TSV may make available and the amount of trading in each stock, with different limits for Tier 1 and Tier 2 NMS stocks.
  
• Transaction transparency. TSVs must publicly report specified transaction and liquidity-pool information in a machine-readable format shortly after trades occur.
  
• Trading halts. A TSV must stop trading a tokenized stock when trading in the corresponding traditional stock is halted or suspended on its primary listing exchange.
  
• No leverage. TSVs may not provide financing or extend credit to participants to purchase tokenized NMS stocks.
  
• SEC oversight. TSVs must maintain specified books and records and make them available to the SEC.
  

The exemption does not displace the federal securities laws more broadly. The Exchange Act’s anti-fraud and anti-manipulation provisions continue to apply, as do other registration and regulatory requirements to the extent they are not covered by the Order.

Exemption for Certain Liquidity Providers

The second part of the Innovation Exemption addresses when firms providing liquidity to AMM Liquidity Pools could be treated as “dealers” under the Exchange Act.

The Exchange Act generally defines a “dealer” as a person engaged in the business of buying and selling securities for its own account, but excludes a person that buys and sells securities for its own account “not as a part of a regular business,” the statutory exclusion generally known as the “trader” exception.[2] The distinction is important because both dealers and traders may buy and sell securities for their own accounts, but a dealer does so as part of a regular securities business, while a trader does not. A person that falls within the dealer definition generally must register with the SEC as a broker-dealer and become a FINRA member, unless an exception or exemption is available. Whether a particular firm is acting as a dealer or a trader ultimately depends on the facts and circumstances of its activities.

The Order states that providing liquidity, by itself, does not make a firm a dealer. The Commission therefore expects that, absent other indicia of dealer activity, a firm that provides liquidity to an AMM Liquidity Pool generally would be acting as a trader rather than a dealer. The Commission recognized, however, that some liquidity providers may engage in additional activities that look more like traditional dealing, for example, providing pricing to customers or exercising control over pricing or inventory or committed liquidity under an agreement or other arrangement.

The Order addresses that uncertainty by providing a temporary exemption from the dealer definition for qualifying “Covered Firms.” Broadly, the exemption is available to firms that use their own capital to provide tokenized NMS stock to an AMM Liquidity Pool on a qualifying TSV, including firms that engage in additional activities that otherwise could be viewed as indicia of dealing. In other words, the exemption provides additional certainty for liquidity providers whose activities may go beyond ordinary proprietary trading and raise dealer-status questions.

The relief is limited to a Covered Firm’s activities involving tokenized NMS stocks through AMM Liquidity Pools covered by the Innovation Exemption. A Covered Firm must trade solely for its own account and may not hold or take custody of [GC1.1]customer assets. Covered Firms also are subject to targeted recordkeeping, disclosure, and SEC notice requirements, and remain subject to the federal securities laws’ antifraud and antimanipulation provisions. Because dealer status remains a facts-and-circumstances inquiry, the SEC also makes clear that a firm’s reliance on the exemption does not itself create a presumption that the firm otherwise would be a dealer.

Looking Ahead

The Innovation Exemption marks a significant step in the SEC’s effort to develop a regulatory framework for on-chain securities markets. Rather than requiring AMM-based trading to operate under rules developed for traditional exchanges and dealers, the Order creates a limited framework for market participants to test these models while the Commission evaluates how they operate in practice.

The relief is temporary, and the SEC is seeking comment on whether the exemptions should be modified or made permanent, including whether additional securities should be permitted to trade on TSVs and whether changes should be made to the conditions applicable to TSVs and Covered Firms. Market participants considering the exemptions should therefore continue to monitor both experience under the new framework and the SEC’s broader work on tokenized securities and the scope of the dealer definition.

[1] See SEC, Order Granting Temporary Conditional Exemptive Relief, Exchange Act Release No. 34-106402, File No. 4-927 (Sept. 17, 2026) (the “Order”).

[2] See Exchange Act § 3(a)(5)(A)–(B), 15 U.S.C. § 78c(a)(5)(A)–(B); Order at 52–53 & nn.111–112. See also “Definition of Terms in and Specific Exemptions for Banks, Savings Associations, and Savings Banks Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934,” Exchange Act Release No. 34-47364, 68 Fed. Reg. 8,686, 8,688 (Feb. 24, 2003) (discussing the dealer/trader distinction).