The U.S. Securities and Exchange Commission (SEC) has granted a five-year approval for limited trading of tokenized stocks on select on-chain platforms. This conditional temporary exemption, known as the Innovation Exemption, was issued on September 17.
This exemption applies to Tokenized Securities Venues (TSV), which will be allowed to facilitate trading of tokenized NMS stocks via automated market makers (AMM) and restricted liquidity pools.
The SEC has temporarily exempted these platforms from being classified as an "exchange" under the Securities Exchange Act of 1934. An additional exemption applies to certain liquidity providers using their own capital: if conditions are met, they will not be deemed dealers.
A token can be issued by the issuer, a party acting on their behalf, or an independent third party. In any case, the token holder must receive the same rights as the owner of a regular share of the corresponding class, including the right to dividends and voting.
However, synthetic instruments that merely track the stock's value without granting the underlying security owner's rights are excluded.
If the tokenization is conducted by an independent third party, the TSV must notify the underlying stock issuer in writing beforehand. The company will have the opportunity to object and prevent trading of its asset on the TSV.
Trading Volume
The SEC has set limits on the number of available instruments and trading volumes, which will be based on the Limit Up-Limit Down levels used in the U.S. stock market to mitigate sharp price movements.
Platforms are required to regularly disclose transaction details in dollar terms. SEC Commissioner Mark Uyeda noted that they must report the price, size, and time of the transaction, pool address, its size at the end of the day, and daily trading volume.
TSVs must also reveal information about their operations, trading activity, and transactions involving affiliated parties. The smart contracts of the trading system must be public, available for auditing, and hosted on a permissionless public blockchain.
In the event of a trading halt for a regular stock on the primary exchange, the TSV must simultaneously suspend operations with its tokenized version.
SEC Chairman Paul Atkins emphasized that federal securities laws regarding anti-fraud and anti-manipulation will continue to fully apply to transactions under the new regime. Uyeda described the Innovation Exemption as a controlled mechanism, stating that the SEC will be able to monitor the operations of new platforms and market participants, gather data, and use it to develop long-term regulations.
This new exemption does not imply that tokenized stocks are no longer considered securities. In January, the SEC clarified that the asset format and ownership rights accounting methods do not alter the applicability of federal laws.
The Innovation Exemption temporarily relieves specific trading venues and liquidity providers from being classified as exchanges and dealers. The regulator has requested public comments on potential changes to the conditions and further steps for regulating on-chain trading.
It is worth noting that in March, the SEC allowed Nasdaq to initiate trading in tokenized stocks.
Subsequently, the New York Stock Exchange announced a partnership with the RWA platform Securitize.