SEC issues landmark “Innovation Exemption” order for tokenized securities venues

Key takeaways

• The Order allows qualifying blockchain venues to match buyers and sellers of tokenized stocks without registering as a stock exchange or operating as an alternative trading system.
• Firms that supply their own capital to these liquidity pools can avoid registering as securities dealers, provided they meet the Order’s conditions.
• Both exemptions are temporary—they expire on September 17, 2031.
• The Order leaves important questions unanswered, including how investment advisers should handle custody of tokenized assets, how to evaluate trade execution quality when Tokenized Securities Venue (TSV) prices are set by algorithm rather than by reference to the national best bid and offer (NBBO), whether funds regulated under the Investment Company Act of 1940 can participate at all, what types of assets can be deposited into liquidity pools, how tokenized stocks fit into order handling, trade routing and customer-protection frameworks for broker-dealers, and how firms should address smart-contract risks and the risk that deposited assets lose value relative to their value if firms simply held the assets (so-called “impermanent loss”) in compliance policies.

Background

This Order is the latest step in the SEC’s crypto asset agenda. That agenda began in early 2025 with the formation of the Crypto Task Force and the President’s Working Group on Digital Assets, continued with a series of staff statements on tokenized securities, and includes the recently proposed Regulation Crypto Assets. The Order was issued promptly after the CLARITY Act failed to advance in Congress, on the same day that the SEC held its roundtable on 24-hour trading.

The Order defines a “Tokenized NMS Stock” as a digital version of an NMS-listed stock, created by either the issuer or an unaffiliated third party. Importantly, the definition excludes tokenized synthetic exposure instruments, such as derivatives, structured products, tokenized linked securities, security-based swaps, rights and warrants. A TSV is a platform that matches buyers and sellers of tokenized stocks through automated market makers (AMM) and liquidity pools (LPs and, together with AMMs, AMM LPs) and enforces access standards governing who may participate.

An AMM is a smart contract (self-executing code on the blockchain) that sets prices algorithmically based on the ratio of the assets in the pool, replacing the traditional market-maker function with code-based pricing. Each LP is a portfolio of crypto assets that is algorithmically bound and traded based on the terms of the smart contracts that compose the AMM LP. Liquidity providers commit assets to the LP and, in return, receive “LP tokens” that are proportionate to the percentage of assets they have contributed to the LP and a fee paid by liquidity takers as incentive for depositing assets in the LP.

The smart contracts used by a TSV must be auditable, public and deployed on a “permissionless” block chain to provide transparency. However, the AMM LP where the tokenized stocks trade must operate on a “permissioned” basis, meaning only credentialed wallet addresses may participate. Requiring TSVs to operate on open, permissionless blockchain chains is designed to enhance transparency and support market integrity. 

The exemptive framework

• Who can operate. The TSV must be a US entity, must make its trading software publicly auditable on an open (permissionless) public blockchain, must screen participants against the OFAC sanctions list and must publish clear rules about who can trade.
• Notice requirements. The TSV must post a detailed public notice at least 30 days before launch and update it whenever anything material changes. The notice must include, among other things, a disclaimer that the TSV is not registered with the Commission, an overview of the TSV’s structure, governance and operations, permissioning criteria and participant eligibility, the securities and crypto assets available for trading, a description of the distributed ledger technology and trading procedures, fees and compensation structures, known material risks and systems safeguards.
• Issuer permission. Before listing a tokenized NMS stock tokenized by a third party unaffiliated with the underlying issuer, the TSV must provide written notice to that issuer (Issuer Notice). Trading may not begin until at least 30 calendar days after the issuer receives the Issuer Notice, giving the issuer time to review and potentially block the listing.
• What can be traded. The exemption covers only secondary market trading; TSVs may not conduct IPOs or primary offerings. Token holders must retain the same rights and privileges as traditional shareholders, including voting and dividends. Volume and the number of listed stocks are capped; a venue that repeatedly exceeds its cap must pause trading in the affected stock for three months.
• Operational safeguards. All transactions must be priced in US dollars and reported in machine-readable form within 10 minutes. The TSV must halt trading whenever the primary exchange halts, promptly disclose significant operational problems and may not offer margin, lending or asset pledging.
• Records and conduct. The TSV must maintain US-based records for at least three years, permit Commission examination, avoid claiming Commission endorsement, and comply with federal anti-fraud rules. Persons with regulatory disqualifications may not operate or control a TSV.
• No Regulation NMS coverage. Because a TSV operates outside the national market system, the standard rules governing order routing, trade-through protection and consolidated audit trails do not apply.

The table below summarizes the volume and listing caps:

Dealer exemption. Firms that commit proprietary capital to a TSV’s LPs might be required to register as dealers under the Exchange Act if they were to engage in certain activities, such as providing pricing to customers. The Order exempts qualifying firms from that requirement, subject to the conditions below. Importantly, a firm that chooses not to rely on the exemption does not automatically become a dealer; the ordinary dealer-trader analysis still applies.
Who qualifies. A “Covered Firm” is any firm that provides liquidity to a TSV’s pools using only proprietary capital—not customer funds. The firm may not hold, manage or exercise custody over customer assets. This requirement distinguishes a principal trader acting for its own account from a dealer intermediating on behalf of customers.

• Exempt venues only. The firm may provide liquidity only to pools on a TSV that qualifies for the exchange exemption described above. The firm may operate across multiple TSVs, provided each one independently qualifies for the TSV Exemption.
• Records and disclosure. The firm must maintain financial records and track its capital contributions. It must also publicly disclose that it is not a registered broker-dealer and that it may receive fees or other incentives from the TSV.
• Commission notification. Before commencing operations, the firm must notify the Commission of its business model, risk controls, venue agreements and incentive arrangements. The firm must also consent to Commission examination.
• Conduct rules. Persons subject to statutory disqualification may not act as Covered Firms, and federal anti-fraud and anti-manipulation rules continue to apply.

Key observations for investment advisers

Best execution. TSV prices are set by algorithm, not by reference to the best available price on traditional exchanges (i.e., the NBBO), and standard trade-through protections do not apply. Investment advisers that wish to trade tokenized securities on TSVs may want to consider how to satisfy their fiduciary obligations owed to clients, including the duty to seek best execution. This may include, for some advisers, comparing TSV prices against real-time exchange quotes, setting internal thresholds for acceptable price differences, and evaluating risks unique to automated pools, including the ability of blockchain validators to profit by reordering transactions (known as Maximal Extractable Value) and the risk of impermanent loss.

Custody. The Order does not modify the Commission’s custody rule, which requires advisers to hold most client assets with a qualified custodian. Whether any existing custodian can safely hold tokenized NMS stocks or LP tokens on a blockchain remains unclear. TSVs enable investor self-custody through crypto wallets, which the Order acknowledges as a benefit—onchain custody can reduce reliance on intermediaries and increase investor control. But for advisory clients, self-custody creates tension with existing regulations: if the client (rather than the adviser) holds the private keys, the adviser may avoid triggering the custody rule but loses the ability to place trades or rebalance portfolios without the client’s direct involvement. Self-custody also carries security risks, as demonstrated by a recent hack in which clients who chose to self-custody lost nearly $116 million in bitcoin. Advisers considering TSV participation may consider evaluating key custody questions: who controls the private keys, whether the custodian can support a surprise examination and how LP tokens should be classified within the custody framework.

Investment Company Act. The Order provides no relief under the Investment Company Act of 1940. Registered investment companies, including mutual funds, ETFs and closed-end funds, as well as business development companies remain subject to all existing statutory and regulatory constraints. Before participating in TSV activity, these funds should evaluate several threshold questions: whether tokenization would create a separate class of shares; how to address transaction pricing issues for redeemable securities; whether transactions in tokenized fund shares can occur on a TSV consistent with Section 22(d); how to classify tokenized assets under concentration limits and liquidity requirements; how to value onchain assets; and whether LP tokens qualify as securities under the Investment Company Act. The Commission appears willing to grant relief from certain of these requirements, but the scope of that relief has not yet been defined.

Compliance updates. Advisers participating in these markets should update their written compliance policies, Form ADV disclosures and codes of ethics to address tokenized-securities trading, liquidity provision, smart-contract risks and the conflicts of interest these activities create, including trading the adviser's own account against client orders on the same platform, earning fees or rewards that create an incentive to recommend certain tokens over other investments, receiving undisclosed payments from token issuers or DeFi platforms and acting as both a liquidity provider and a fiduciary when the adviser's financial interest in a liquidity pool may conflict with its duty to get the best result for clients.

Broker-dealer implications

The Order also does not modify broker-dealer registration requirements, FINRA membership obligations, or existing conduct rules. Broker-dealers considering TSV activity should focus on the following issues.

• Market structure gaps. TSVs operate outside the national market system, so Regulation NMS rules on order routing, trade-through protection and consolidated audit trails do not apply. However, broker-dealers that choose to become TSV Participants are still subject to Regulation NMS, and such firms may wish to clarify their best-execution and trade-reporting requirements, among other operational and compliance challenges, with FINRA before commencing TSV activity.
• Scope of activity. A broker-dealer can establish a separate Covered Firm affiliate for proprietary liquidity provision to receive fees and LP tokens. However, a broker-dealer that chooses to facilitate trading by its customers on a TSV will remain subject to its full regulatory obligations, including order handling, customer protection and books and records obligations.
• Capital and customer protection rule. Tokenized stocks and LP tokens raise unresolved questions about net capital calculations and possession-or-control requirements for onchain assets. Firms should consider addressing these issues with FINRA and counsel before commencing TSV activity.
• Anti-money laundering. Existing AML obligations remain in effect, including customer identification, suspicious activity reporting and OFAC sanctions screening. Firms should consider evaluating each TSV’s participant-verification procedures against their own compliance programs to ensure the TSV activity does not run afoul of the firm’s policies and procedures.

Broader context and next steps

Both exemptions expire on September 17, 2031, unless the Commission extends or makes them permanent. The Commission has solicited public comment on whether the exemptions should continue, which securities should be eligible, whether the volume caps are appropriate, and how the Order interacts with other pending rulemakings. Key unresolved issues remain, including custody arrangements, best execution methodologies, LP token treatment, broker-dealer capital requirements and how the Order fits within the broader regulatory landscape—particularly the proposed trade-through rule elimination, dealer definition amendments and the GENIUS Act stablecoin framework.

Firms should consider:

• Evaluating whether participating on a TSV—either as a user or as a liquidity provider—aligns with the firm’s business model, client base and risk tolerance.
• Identifying and addressing compliance gaps—including custody arrangements, trade execution procedures, disclosure obligations, capital requirements, the customer protection rule and AML controls—before commencing any TSV activity.
• Monitoring parallel SEC rulemakings—including the proposed trade-through rule elimination, dealer definition amendments, Regulation Crypto Assets, transfer agent proposal and GENIUS Act implementation—and calendar the September 2031 exemption expiration date.

Our team is monitoring these developments closely and is prepared to help clients assess the Order’s operational impact and prepare comment submissions. Please contact us with any questions.

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If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.