The SEC's Innovation Exemption for Tokenized NMS Stock: A Summary of the New Conditional Relief

I. Overview

On September 17, 2026, the U.S. Securities and Exchange Commission (the "Commission") issued an order granting temporary, conditional exemptive relief (the "Innovation Exemption") intended to facilitate the permissioned trading of tokenized National Market System stock ("Tokenized NMS Stock") through automated market maker liquidity pools ("AMM Liquidity Pools"). The relief is scheduled to remain in effect from September 17, 2026 through September 17, 2031, subject to the Commission's ability to modify or terminate it. The Commission has also opened a public comment period, so aspects of the framework described below may be subject to change.

This alert summarizes the principal terms of the Innovation Exemption as set forth in the Commission's order. It does not purport to be a complete summary of the order, and it should not be relied upon as a substitute for reviewing the order and the accompanying fact sheet in full. Market participants considering activity under this framework should consult with counsel regarding their specific facts and circumstances.

II. Key Definitions

A. A "Tokenized Securities Venue" ("TSV") is generally defined as an entity that brings together buyers and sellers of Tokenized NMS Stock by providing one or more AMM Liquidity Pools for permissioned participants and by setting standards for access to trading on such pools.

B. "Tokenized NMS Stock" generally refers to an NMS stock tokenized either by, or on behalf of, the issuer, or by a third party unaffiliated with the issuer. The definition appears to exclude synthetic exposure instruments such as tokenized linked securities or security-based swaps, as well as rights and warrants.

C. A "Covered Firm" generally refers to a liquidity provider in an AMM Liquidity Pool that supplies Tokenized NMS Stock using proprietary capital and that may also engage in activity that could otherwise indicate dealer status, such as quoting prices or committing capital under an agreement.

III. Conditional Exemption from "Exchange" Status

The order conditions relief on compliance with a series of enumerated requirements, including the following, each of which warrants independent legal review by any entity considering TSV operation:

A. Scope of trading. Relief appears limited to secondary trading. Primary issuances and initial offerings do not appear to be permitted on a TSV, and all offers and sales are expected to remain registered or exempt under the Securities Act of 1933.

B. Equivalent rights. A TSV is expected to verify that Tokenized NMS Stock provides holders the same economic interest, dividend rights, voting rights, and liquidation rights as the underlying stock.

C. Tiered symbol and volume limits. The order appears to establish a two-tier structure: Tier 1, limited to 75 symbols and 0.25% of the prior month's average daily volume in the underlying stock, and Tier 2, limited to 250 symbols and 2.5% of average daily volume, in each case aggregated across affiliated TSVs. The order suggests that exceeding the volume threshold a first time results in a three-month trading pause for that symbol, while exceeding the symbol cap results in forfeiture of the exemption. Entities relying on this relief should independently confirm current thresholds, as the Commission has reserved the ability to modify them.

D. Opt-in notice. A TSV appears required to publish a detailed, plain-English public notice at least 30 calendar days before commencing operations, and to notify the Commission in writing within one business day of publication. The notice is expected to address governance, permissioning criteria, trading procedures, fees, conflicts of interest, systems safeguards, and related matters, and to be updated on specified timelines.

E. Operational restrictions. A TSV does not appear permitted to extend credit to participants, borrow or hypothecate assets on the venue, or represent that it is "registered" with or "approved" by the Commission.

F. Recordkeeping. A TSV appears required to maintain records in the United States, retain them for three years following expiration of the exemption, and produce them to Commission staff upon request.

IV. The Issuer Notice Process

Where a third party unaffiliated with an issuer seeks to tokenize that issuer's stock for trading on a TSV, the order appears to require written notice to the issuer at the address reflected in its Exchange Act filings, followed by a 30-calendar-day period during which the issuer may object. If a timely objection is delivered, the TSV does not appear permitted to list the stock, and is expected to disclose the objection in its public notice within five business days. Issuers subject to Exchange Act reporting obligations may wish to establish an internal process for identifying and responding to such notices within the applicable window, as the consequences of inaction are not addressed in this alert and should be evaluated separately.

V. The Covered Firm Exemption from Dealer Registration

The order appears to provide conditional relief from dealer registration under Exchange Act Section 3(a)(5) for Covered Firms, subject to conditions that generally include trading solely for the firm's own account, not holding or custodying customer assets, maintaining specified records, and publicly disclosing that the firm is not a registered broker-dealer. This relief appears narrowly scoped to activity related to AMM Liquidity Pool trading under the Innovation Exemption and should not be assumed to extend to other activity.

VI. Matters the Exemption Does Not Appear to Address

The order does not appear to affect the antifraud or antimanipulation provisions of the federal securities laws, nor the Investment Company Act of 1940. A registered broker-dealer or exchange that operates or participates in a TSV should evaluate what separation may be required between that activity and its existing registered business.

VII. Considerations for Market Participants

This summary is general in nature and is not intended to address the application of the Innovation Exemption to any particular entity, transaction, or set of facts. Whether and how the exemption applies, and what steps, if any, a given market participant should take in response, will depend on that participant's specific circumstances and should be assessed with the assistance of counsel. Nothing in this alert should be understood as a determination that any particular activity is, or is not, permissible under the exemption.

Kaelus Law advises TSV participants, issuers, and institutional investors on Innovation Exemption compliance, including dealer-registration analysis and Issuer Notice response planning. If you're evaluating a role under this framework, we'd welcome the conversation.

Frequently Asked Questions

Is the Innovation Exemption a new rule?
Based on our review of the order, it does not appear to amend any existing SEC rule. It instead appears to condition temporary relief from certain existing requirements on compliance with the terms described in the order. Whether it will lead to permanent rulemaking is not yet known.

Does this exemption apply to my company automatically?
No. The relief appears to apply only to entities that qualify as a TSV or a Covered Firm and that satisfy the applicable conditions. Whether a particular company or activity falls within scope requires individualized analysis.

Can a company prevent its stock from being tokenized by a third party?
The order appears to provide issuers with a notice-and-objection mechanism within a defined window. Whether this operates as a practical means of preventing tokenization in a given case depends on the specific facts and has not been tested. Companies with questions about this process should consult counsel.

Does this exemption allow companies to raise capital through tokenized stock?
Based on our reading of the order, the relief appears limited to secondary trading, not primary issuances. Questions about capital-raising activity involving digital assets should be directed to counsel separately.

How long will this exemption remain available?
The order indicates the exemption is scheduled to run from September 17, 2026 through September 17, 2031, subject to the Commission's ability to modify, extend, or terminate it earlier. Market participants should not assume the current terms will remain unchanged for the full period.

Is participating in a TSV or acting as a Covered Firm without registration guaranteed to be compliant?
No. The relief is conditional, and compliance depends on an entity's ongoing satisfaction of the order's requirements. This alert does not evaluate any particular entity's facts and should not be relied upon for that purpose.

Where can I read the underlying order?
The Commission's order and accompanying fact sheet are available on SEC.gov. Readers are encouraged to review the primary source materials directly and to consult counsel regarding their application.

Attorney Advertising. This alert is provided for general informational purposes only, is based on our review of publicly available materials as of the date of publication, and does not constitute legal advice or a legal opinion on any specific matter. It is not intended to be, and should not be relied upon as, a complete or current statement of the law, which may change. Reading this alert does not create an attorney-client relationship between the reader and Kaelus Law, PLLC. Prior results do not guarantee a similar outcome. Readers should consult with qualified counsel before taking any action based on the contents of this alert.

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