On September 17, 2026, the U.S. Securities and Exchange Commission (“SEC”) issued an order (sometimes referred to as the “Innovation Exemption”) to address some questions on how to trade public company stock using distributed ledger technology – in other words, how to trade “tokenized” securities. A number of marketplaces have been created to trade digital assets, and traditional securities market players have been exploring the infrastructure necessary for trading digital securities. The SEC order addresses whether a marketplace where trading in tokenized securities occurs needs to register as an “exchange” and whether participants that provide liquidity to those marketplaces need to register as “dealers.”
A threshold question is what securities can be traded in these markets. These markets – or “tokenized securities venues” (“TSV”) - could trade National Market System (“NMS”) stock that has been tokenized by the issuer of the stock, or, subject to the issuer’s ability to object, a third party unaffiliated with the issuer could create the digital version of the stock. The order therefore raises the question of whether public companies want their stock to trade on a TSV. Importantly, the order does not require issuers to tokenize their stock or to participate in a TSV, directly or indirectly, but, by enabling third parties to tokenize an issuer’s stock, the order makes tokenization a more immediate governance, operational, disclosure, and investor-relations issue.
The SEC issued an exemptive order; it is not a rule (although the SEC is seeking comment). The order is effective immediately, although a TSV must provide public notice 30 calendar days before operating. The order provides “conditional exemptions” from the Exchange Act definitions of “exchange” and “dealer” – that is, to take advantage of the exemptions, participants need to comply with certain conditions specified in the order. The order also provides that a TSV must publish a revised public notice within five business days of commencing or ceasing to make a tokenized stock available for trading, or within five business days of receiving a notice of objection from an issuer. The order has a term of five years.
A TSV seeking to trade a tokenized stock must provide written notice to the issuer at least 30 calendar days before trading commences, providing the issuer with an opportunity to object. TSVs are required to send the notice to the physical or email address for the issuer’s principal executive offices listed on the cover page of its Exchange Act reports, and include the TSV’s current, accurate contact information. Companies that wish to object must provide written notice of objection to the TSV.
Third party tokenized stock must have the same economic and governance rights of listed stock (i.e., the right to dividends, residual assets, and vote). The order does not permit any primary issuance or initial offerings on a TSV; companies should not, at this stage, view tokenizing securities as a capital raising opportunity, unlike the SEC’s recent Regulation Crypto Assets proposal.
A distributed ledger (commonly called a blockchain) is a shared digital record of ownership maintained simultaneously by many independent computers rather than by a single institution. To “tokenize” a security is to create a digital record, or “token,” on that ledger representing a share of stock, so that ownership can change hands by updating the ledger rather than by instructing a broker, clearing agency or transfer agent. Importantly, digital tokens contemplated by the order would not be new or synthetic instruments; rather, they would represent the same NMS stock, carrying the same dividend and voting rights, but recorded in a different place.
This is not a hypothetical market. Tokenized versions of U.S.-listed shares have traded outside the U.S. since mid-2025 on various platforms, making up part of a market that now measures in the tens of billions of dollars. Those offshore products are often wrapper or debt instruments that track a share price without conveying shareholder rights, which is a key distinction from what the order contemplates.
U.S. incumbent infrastructure has been moving in the same direction: SEC staff granted no-action relief in December 2025 for a Depository Trust Company pilot to tokenize securities entitlements and approved Nasdaq and NYSE rule changes permitting listed securities to trade in tokenized form. Importantly, these efforts involved tokenizing assets at the end of the existing settlement chain and preserved today’s clearing plumbing. The Innovation Exemption, on the other hand, may be understood as a fully on-chain venue alongside the current system.
The SEC cites a number of potential benefits, mostly addressed to market participants and investors. These benefits include the ability to self-custody securities (i.e., not with a broker, adviser or bank); fractionalized ownership of shares; faster settlement; and improved auditability and record-keeping. The only benefit identified by the SEC for public companies is the possibility that proxy communications could be conducted at a lower cost. In addition, companies already in or contemplating entering the digital asset space may want to establish proof-of-concept and demonstrate their mastery of the technology.
Settlement today is typically a one business day process involving intermediaries. On a distributed ledger, the transfer of the token and the transfer of payment can be made to occur simultaneously and within seconds. Because a token can be divided into very small units, fractional ownership lets an investor buy a fixed dollar amount of a high-priced share. Additionally, tokens are “programmable,” meaning that the rules governing them are written into software that runs automatically; in principle, this feature can enable the automation of certain functions, including dividend distributions, transfer restrictions and delivery of proxy materials. Whether these efficiencies materialize at scale remains an open question.
The SEC identifies two primary risks to public companies: the challenge of maintaining its shareholder register related to on-chain transfers; and the potential price dislocation or adverse effects on the price of the underlying stock. The order does not address any obligation or expectation of coordinating the TSV’s records with those of the company’s transfer agent. Moreover, the order assumes a pricing mechanism on a TSV that need not reflect the security’s primary market. In addition, companies should consider investor relations challenges of two potentially very different shareholder bases with two fundamentally different markets.
A TSV will not be regulated like an exchange (and may not hold itself out as an exchange). Prices will be generated by algorithmic trading among liquidity pool participants, and as mentioned above, may not reflect the security’s exchange-listed price. A TSV could potentially operate 24/7 trading, longer than the exchange where the company’s security trades. Because of the algorithmic (“smart contract”-based)[1] trading, there will potentially be instant settlement with fewer broken trades.
The order limits the volume of trading permitted on a TSV compared with the primary market. (If a TSV exceeds the volume limit, it will be required to cease trading that security for three months.) A TSV can only trade NMS stock, which generally includes exchange-listed equity securities for which transaction reports are collected under an effective transaction reporting plan. It may not trade tokenized options, rights, warrants or swaps.
The order provides that a TSV must stop trading a tokenized NMS stock concurrently with a stoppage in the underlying NMS stock on its primary listing exchange. In addition, the TSV must verify that the tokenized stock has the same economic and governance rights as the primary security. The TSV must also determine if the third party token sponsor will distribute proxy materials to holders at no cost.
- What happens to holders of tokenized stock after five years (the stated duration of the exemptive order)?
- What are the TSV procedures for trading halts not required by the exchange where the securities are listed? (The TSV is required to disclose “any procedures to address price volatility or trading involving, for example, corporate actions occurring when markets for the underlying securities are closed,” but does not dictate what those procedures will be.)
- What options does a holder of tokenized stock have if the trading venue is required to halt trading in a security for three months because it exceeded the volume limitation?
- Does a public company have any remedy if a TSV improperly trades a company’s tokenized security? (The SEC could pursue an enforcement action for operating as an unregistered exchange outside the permission of the exemptive order.)
- The order only addresses the status of market participants in the operation of a trading venue under the Exchange Act; it does not address the Securities Act (or state corporate law) implications of establishing a tokenized security program. (For example, how does a public company authorize, issue, offer and sell tokenized stock?)
- If multiple TSVs tokenize the same stock on different blockchains, what technical or interoperability standards apply, and can those tokens move between venues or be reconciled with one another?
- Check the contact information on your Exchange Act reports and train employees who monitor communications about this development and the importance of timely escalation of any notices received from TSVs.
- If you haven’t, begin the conversation with the Board, as well as with appropriate employees in the company’s treasury and investor relations functions, to consider whether tokenization might be appropriate.
- Comment to the SEC if you think the order could be improved.
- If you are considering participating in a TSV, coordinate with your transfer agent and primary listing exchange. Issuers should understand how a proposed tokenization structure would interact with the official shareholder register, existing settlement arrangements, corporate actions, and trading halts.
If you have any questions concerning the materials discussed in this client alert, please contact members of the Securities and Capital Markets practice.
[1] A “smart contract” is software deployed on the blockchain that executes automatically once its conditions are met, with no intermediary approving or processing the trade; that is what makes near-instant settlement possible, and it also means a coding error or exploit is an operational risk in its own right. An “automated market maker,” or AMM, is a type of smart contract that replaces the traditional order book: rather than matching a buyer against a seller, participants deposit inventory into a shared “liquidity pool,” and the pool quotes prices algorithmically based on the relative amounts of each asset it holds. Prices in such a pool are therefore set by supply and demand within the pool itself.
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