SEC Issues Exemptions for Dealers and Exchanges in Tokenized NMS Stock

The SEC granted conditional exemptions for (i) "Tokenized Securities Venues" ("TSVs") from exchange registration and (ii) "Covered Firms" acting as liquidity providers on TSVs from dealer registration.

1. Exemptions

Exchange Exemptions for TSVs. A "Tokenized Securities Venue" (TSV) is exempt from the definition of "exchange" in Section 3(a)(1) of the Exchange Act. A qualifying TSV is not an ATS under Regulation ATS, and is not a "trading center" or "market center" for Regulation NMS purposes.

An indirect, but intended, effect of these exemptions is that various provisions of Regulation NMS would not apply: (i) the trade-through prohibition that applies to trading centers in Rule 611 would not apply; (ii) the ban on trading in sub-sub penny increments in Rule 612 would not apply; and (iii) the quote dissemination requirements of Rule 602 would not apply.

Covered Firm Exemption. A liquidity provider that supplies liquidity in the form of Tokenized NMS Stock to an AMM Liquidity Pool using proprietary capital, and that may also engage in related activities traditionally associated with dealing, such as quoting prices to customers, is exempt from the definition of "dealer" in Section 3(a)(5).

Duration of Exemption. The exemption is immediately effective, although firms will need some time to comply with its conditions. By its terms, the exemption runs for five years, through September 17, 2031, but the SEC may change the term (or other conditions) of the exemption at any time.

2. Key Definitions

TSV. An organization that brings together buyers and sellers of Tokenized NMS Stock by (1) providing one or more AMM Liquidity Pools for permissioned participants to interact and agree to the terms of a trade, and (2) setting standards for persons to access trading on those pools. "Providing" includes designating a pool as the means and location for trading, or exercising control over it. Coding a smart contract is not "providing."

Tokenized NMS Stock. Just what it says. A token that gives synthetic exposure to an NMS stock would not qualify. The TSV must verify that the token conveys the same rights and privileges as the equivalent class of traditional NMS stock: the same interest in the company, the same dividends, the same voting rights, and the same residual-asset claim. For third-party tokenizations, the third party must make proxy materials and issuer communications available at no cost to the issuer or shareholders.

AMM Liquidity Pool. Smart contracts that enforce trading terms and set token prices based on the ratio of quantities of paired assets committed to the pool.

Pairs Trading. Every instrument on a TSV must trade against a Tokenized NMS Stock. According to the order, a Tokenized NMS Stock may trade against (i) another Tokenized NMS Stock, (ii) a non-security cryptoasset (such as a stablecoin) or (iii) a tokenized SEC-registered money market fund. (In theory, transactions may have multiple components, as long as the types of components are limited.)

Covered Firm. The liquidity provider (dealer) in an AMM Liquidity Pool.

TSV Participants. Anyone who is permitted to trade in an AMM Liquidity Pool. The SEC's exemption does not limit participation.

3. Conditions on the TSV (Exchange) Exemption

The TSV must meet the following conditions:

A. Distributed ledger applications

Smart contracts used by the TSV must be auditable, public, and deployed on a public, permissionless distributed ledger.

B. Permitted Entities

The TSV must be a U.S. person and is therefore subject to OFAC sanctions compliance, including SDN List prohibitions and blocking obligations. Neither the TSV nor its affiliates may be subject to "statutory disqualification."

C. Public Notice

Publish a plain-English Notice prominently on the public website at least 30 calendar days before operating, and notify the SEC in writing at tradingandmarkets@sec.gov within one business day with contact details and the Notice location.

Revised Notices are required:

• Within 5 business days for commencing or ceasing a Tokenized NMS Stock, volume-related pauses or resumptions, or receipt of an Issuer Objection.
• 20 calendar days in advance of any material change.
• Within 30 days after quarter-end for non-material changes.
• Within 5 business days of discovering materially inaccurate or incomplete information.

All versions must remain available on the website.

D. Issuer Notice and Issuer Objection

For third-party-tokenized stock (that is, tokens not created by the issuer), written notice must go to the issuer at the principal executive offices address on the cover of its Exchange Act reports. Trading cannot begin until at least 30 calendar days after receipt. If the issuer objects in writing on or before the 30th day, the TSV cannot list that stock and must amend its public notice within 5 business days. Note that the issuer objection right is, under the terms of the exemption, not an ongoing right.

E. No primary issuance; equivalent rights

No primary issuances or initial offerings may occur on a TSV. All offers and sales must be registered or exempt under the Securities Act.

F. Issuer and volume caps

A TSV and its affiliates would be subject to caps on the number of different securities they could trade and on the percentage of volume they could trade in each security.

G. Transaction transparency

While the NMS quoting requirements would not apply, the TSV would be required to publish public, machine-readable, USD-denominated transaction data for the trailing 30 days, updated within 10 minutes of each transaction, including the symbols of the stock and the paired asset, price, size, and other data.

H. Stoppage of trading

Trading in a Tokenized NMS Stock must stop concurrently with any halt or suspension in the underlying stock on the primary listing exchange.

I. Significant operational event

The TSV must immediately notify participants and promptly notify the SEC of events with significant impact on TSV operations or participants.

J. No leverage

The TSV cannot borrow securities or non-security crypto assets on the TSV (secured or unsecured), cannot directly or indirectly hypothecate or arrange or permit hypothecation, and cannot extend credit to participants to purchase Tokenized NMS Stock.

K. Books and records

The TSV must keep detailed transaction records and make them available to the SEC.

L. Statutory disqualification bar

The TSV Exemption is unavailable if the entity, association, or any person in the group is subject to statutory disqualification under Section 3(a)(39), absent Commission or SRO permission to continue.

4. Contents of the TSV Public Notice

The Notice must contain 30 enumerated disclosure items (a through dd), including:

• Venue structure, ownership, onchain and offchain governance, and LP-token governance rights.
• Eligible participant types; permissioning and identity-verification criteria including OFAC and AML/CFT screening.
• Assets traded and any volume-related pauses.
• Tokenization processes; any Issuer Objections received.
• Self-tokenization by the TSV or its affiliates and any differential treatment; the TSV's and affiliates' own trading participation; differences in treatment among participants.
• DLT details: chains, smart contract addresses, wallets, aggregators, solvers, relayers, and who can upgrade, modify, suspend, override, or cease each application.
• Trading-interest entry; AMM pool procedures including pricing curves (for example, x*y=k) and customization; offchain functionality; hours of operation including whether 24/7; use of oracles and external market data; display.
• Fees and rebates; complaints and error or dispute procedures; confidentiality, PII, and MEV policies.
• Systems safeguards: code review, audit types, stress tests, BCP and DR testing.
• Clearance and settlement arrangements.
• Risks: private-key loss, smart-contract bugs, reentrancy, denial of service, impermanent loss, and the potential for things to go wrong.
• Service providers; trading oversight and surveillance.
• Stoppage circumstances and risk controls.

5. The Covered Firm (Dealer) Exemption

The SEC states that liquidity provision alone does not constitute dealer activity and that, absent other indicia, AMM liquidity providers would typically be engaged in trader activity. However, the SEC's order permits liquidity providers to engage in activities that would be regarded as dealer activities, such as providing committed liquidity.

Conditions

• The liquidity provider must trade solely for its own account through a TSV; that is, it may not act as a broker and may not hold or take custody of customer assets.
• The liquidity provider must maintain records of its assets available to cover potential losses, the liquidity supplied, any liquidity-provision or market-making agreements with a TSV, and any incentives, fees, rebates, or other compensation, including volume-threshold incentives.
• Prominent website disclosure, if applicable, that the firm is not registered as a broker-dealer and that it may receive fees, tokens, or other incentives.
• Written notification to the SEC with specified information and consent to SEC information requests.
• The liquidity provider and its affiliates must not be subject to statutory disqualification.

6. What the Order Does Not Do

• No antifraud relief. The antifraud and antimanipulation provisions, including Section 10(b) and Rule 10b-5, apply to securities activities performed on a TSV.
• No Securities Act relief for the TSV or its participants. As noted, transactions requiring registration may not trade on a TSV.
• No Investment Company Act relief. While the order provides for tokenized money market shares to be used for pairs trading on a TSV, it is likely that this will require some further exemptive action under the Investment Company Act.
• No relief for securities activity conducted outside the TSV. A registered entity may operate a TSV but must keep registered activity separate from TSV operations.
• No effect on participants' own registration status. Broker-dealer participants remain subject to SEC and SRO rules and AML/CFT requirements. The order notes, by way of example, the FINRA Rule 6110 obligation on members to report off-exchange NMS stock transactions to FINRA.

7. Request for Comment

The order poses ten questions under File No. 4-927, covering:

1. Whether and how to modify the TSV Exemption.
2. Whether the exemption should be permanent and whether five years is the right term.
3. The impact of TSV trading on liquidity, pricing, and the underlying NMS market, including the effects of 10-minute transaction reporting and overnight trading on exchange opening, reopening, and closing processes.
4. Whether TSVs should be allowed to trade securities beyond Tokenized NMS Stock, and whether paired assets should be limited.
5. Whether the conditions pose operational challenges.
6. Whether the Tier 1 and Tier 2 tiering and the 75-symbol / 0.25% and 250-symbol / 2.5% caps are calibrated correctly.
7. Whether registered broker-dealer participants need Regulation NMS relief, and which provisions.
8. Items 8 through 10: parallel questions on the Covered Firm Exemption's scope, permanence, and conditions.

8. Statements by the Chair and Commissioners

SEC Chair Paul Atkins issued a statement saying that the relief allowed tokenized securities venues to operate in a permissioned environment while the agency developed a permanent regulatory framework. He asserted that investor protection remained central to the exemption. He said TSVs must be U.S. persons, comply with sanctions programs, and limit access to permissioned participants. Mr. Atkins said the exemption built on the SEC's "Project Crypto" initiative (see prior coverage) and invited public comment to inform future permanent rules.

Commissioners Hester Peirce and Mark Uyeda published separate statements supporting the order. Ms. Peirce said the exemptions let market participants experiment ahead of a future in which onchain trading of tokenized stocks is commonplace. She added that the Commission tailored the relief to the technology rather than forcing the technology to fit existing rules. Mr. Uyeda noted that the exemption included symbol limits, volume caps, and public transparency requirements to reduce information asymmetries.