On September 17, 2026, two days after the Clarity Act failed to advance in the U.S. Senate, the Securities and Exchange Commission issued a highly question-begging and likely illegal “Order” granting five-year conditional exemptions from the definitions of exchange and dealer in the Securities Exchange Act for tokenized securities venues (TSVs) and certain liquidity providers to trade tokens of National Market System stocks using automated market makers and AMM liquidity pools under its so-called Innovation Exemption.
The “Order” should have gone through notice and comment. It is labeled an exemptive “order,” but in substance it is a legislative rule. It applies to an open-ended class of persons, namely any entity that meets the definition of a “Tokenized Securities Venue” or a “Covered Firm.” It operates only in the future and lasts for five years. It sets out a detailed set of purportedly binding conditions: symbol and volume caps, trade-reporting deadlines, rules on trading halts, notices to issuers with a right to object, recordkeeping, and a long list of required public disclosures.
Taken together, the “Order” attempts to create a new regulatory category for trading venues adjacent to but not part of the national market system, with potentially significant and sweeping consequences. While TSVs will trade “tokens” of NMS stocks, they will not be trading what anyone today would identify as NMS stocks themselves, notwithstanding the SEC’s confusing attempt to decree by definition (in passing, without discussion) tokens of NMS stocks to actually be NMS stocks.[1] Unlike the rules that apply to the national market system and the NMS stocks that trade within it, the conditions imposed by the “Order” do not require connectivity between TSVs or aggregation of their quotation or last-sale information.[2] Accordingly, if anyone uses it, the regulatory regime created by the Innovation Exemption will result in fragmented liquidity, reduced price discovery, and an undercutting of investor protections assured by the existing NMS rules.
In sum, the “Order” is an “agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy” within the meaning of 5 U.S.C. § 551(4). Section 36(a)(1) of the Securities Exchange Act allows exemptions by “order,” but that does not remove an action that is a rule in substance from coverage by the Administrative Procedure Act.[3]
The “Order” admits as much. It calls itself an “interim, targeted measure” issued “while the Commission considers the need for future rulemaking,” and it does ask for public comment—but only after the relief takes effect. Asking for comment after adoption is not a substitute for asking for public input before a rule is implemented.[4]The “Order” does not invoke the good-cause exception to the APA requirement to publish a notice of proposed rulemaking, and nothing in the “Order” provides a basis for believing that five years of relief could not have waited for a normal comment period.[5] We could only guess why the SEC rushed to issue this “Order”—it does not explain why.
The “Order” purports to exempt a TSV from the definition of “exchange” (and from the duty to register with the SEC) but also imposes a new set of compliance burdens on wholly unrelated parties (including issuers, who have to read and respond to TSV notices to trade tokens of their stocks). Issuers of NMS stocks will have 30 calendar days (i.e., roughly 21 trading days) to object to notices to trade tokens of their stocks,[6] but the “Order” establishes none of the typical guardrails for TSVs to initiate and issuers to respond to such notices, including what happens if an issuer reasonably believes it needs more information before responding to a notice, or if it inadvertently fails to see an incoming notice, or it responds but the response never reaches the TSV. Nor is there any authority for issuers to revisit an initial decision not to object for good cause, based (for example) on discovering that:
- trading of tokens disrupts their shareholder relations,
- tokens have reduced the liquidity of their shares,
- tokenization has created problems with the voting process for their shareholders,
- their shareholders are not in fact receiving equivalent rights through the TSV, or
- even that a TSV has broken the law or failed to adhere to conditions of the “Order.”
Nor does a TSV’s revised notice of a material change in its operations, which the “Order” requires to be posted 20 days in advance, have to be sent to affected issuers, much less does such a revised notice reopen an issuer’s right to object, even if the change goes to the very matters (such as pool design or the treatment of pooled shares) that would have informed an issuer’s initial decision. Nor is there any dispute resolution or complaint process created for disputes over whether, when, and how notices and objections were made. New burdens such as these should have been accompanied by a Paperwork Reduction Act analysis, and open questions such as these should have been addressed along with all of the other requirements of a formal rulemaking.
The “Order” leaves too many basic questions open to have been adopted rather than proposed. Each of the following should have been put out for comment before the relief took effect.
(i) Shareholder communications and voting. The only provision on the proxy system in the “Order” is a listing condition. A TSV may trade a stock tokenized by a third party only if the tokenizer makes proxy materials and issuer communications available “at no cost.” We do not understand who will bear the costs of transmitting communications and voting instructions—they must ultimately be paid by someone. Even if, theoretically, the adoption of tokenized trading might lower those costs, they will not go to zero.
The “Order” says nothing about how Exchange Act § 14(b) and Rules 14a-13, 14b-1, and 14b-2 apply when the tokenizer is not a registered broker-dealer or bank. In that case § 14(b) does not reach the tokenizer at all. The “Order” provides no mechanism for:
- record-date snapshots,
- identifying beneficial owners behind wallet addresses,
- collecting and passing on voting instructions,
- reconciling overvotes, or
- handling shares for which no instructions come in.
The TSV’s obligation is to “verify” equivalent rights and describe its verification steps in a notice posted on its own website. Nothing says how often that verification must be repeated. Nothing requires the TSV to file anything with the Commission other than an email. Nothing requires staff to review the notices, monitor how rights are actually passed through, or report to the Commission on how TSVs are meeting their responsibilities. Adding yet another institution to the mix that the SEC supervises without adding staff and budget resources only invites evasion of the nominal requirements imposed on TSVs.
At a minimum, the Commission should now (as it should have already done): (1) set out what it expects of TSVs and tokenizers over the life of the exemption; (2) require notices and periodic compliance certifications to be filed on EDGAR; (3) commit to a formal staff review, with a public report, well before the exemption expires; and (4) establish normal enforcement authority (by requiring registration) for the Commission to verify compliance with the conditions of the “Order.”
(ii) Liquidity-pool (LP) tokens. The “Order” describes how LP tokens work but says nothing about their status. Tokenized stock deposited in a liquidity pool on a record date is held by a smart contract that cannot vote or receive communications. The economic owners are the LP-token holders, whose share of the pool changes with every trade. The “Order” does not say:
- whether LP tokens are securities (and if not, on what basis);
- who is entitled to vote pooled shares, or to receive issuer communications about them; or
- whether pooled shares simply go unvoted.
It is unclear whether the same stock could carry full rights when held in a wallet and none when held in a pool. That result would seem in conflict with the requirement of the “Order” that holders get the “same rights and privileges” as holders of ordinary shares. The Covered Firm Exemption makes this worse. It encourages professional liquidity providers to hold large, pooled positions for which voting is undefined.
(iii) Conflicts of interest and the means to detect them. The “Order” allows TSVs and their affiliates to tokenize the stock they list, to trade on their own venues, and to pay fees and other incentives to Covered Firms. Its main answer to these conflicts is disclosure[7]. The “Order” provides no way for the Commission, issuers, or investors to find out when these or other conflicts actually cause harm, such as:
- favorable treatment of affiliated tokens;
- voting pooled or affiliated positions in the TSV’s own interest;
- incentive arrangements that shape pool pricing; or
- MEV (maximal extractable value) extraction at participants’ expense.
For investors, we note that tokens held in self-custody or in liquidity pools, rather than with a SIPC-member broker-dealer, would have no SIPC protection if the custodian or venue fails.
For issuers, the “Order” also does not explain how an issuer could learn that its token holders’ votes are being lost or controlled by others. The issuer’s only protection is a one-time 30-day objection before a third-party token is first listed. The “Order” provides no ongoing remedy if new problems develop or are discovered over time. Whoever controls the pool design, typically the TSV, decides whether pooled shares carry any voice at all.
Before relying on disclosure alone, the Commission should propose and consider adopting conflict-management policies, periodic reporting of affiliated trading and liquidity-incentive payments, and a way for issuers and investors to raise complaints with the Commission, particularly if there are allegations that the full rights and privileges of holders of NMS stocks are not shared by holders of their tokenized versions.
(iv) Fully decentralized protocols. The “Order” applies only to venues run by an identifiable U.S. operator. It does not say how the Commission views AMM protocols that trade tokenized stock with no such operator, or whether they would be unregistered exchanges, outside the Commission’s reach, or something else. Operators that assume the conditions of the “Order” may face competition from protocols with no identifiable operator. Unless a Tokenized NMS Stock’s own smart contract restricts transfers to credentialed wallets, which the “Order” permits but does not require, holders may be able to withdraw tokens from a TSV and trade them in permissionless pools. That activity falls outside (and thus undercuts) the volume caps, halt requirements, and issuer-objection rights of the “Order,” all of which operate only at the TSV level. As noted earlier, the “Order” does not say whether such protocols would be unregistered exchanges, and it creates no presumption either way (Order n. 37). The Commission should have addressed how the “Order” interacts with decentralized venues before adopting relief whose protections depend on that answer.
(v) Weak enforcement. The TSVs will by design not be SEC registrants in any capacity. That means the SEC will have no mandatory examination authority, no statutory authority to inspect books and records, and so on. The “Order” does condition its availability on TSVs’ “consent” to being examined by SEC staff, but the SEC has yet to establish any regular examination program, the SEC has not yet obtained funds from Congress to staff a new exam program, and in any event the SEC’s ability to oversee a non-registrant via a voluntary consent to conditions is uncertain at best.[8] Nor will the TSVs be subject to mandatory supervision by any self-regulatory organization, as would an exchange (itself an SRO) or an ATS (a FINRA-member broker-dealer). Given the lawbreaking track record in the crypto industry to date (e.g., Terraform, Celsius, SafeMoon, Binance, Bitfinex, Bybit, OneCoin, and, of course, FTX),[9] and the challenges of monitoring ongoing innovation in a new set of securities markets, enforcement of the conditions of the “Order” is likely to be weak, and evasion or lawbreaking common.
Conclusion. The above open questions do not exhaust the uncertainties about the “Order.” Many practitioner commentaries already raise other questions.[10] The Commission should revisit its action before it starts to do harm. It should publish a revised framework addressing these types of questions with full notice and comment, and in the meantime withdraw the current relief.
ENDNOTES
[1] Order at 2. The SEC concedes in passing in its notes 2-3 that its definition of a Tokenized NMS Stock draws on a prior, non-binding statement by SEC staff: “The statement, and any other staff statement referenced in this release, is not a rule, regulation, guidance, or statement of the Commission, and the Commission has neither approved nor disapproved its content. Staff statements have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.”
[2] While each TSV must publish its trades within 10 minutes to comply with the conditions of the “Order” (§ II.G), the “Order” establishes no mechanism to consolidate token trades into the consolidated tape.
[3] Section 36(a)(2) requires the Commission to adopt procedures for considering applications for exemptive orders, which suggests an order is meant for particular persons, not for a new regulatory regime for a whole market segment. Cf. Regulation ATS, Exchange Act Release No. 40760 (Dec. 8, 1998), which adopted Rule 3a1-1 under § 36 after notice and comment.
[4] Many law firms have issued memos about the “Order,” see note 7 infra, but few have to date filed those memos as comments in response to the request for comment.
[5] In addition to needing to publish a notice of a proposed rulemaking, the Commission should also have delayed the effectiveness of the “Order” under the APA for 30 days. The “Order” is not simply “grant[] … an exemption” under 5 U.S. Code § 553(d)(1), because it imposes new burdens on issuers and sets a new framework of binding conditions for an entire market segment.
[6] The “Order” is silent on whether a new notice is required for each third-party sponsor of a token of the same NMS stock through the same TSV, yet another gap that would have likely been spotted in a normal notice-and-comment process. Nor does it address what happens if a token ceases to trade for some reason (as happens all the time with actual stocks) and then resumes trading–is another notice and non-objection required?
[7] Notice items (k), (l), and (m).
[8] National securities exchanges owe Section 31 fees on sales transacted on an exchange, and FINRA owes such fees on sales of exchange-listed securities transacted by or through its members otherwise than on an exchange. 15 U.S.C. § 78ee(b)–(c); 17 C.F.R. § 240.31. Because TSVs are exempt from the definition of “exchange,” sales on a TSV will incur no Section 31 fee unless a FINRA member is a party, and many TSV participants (including Covered Firms relieved of dealer registration) will not be. The Commission sets a fee rate annually so that collections equal its congressional appropriation, id. § 78ee(j), so to the extent trading migrates to TSVs, sellers in traditional markets will have to pay higher rates to fund the Commission’s oversight of everyone, including TSVs, and TSVs will share none of that burden. Although volume caps limit this cross-subsidy, the “Order” adds a fee disparity to other disparities between TSVs and traditional markets.
[9] See, e.g., Press Release, U.S. Att’y’s Off., S.D.N.Y., Crypto-Enabled Fraudster Sentenced for Orchestrating $40 Billion Fraud (Dec. 11, 2025), https://www.justice.gov/usao-sdny/pr/crypto-enabled-fraudster-sentenced-orchestrating-40-billion-fraud (Terraform Labs co-founder Do Kwon sentenced to 15 years for fraud in connection with the collapse of the TerraUSD “stablecoin”); Press Release, U.S. Att’y’s Off., S.D.N.Y., Founder of Celsius Sentenced to 12 Years for Fraud and Market Manipulation (May 8, 2025), https://www.justice.gov/usao-sdny/pr/founder-celsius-sentenced-12-years-fraud-and-market-manipulation (crypto lender’s founder defrauded customers and manipulated the price of its proprietary token); Press Release, U.S. Att’y’s Off., E.D.N.Y., CEO of Digital Asset Company SafeMoon Sentenced to 100 Months in Prison for Multi-Million Dollar Crypto-Fraud Scheme (Feb. 10, 2026), https://www.justice.gov/usao-edny/pr/ceo-digital-asset-company-safemoon-sentenced-100-months-prison-multi-million-dollar (CEO diverted millions of dollars in tokens from liquidity pools that investors had been told were “locked”); Press Release, U.S. Dep’t of Just., Binance and CEO Plead Guilty to Federal Charges in $4B Resolution (Nov. 21, 2023), https://www.justice.gov/archives/opa/pr/binance-and-ceo-plead-guilty-federal-charges-4b-resolution (world’s largest crypto exchange pleaded guilty to Bank Secrecy Act, unlicensed money transmitting, and sanctions violations), pardon granted, U.S. Dep’t of Just., Off. of the Pardon Att’y, Pardon of Changpeng Zhao (Oct. 21, 2025), https://www.justice.gov/pardon/media/1416576/dl?inline=; Press Release, U.S. Dep’t of Just., Bitfinex Hacker Sentenced in Money Laundering Conspiracy Involving Billions in Stolen Cryptocurrency (Nov. 14, 2024), https://www.justice.gov/archives/opa/pr/bitfinex-hacker-sentenced-money-laundering-conspiracy-involving-billions-stolen (laundering of approximately 120,000 bitcoin stolen in 2016 hack of a virtual currency exchange); Press Release, U.S. Att’y’s Off., S.D.N.Y., Co-Founder of Multibillion-Dollar Cryptocurrency Scheme “OneCoin” Sentenced to 20 Years in Prison (Sept. 2023), https://www.justice.gov/usao-sdny/pr/co-founder-multibillion-dollar-cryptocurrency-scheme-onecoin-sentenced-20-years-prison (purported cryptocurrency pyramid scheme took in more than $4 billion from at least 3.5 million victims); see also Fed. Bureau of Investigation, North Korea Responsible for $1.5 Billion Bybit Hack, Alert No. I-022625-PSA (Feb. 26, 2025), https://www.fbi.gov/investigate/cyber/alerts/2025/north-korea-responsible-for-1-5-billion-bybit-hack (attributing theft of approximately $1.5 billion in virtual assets from a cryptocurrency exchange to North Korean state actors).
[10] See, e.g., Sullivan & Cromwell LLP, SEC Issues “Innovation Exemption” for Tokenized Securities (Sept. 2026) (observing that the “Order” does not address the securities-law status of liquidity-provider tokens representing an entitlement to the assets and fees of an AMM Liquidity Pool, or the status of decentralized trading protocols lacking control by an identifiable operator); Gibson, Dunn & Crutcher LLP, SEC Opens Up Five-Year Sandbox for Tokenized Trading of NMS Stocks (Sept. 29, 2026) (noting the “Order” requires equivalent voting rights without prescribing any mechanism for passing them through to token holders, leaving open how votes are transmitted and what becomes of shares for which no instructions are received, and that TSVs, unlike registered exchanges, are not subject to fair-access requirements and may set and differentiate permissioning criteria without Commission review); Sidley Austin LLP, SEC Issues “Innovation Exemption” for On-chain Trading of Tokenized U.S.-Listed Stocks (Sept. 22, 2026) (noting that TSVs must merely disclose any policies addressing maximal extractable value, with no required mitigation); WilmerHale, The Innovation Exemption Arrives: SEC Clears a Conditional Path for Onchain Trading of Tokenized NMS Stocks (Oct. 5, 2026) (describing the “Order” as a “bridge” toward rulemaking); see also Letter from Gabriel Shapiro to Vanessa A. Countryman, Sec’y, SEC, at 1–3 (Sept. 19, 2026) (observing that “[t]he Order . . . does not mention transfer agents at all,” and urging that the TSV Notice answer “who is the registered owner or entitlement holder of the underlying shares, and who votes them and receives their dividends” while a token sits in a pool’s contract).
This post comes to us from the Shadow SEC, whose members are professors John Coates at Harvard Law School, John C. Coffee, Jr. at Columbia Law School, James D. Cox at Duke University School of Law, Merritt B. Fox at Columbia Law School, and Joel Seligman at Washington University School of Law. The authors thank Michael Gaw for comments and suggestions.