The SEC Innovation Exemption: Decoding the Regulatory Bridge for Onchain Equities

The SEC Innovation Exemption: Decoding the Regulatory Bridge for Onchain Equities

On September 17, 2026, the SEC established a landmark five-year "Innovation Exemption." Rather than forcing decentralized infrastructure into legacy regulatory regimes, the Commission established a self-executing conditional relief to allow tokenized U.S stocks to trade onchain via permissioned Automated Market Makers (AMMs) and liquidity pools exempting them from registration as traditional national exchanges, alternative trading systems (ATS) or broker-dealers.

Together, the SEC’s Covered User Interface (CUI) guidance and the TSV Innovation Exemption signal a clear preference: This SEC favors carving out tailored, self-executing safe harbors directly for protocol builders rather than forcing decentralized software into legacy broker-dealer (BD) and ATS regimes, a trend that could expand over the next two years under this administration, particularly with CLARITY failing to pass in Congress. 

While this creates a streamlined path for protocol devs to build onchain venues over the next few years, the catch is that conditional exemptions exist at the agency's discretion, meaning a future administration could repeal the framework quickly. 

For years, Web3 builders and institutional issuers faced a core structural roadblock: while issuing tokenized shares on distributed ledgers was technically feasible, there was no compliant pathway to provide secondary trading, liquidity pools, or crypto-native market access. 

The SEC’s Innovation Exemption directly addresses this gap, establishing a self-executing regulatory framework for a new class of trading infrastructure known as Tokenized Securities Venues (TSVs).

The order defines a Tokenized Securities Venue (TSV) as an organization, association, or group of persons that brings together buyers and sellers of Tokenized NMS Stock by:

1. Providing one or more AMM Liquidity Pool(s) for permissioned participants to interact and agree to terms of a trade; and
2. Setting standards for persons to access trading on such AMM Liquidity Pool(s).

To complement the TSV framework, the SEC also established the Covered Firm exemption, which protects liquidity providers operating in these pools. So long as a liquidity provider trades solely for its own account, does not custody customer assets, and meets specific disclosure and notification requirements, it is temporarily exempt from registering as a traditional securities "dealer" merely for committing capital to a TSV liquidity pool. For professional market makers and liquidity providers,, this eliminates the regulatory liability that previously scared them away  away from providing onchain liquidity to security token pools.

Traditional exchange and broker-dealer regulations were constructed for centralized clearinghouses, continuous order books and manual transfer agents. They simply do not align with self-executing smart contracts or peer-to-pool liquidity mechanisms. 

Specifically, legacy Regulation NMS rules assume a centralized matching engine where individual brokers post bids and offers. These rules force order routing across national exchanges to match external "best prices", require explicit broker-dealers to quote each order, and mandate strict penny tick sizes. None of that translates to an AMM pricing continuously with 18-decimal token precision.

Paired with the SEC’s Covered User Interface Safe Harbor, which clarifies that non-custodial front-ends and wallets are not regulated as broker-dealers merely for displaying trading parameters, app developers now have a blueprint to connect users to onchain equity venues.

Key Conditions: Protocol Specifications of the Innovation Exemption

To maintain investor protection while fostering innovation, the SEC attached explicit protocol conditions and operating rules to claiming the TSV framework as a safe haven. Let’s go through some of them.  

Asset Oriented Specifications

The Innovation Exemption is limited to certain categories of tokenized securities issued on chain. 

• No Synthetics or Derivatives: Unbacked synthetic tokens, security-based swaps, leverage wrappers, and offshore derivative contracts (such as xStocks) are explicitly excluded from the exemption and cannot be listed in TSV pools.
• 1:1 Native Shareholder Rights: Tokenized assets must convey identical legal and economic rights as traditional stock, including dividend passthroughs, liquidation claims, and proxy voting materials delivered at zero cost to holders.
• NMS Stocks Only: Pool assets are restricted strictly to U.S. exchange-listed equities (NMS stocks listed on NYSE or Nasdaq). No private equity, fixed income, or other securities. 

Trading Venue Specifications

• Secondary Trading Only: No primary issuance or capital raising events. TSV liquidity pools are strictly engineered for secondary market liquidity. Primary mints, initial coin offerings, and capital raises on a TSV are prohibited.
• No Leverage or Margin: Explicitly bars a TSV from offering margin trading, extension of credit, or leverage, requiring all onchain transactions and liquidity provision to execute on a fully-collateralized, spot basis. 
• 30-Day Issuer Notice & Objection Protocol: Before deploying a pool for a third-party tokenized stock, the TSV must send a 30-day advance notice to the underlying company's executive offices. If the issuer files a formal Notice of Objection within that window, the venue cannot deploy or maintain trading for that asset.
• Permitted Pool Pairing: Tokenized NMS stocks can only be paired in liquidity pools with other Tokenized NMS stocks and non-security crypto assets, including digital commodities, utility tokens, digital collectible and permitted payment stablecoins (e.g., GENIUS Act-compliant stablecoins), or tokenized money market funds.
• Volume Caps & Automated Circuit Breakers: Venues are subject to strict symbol and volume throttles (Tier 1 stocks: 75 symbols max, capped at 0.25% of prior-month consolidated daily volume; Tier 2: 250 symbols max, capped at 2.5% volume). TSVs must also implement automated trading halts that trigger concurrently with any primary exchange trading suspension.
• Smart Contract Allowlisting & Permissioned Access: Protocol architectures must enforce permissioned access at the smart contract layer via native transfer hooks or allowlisted wallet registries to maintain continuous sanctions (OFAC) and investor eligibility verification. There is no prescriptive recipe for enforcing these restrictions, asset based allowlisting or AMM pool permissioning could both work.
• U.S. Entity Standard: The TSV operator must be a legally organized U.S. person, ensuring direct compliance with sanctions, 3-year audit trail storage, and SEC inspection access.

Filing to Become a TSV: What Builders Need to Know

Crucially, the SEC does not officially "approve" or issue custom licenses for individual TSVs, nor does it require traditional exchange, ATS, or broker-dealer registration. 

Instead, reliance on the Innovation Exemption functions as a self-executing notice-filing process. For dev teams and protocol operators looking to launch a compliant TSV, the execution path consists of three key steps:

1.     Deploy Auditable Smart Contracts: Your AMM liquidity pools, token standards, and allowlist registry contracts must be auditable, publicly accessible, and deployed on a public, permissionless blockchain.

2.     Publish the Public Notice: At least 30 calendar days before commencing trading operations, the venue must publish a plain-English Public Notice on its website. This disclosure must cover venue governance, smart contract architecture, upgrade/override controls, fee structures, MEV mitigation practices, and explicit disclaimers confirming the venue is not a registered exchange.

3.     Notify the SEC: Within 1 business day of posting the Public Notice on your site, submit written notice and the website URL to the SEC's Division of Trading and Markets (tradingandmarkets@sec.gov).

By replacing traditional multi-year ATS exchange and broker-dealer registration with a self-executing 30-day notice requirement, the SEC has effectively opened the door for protocol developers to build, test, and ship onchain capital markets infrastructure directly.

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Passage by CoinList is already set up to work under these new exemptions, allowing any self-custodial application to support these novel assets and trading venues. One integration connects your platform to a growing network of supported issuers and assets, with common onboarding, eligibility and wallet authorization, swapping, and DeFi workflows. 

Learn more about how Passage works within the Innovation Exemption.

Want to offer tokenized assets in your own product? See how Passage works.