TheCorporateCounsel.net

Last week, the SEC announced that it had issued an order granting temporary, conditional exemptive relief to Tokenized Securities Venues (TSV) from the definition of “exchange” to trade tokenized National Market System (NMS) stock using innovative permissioned automated market makers and liquidity pools. The order also grants a temporary, conditional exemption from the definition of “dealer” in the Exchange Act to certain liquidity providers that provide liquidity in tokenized NMS stock. I must admit that this is a word salad that I never anticipated writing during the course of my career!

The SEC’s Fact Sheet does a good job of untangling this knot of strange and mysterious words for old fogey securities lawyers such as myself:

Over the past several years, advancements in distributed ledger technology have facilitated innovations in trading across non-security crypto assets. Increasingly, market participants are seeking to buy and sell tokenized NMS stock using automated market maker (“AMM”) and liquidity pool distributed ledger technology. However, a TSV that trades tokenized NMS stock may face substantial challenges with complying with the Federal securities laws without potentially burdensome changes to its business model. TSVs and the use of distributed ledger technology can offer several benefits to market participants, including enabling investor self-custody, around-the-clock trading, fractional ownership of shares, and near instantaneous settlement, while improving efficiencies and providing greater transparency.

The order granting the exemptions – known as the “Innovation Exemption” – allows market participants to obtain the potential benefits of distributed ledger technology for trading tokenized NMS stock. Specifically, the order facilitates trading in tokenized NMS stock using distributed ledger technology while maintaining appropriate investor protections and fair and orderly market principles as the Commission further considers potential regulatory changes or other actions.

The Fact Sheet further notes that the exemptive relief is subject to a number of conditions, including:

– Tokenized NMS stock traded on a TSV is subject to limits on the number of symbols and volume traded;

– A TSV must verify that the tokenized NMS stock made available for trading on the TSV provides holders the same rights and privileges as does traditional NMS stock of an equivalent class;

– Before making available for trading tokenized NMS stock that is tokenized by an unaffiliated third party, the TSV must provide written notice and an opportunity to object to the issuer of the underlying NMS stock;

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

– A TSV must provide public notice about its operations, trading activities, and the trading activities of its affiliates on the TSV.

The exemptive order grants the subject relief for a period of five years and solicits public comment about possible modifications to the relief and potential next steps.

– Dave Lynn