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I realize third-party tokenization was already a reality before the SEC’s Innovation Exemption order. But it sure feels like we’ve opened a Pandora’s box in the last few weeks. Every time I open LinkedIn, I see tokenization discussions. Sure, that’s partly the work of my algorithm, but there are many considerations for issuers, including some John shared last week. Luckily, there are also new resources available and some news reports on company objections to TSV notifications. Here’s a somewhat random grab bag of those resources and developments:

Yesterday, the Staff in the SEC’s Division of Trading and Markets issued these FAQs on the Innovation Exemption and a list of entities that have submitted written notice to the SEC that they intend to operate as a TSV pursuant to the TSV Exemption.

Earlier this week, the Securities Industry and Financial Markets Association (SIFMA) submitted a comment letter to the SEC reflecting input from its broker-dealer and asset manager members, plus the public companies that own them. Among other recommendations, SIFMA believes that a third-party tokenized version of a company’s NMS stock should only trade on a TSV after the company has given affirmative consent (i.e., an opt-in, not an opt-out).

Late last month, Nasdaq released a series of FAQs on the exemption, which highlight that there’s no requirement in the exemption that the tokens be interoperable across TSVs and that the lack of requirements related to price transparency on TSVs “effectively creates a shadow market for equity securities that can become disconnected from the broader market in both pricing and price transparency.” Nasdaq warns that this “impairs an issuer’s ability to maintain a complete, accurate and contemporaneous understanding of the price and trading behavior of its own securities” and that investors with poor outcomes on TSVs may blame the issuer. It concludes with the note that “As an issuer ourselves, having carefully reviewed and weighed these current considerations of the Innovation Exemption, we intend for Nasdaq, Inc. (Nasdaq: NDAQ) to opt out of TSVs.”

A group called the Issuer Sponsored Token Coalition has been formed around the goal that tokenized public securities preserve the fundamental relationship between an issuer and its shareholders. 

We also now know that a number of well-known large caps have objected to having tokenized versions of their shares traded on the TSV jointly launched by the crypto exchange OKX and NYSE’s parent, Intercontinental Exchange.

There’s also this announcement from Securitize that it will offer security entitlements to shares of twelve well-known companies. While the press release notes that these security entitlements are expected to be eligible for trading on TSVs eventually, apparently (I’m not going to pretend I fully get this!), the structure of the tokens and the fact that secondary market trading is availble “in a regulated manner through its broker-dealer” means that this development is initially not relying on the TSV exemption.

See also these nine more things you should know about tokenization from Broc on the Governance Beat blog. Panelists at our Proxy Disclosure Conference also said some companies are considering the issuer-sponsored token route to get ahead of demand for tokenized securities and maintain control, for example, through the issuer-focused Nasdaq Equity Token.

– Meredith Ervine