On March 5, 2026, the Market Structure Subcommittee of the U.S.  Securities and Exchange Commission’s (“SEC”) Investor Advisory Committee (“IAC”) released a recommendation regarding the tokenization of equity securities.  The recommendation will be discussed and voted on at the IAC’s March 12, 2026 meeting.  As discussed below, the IAC cautions against adoption of a “blanket” innovation exemption to existing securities rules in connection with tokenized equity securities.

Defining a Tokenized Equity Security

According to the IAC, a “tokenized equity security” is a crypto asset that meets the definition of an equity “security” under the federal securities laws.  A crypto asset refers to an asset the ownership of which is recorded, in whole or in part, on a distributed ledger (e.g., a blockchain), where cryptographic methods (e.g., secure digital communication) are used to document ownership and verify ownership transfers.  The IAC observes that, as with traditional equity securities, securities laws and Financial Industry Regulatory Authority (“FINRA”) requirements apply to the issuance and trading of tokenized equity securities.  However, tokenized equity securities differ from traditional equity securities with respect to their issuance and trading; accordingly, new regulations or exemptions are needed to address these instruments.

The IAC identifies two different approaches:

  • Native vs.  Wrapped Tokens:  Tokenized equity securities may be classified as either “native,” meaning they are issued directly on a blockchain, or “wrapped,” in which the underlying equity security is held in custody and a token representing an interest in that custodied position is issued.
  • Issuer-Sponsored vs.  Third-Party Tokenization:  Equity securities can be tokenized by or on behalf of the issuer of such securities or by third parties unaffiliated with the issuer.

The IAC points out that these distinctions raise different considerations.  For instance, a holder of a wrapped token of a public company may not have the same shareholder voting or bankruptcy rights as a holder of a native token.

Potential Benefits of Tokenization

The IAC identifies several potential benefits, including:

  • Reduced Settlement Risk:  Tokenized equity securities allow for simultaneous delivery and payment in a single transaction—commonly known as “atomic settlement”—which eliminates settlement risk.
  • Enhanced Shareholder Engagement:  Public companies may lack visibility into their shareholder base because securities are commonly held in “street name” only (i.e., securities are registered in the broker-dealer’s name rather than the beneficial owner’s).  Tokenizing equity securities may provide direct, transparent, and real-time access to shareholder information, enhancing investor communications.
  • Reduced Intermediary Costs: Tokenized equity securities can reduce or eliminate reliance on intermediaries for certain corporate actions (e.g., dividend payments and proxy voting).
  • 24/7 Trading: By reducing reliance on intermediaries, tokenized equity securities may also enable 24/7 trading.

Potential Risks of Tokenization

The IAC emphasizes that the greatest risk is regulatory risk—that is, regulatory relief provided to enable tokenization may itself give rise to unanticipated or unforeseeable risks.  These may not be understood by investors, may impose costs on investors and may outweigh the benefits of tokenization, including those described above.  Potential known risks include the following:

  • Disclosure Gaps:  If the SEC allows unaffiliated third parties to create tokenized equity securities on behalf of public companies, it will need to ensure that such third parties are subject to appropriate regulatory oversight and that disclosures provide investors with sufficient information to understand their ownership rights.  Accordingly, new disclosure frameworks need to be developed for the issuance of tokenized equity securities and the ownership rights they confer.
  • Costs of Atomic Settlement: Atomic settlement may introduce new risks, including preventing multilateral netting (in which an investor’s trades over a day can be netted to reduce capital requirements) and reducing opportunities to correct trading errors.
  • Loss of Intermediary Protections:  Decentralized finance (“DeFi”), which might eliminate traditional intermediaries such as broker-dealers or exchanges, would potentially weaken other investor protections.  For example, in the absence of new regulations, investors might lose protections associated with intermediaries such as those associated with best execution, post-trade transparency, etc.
  • Market Resilience:  There are market resilience mechanisms applicable to broker-dealers and exchanges (e.g., kill switches and circuit breakers) that suspend trading during periods of extreme price volatility.  It is unclear how these measures would apply to the DeFi trading of tokenized equity securities.
  • Key Policy Recommendations

The IAC recommends that the SEC revise its regulatory framework in a manner that permits market participants to tokenize equity securities, provided that such revisions do not undermine fundamental investor protections.  These protections should address at least the following principles:

  • Mandatory Disclosures:  The SEC should require issuers of tokenized equity securities to provide investors with a concise disclosure document that explains how tokenization impacts their rights.  The disclosure document should address whether investors have the same ownership rights as holders of traditional equity securities, are entitled to voting rights, will receive dividends, and will participate in other corporate actions.
  • Intermediary Oversight:  The IAC raises concerns that tokenizing equity securities could enable fully anonymous trading, which would allow investors to take undisclosed ownership stakes in public companies.  This might undermine market integrity, corporate governance, national security, and the SEC’s ability to enforce against insider trading and market manipulation.  Therefore, the IAC stresses that intermediaries involved in the issuance, trading, or settlement of tokenized equities should be governed by the same fundamental principles applicable to other regulated market participants performing comparable functions, such as SEC recordkeeping requirements for broker-dealers regarding beneficial ownership information.  Additionally, the trading of tokenized equity securities must comply with Know Your Customer (“KYC”) requirements.
  • Fair Trading Protections:  The SEC should ensure that decades of market structure rules—including order protection, fair access, minimum price increments, and periodic reporting requirements under Regulation National Market System (“Reg NMS”)—are not eliminated for tokenized equity securities.

Innovation Exemption

The IAC recommends that the SEC follow the public notice and comment process in connection with any rulemaking. The IAC specifically cautions against granting a blanket exemption from existing state, SEC, and FINRA requirements that have successfully protected equity security holders.