On January 27, 2022, the SEC approved the country’s 17th stock exchange, the first one of which will utilize blockchain technology.  The new BSTX is a subsidiary of the Boston BOX Exchange and is a joint venture with tZero, which is providing the blockchain technology.  The BSTX is expected to begin operations sometime after June 2022 and will initially only trade securities that first list directly on the BSTX.  Once listed on the BSTX, a security can dual trade on other exchanges.

To begin, the BSTX will trade traditional securities but intends to move into tokenized securities and intends to brand itself with the look and feel of a digital asset exchange as opposed to the more traditional Nasdaq look.  In December 2020, the SEC rejected the Exchange’s original plan to exclusively trade tokenized securities.  The BOX then filed new proposed rules in May 2021 which, after 3 amendments, were approved by the SEC on January 27th.

The BSTX markets itself as providing (i) faster settlements (though note the SEC has now proposed rule changes that would shorten the settlement period for all market participants); (ii) blockchain secured market data where participants will be able to view proprietary data related to trading activity; and (iii) access for early stage companies – though I note that the SEC tightened the leash on the initial easier listing standards.

The SEC has asked for, and received, several changes throughout the process.  Amendment No. 1 made the following modifications: (i) eliminating the proposed suspension of unlisted trading privileges for thinly traded securities; (ii) eliminating a rule that would allow participants to choose same-day or next-day settlement; (iii) remove the Exchange’s ability to change the content of the market data blockchain and other technical modifications related to the blockchain technology; (iv) add text regarding market data products; and (v) eliminate the ability to convert a security to a BSTX listing (as opposed to original listing).

Amendment No. 2 made the following modifications: (i) provide additional technical and connectivity information; (ii) prohibit the listing of securities on the BSTX that is not distinct from an existing class of the same issuer; (iii) provide additional blockchain rule provisions including availability of trading information to non-members; (iv) add a cut-off time by which an execution must occur to be eligible for same-day settlement; (v) modify certain proposed rules to bring them into closer alignment with the rules of other national securities exchanges, including rules regarding securities eligible for trading, prohibitions against trading ahead of customer orders, round lots, minimum price variants, auctions used to open or reopen trading, the dissemination of market data, risk controls, market maker registration process and obligations, business conduct, trading practices, maintaining books and records, off-exchange transactions, scope of the minor rule violation plan, trade reporting and the dissemination of quotations, clearly erroneous executions, and locking and crossing quotations; (vi) eliminated proposed changes to Consolidated Audit Trail requirements; (vii) bringing the proposed listing standards in alignment with other national exchanges; and (viii) eliminate a proposed listing requirement that an applicant provide a legal opinion that its security qualifies as a security under applicable U.S. securities laws.

Amendment No. 3 made the following modifications: (i) align rules to be consistent with the definition of “penny stock” under Exchange Act Rule 5a51-1 (see HERE); (ii) changing a few definitions; and (iii) eliminating initial listing standards for preferred stock that were based on the rules of the NYSE American.

The final approval of the BSTX was conditioned upon the BOX joining all relevant national market system plans, updating its agreement with FINRA, ensuring its membership in the Intermarket Surveillance Group extends to the BSTX, and that the BOX adopted a rule establishing BSTX as a facility of the BOX.

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