IPO Claims Moving From Courtroom To Conference Room? SEC Reverses Approach To Issuer Registration Statements With Mandatory Arbitration Provisions

On September 17, 2025, the U.S. Securities and Exchange Commission (the "SEC" or the "Commission") issued a Policy Statement (the "Policy Statement") clarifying the Commission's views on the use of mandatory arbitration provisions in the governing documents of companies conducting registered offerings of securities. The Policy Statement indicates that the presence of a provision requiring arbitration of investor claims arising under the federal securities laws will not impact the Commission's decisions regarding whether to accelerate the effectiveness of a registration statement. The Policy Statement is a clear victory for public issuers and another signal that capital formation by initial public offering ("IPO") may be more attractive than in the recent past.

Background

Investors generally have certain private rights of action under the federal securities laws to sue issuers and certain insiders of a corporation if the investors believe they were misled in connection with the purchase or sale of a security. Frequently, those lawsuits take the form of a putative class action.

Mandatory arbitration provisions in a company's governing documents generally require that shareholders waive their right to sue a corporation or its directors in court and, instead, resolve any disputes against the company through legally binding arbitration. Mandatory arbitration provisions may contain additional features, such as a prohibition against the formation of a plaintiff class or a requirement that an arbitrator's ruling be final and not subject to appeal.

There's been a longstanding debate over whether public companies should be allowed to require in their organizational documents arbitration for securities law claims by shareholders and whether such provisions conflict with the anti-waiver provision in Section 14 of the Securities Act of 1933. Before the Policy Statement, the SEC had long followed an unwritten policy of refusing to accelerate the effective date of registration statements of companies with mandatory arbitration provisions in their governing documents,¹ preventing such issuers from making registered sales of securities (in particular, IPOs).

Key Takeaways

The Policy Statement's adoption represents a significant shift in the SEC's views on the use of mandatory arbitration provisions and reflects the SEC's continued focus on its mission to facilitate capital formation.² The Commission's action is likely to reinvigorate a public policy debate over whether mandatory arbitration provisions are advisable from the perspective of both issuers and investors. In the Policy Statement, the SEC declined to express a view on the merits of such provisions.

It remains to be seen whether the SEC's new approach will result in more companies proposing or adopting mandatory arbitration provisions. These provisions have not been widely adopted by public companies (even outside the IPO context), due in part to the SEC's previous policy.

Next Steps

Issuers considering whether to adopt a mandatory arbitration provision should take the following steps:

• Gauge investor sentiment. Mandatory arbitration clauses in a company's governing documents are controversial and routinely opposed by some investors. Companies contemplating an IPO will need to determine whether investors might refuse to invest in a company that requires arbitration, the extent to which such a provision could alienate certain investors and the effects on marketing efforts and pricing of the offering. Actions by proxy voting advisors, stock exchanges, or institutional investors may influence a company's ability to adopt mandatory arbitration provisions, and first movers and early adopters are likely to face the most scrutiny.
• Evaluate potential cost savings. Mandatory arbitration policies can have the effect of limiting investors' ability to pursue claims based on the federal securities laws in the courts and instead channeling any such actions into arbitration, which may help public companies avoid shareholder class action lawsuits. Because class action lawsuits can be lengthy, complex, and costly, mandatory arbitration could result in significant cost savings for companies.
• Analyze restrictions under state law. State laws (or the laws of a non-U.S. jurisdiction) where a company is organized may prohibit the inclusion of a mandatory arbitration provision in its governing documents. For example, a recent amendment to the Delaware General Corporation Law effectively prohibits any bylaw or charter provision that would bar access to any court located in Delaware for claims under the federal securities laws. Recent judicial trends in Delaware have prompted some issuers to explore reincorporating in other states, particularly Texas and Nevada.
• Ensure adequate disclosure about mandatory arbitration provisions. In the Policy Statement, the Commission emphasized that when considering acceleration requests, the SEC staff will focus on the adequacy of the registration statement's disclosures, including disclosure regarding issuer-investor mandatory arbitration provisions. Companies with mandatory arbitration provisions should focus on whether their registration statements contain an adequate description of any mandatory arbitration provision, a discussion of the risks associated with the provision, including any uncertainty regarding its enforceability and the potential impact of the provision of shareholder claims.

Footnotes

1. The staff of the SEC's Division of Corporation Finance indicated that it would not exercise its delegated authority to accelerate the effectiveness of a registration statement submitted by a private equity firm in its 2012 initial public offering because the company's partnership agreement would have required mandatory arbitration of investor claims, including under the federal securities laws.

2. At the Commission's September 17, 2025 open meeting, SEC Chairman Paul Atkins stated that the issuance of the Policy Statement was "among the first steps of my goal to make IPOs great again."

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