SEC Policy Statement Permits Mandatory Arbitration Provisions in Initial Public Offerings

By Jason Spitalnick

Background

On September 17, 2025, the Securities and Exchange Commission (SEC) adopted a policy statement clarifying that the presence of a provision requiring arbitration of investor claims arising under the Federal securities laws will not impact decisions regarding whether to accelerate the effectiveness of a registration statement.

A registration statement is a legal document that a company must file with the SEC before it can offer securities to the public. It is a comprehensive disclosure document that provides potential investors with detailed information about the company and the securities being offered. Issuers often ask the SEC to accelerate the effective date of registration statements. Under Section 8 of the Securities Act of 1933, acceleration is lawful only if the SEC finds that the filing meets the standards of providing full, accurate, and material disclosure, and that doing so is consistent with “the public interest and the protection of investors.”

The new policy statement (Release No. 33-11389; 34-103988) affirms that a company having a mandatory arbitration clause in its charter, bylaws, or similar governing documents will not count against the issuer for acceleration purposes. What matters, according to the Commission, is the adequacy of the disclosures in the registration statement — including any disclosures pertaining to issuer-investor arbitration provisions. To arrive at its conclusion, the Commission concluded that federal securities statutes do not override the Federal Arbitration Act, and that adequate disclosure of arbitration provisions in registration statements satisfies disclosure requirements without implicating public interest concerns regarding acceleration decisions. SEC Chairman Paul Atkins framed the change as “the first [step] of my goal to make IPOs great again.”

Commissioner Caroline Crenshaw delivered remarks expressing her dissenting view regarding the new statement. Commissioner Crenshaw pointed out that arbitrations are typically more expensive for individual shareholders, are not public, have no juries, lack consistent procedures, are not bound by precedent, preclude collective action among shareholders, have limited rights of appeal, and provide no assurance that identical investors would receive the same outcome. She further contended that mandatory arbitration will lead to inadequate policing of markets, undermine deterrence, harm market transparency and integrity, and squelch investor choice by stripping away fundamental litigation rights while regulatory enforcement resources are simultaneously shrinking.

Potential Impact on Class Action Securities Litigation

The key question is how the Commission’s new policy will impact class action securities litigation. The answer likely depends, in part, on state law.

Section 115 of the Delaware General Corporation Law effectively prohibits mandatory arbitration provisions by requiring Delaware corporations to guarantee shareholders at least one Delaware state or federal judicial forum in which to pursue specified categories of claims (including securities suits). By contrast, Nevada and Texas do not have comparable statutory prohibitions. If companies incorporated in permissive states like Nevada or Texas adopt issuer-investor mandatory arbitration provisions, class litigation could become impossible for shareholders, virtually precluding smaller retail investors from pursuing claims under the federal securities laws. For Delaware-incorporated companies, there is going to have to be some ability to seek redress in a Delaware state or federal court — though the details remain uncertain. In any event, it is possible a dichotomy will evolve whereby Delaware corporations will be uniquely vulnerable to securities class action risk. (Incidentally, it is reasonable to think that, on the margins, such a dichotomy may accelerate the “Dexit” phenomenon of companies looking to incorporate or reincorporate outside of Delaware).

Conclusion

The SEC’s new policy statement represents a potentially seismic shift in the securities class action landscape. The ultimate impact will depend on how many companies choose to adopt such provisions, whether courts enforce them consistently across different jurisdictions, and how the interplay between state corporate law and federal securities regulation evolves.