SEC Allows Mandatory Arbitration Provisions in IPOs

On September 17, 2025, the Securities and Exchange Commission (SEC) issued a policy statement addressing mandatory arbitration provisions in initial public offerings (IPOs). This statement clarified that the inclusion of an investor claims arbitration requirement under Federal securities laws would not hinder decisions on accelerating the registration statement’s effectiveness.

Public companies are required to file a registration statement with the SEC before offering securities to the public. This document contains detailed information about the company and the securities being offered, aiming to provide potential investors with comprehensive disclosures. Companies often seek to accelerate the registration statement’s effective date, which the SEC can approve if it deems the filing to have met disclosure standards and be in the public interest and investors’ protection under the Securities Act of 1933.

The newly adopted SEC policy (Release No. 33-11389; 34-103988) confirms that companies with mandatory arbitration clauses in their charters or bylaws will not face obstacles to registration statement acceleration. The focus remains on the adequacy of disclosures in the registration statement, including those related to arbitration provisions. The Commission concluded that federal securities laws do not override the Federal Arbitration Act, and detailed disclosure of arbitration provisions in registration statements is sufficient in meeting disclosure requirements. SEC Chairman Paul Atkins described this change as the initial step in revitalizing IPOs.

Commissioner Caroline Crenshaw expressed a differing perspective on the policy statement, arguing that arbitration processes are costlier for individual shareholders, lack transparency and precedents, limit appeals, and hinder collective shareholder actions. She believes mandatory arbitration might weaken market oversight, deterrence, transparency, and investor choice by limiting litigation rights while regulatory enforcement resources decline.

The implications for class action securities litigation are substantial following the SEC’s policy shift. Companies incorporated in states like Delaware, Nevada, or Texas may adopt mandatory arbitration provisions, affecting shareholder access to legal recourse. Delaware imposes restrictions on mandatory arbitration, ensuring shareholders have access to state or federal courts for certain claims, including securities disputes. Shareholders’ ability to pursue claims will vary based on the state and its legal framework, possibly leading to a dramatic shift in how corporations handle securities class actions.

The SEC’s new policy statement introduces a significant change to the securities class action landscape, pending decisions on the adoption and enforcement of mandatory arbitration provisions. The interaction between state corporate law and federal securities regulation will play a vital role in determining the policy’s impact on companies and shareholders.