SEC permits mandatory arbitration clauses in registration statements

The US Securities and Exchange Commission (SEC) recently issued a policy statement reversing its long-standing practice concerning mandatory arbitration clauses in connection with initial public offerings.

Released on September 17, 2025, this policy approved by the SEC Commissioners along party lines states that the SEC will no longer object to the acceleration of a company's registration statement solely because it contains a provision requiring mandatory arbitration of investor claims arising under federal securities laws. The SEC will instead focus on the adequacy of the disclosures regarding the arbitration provision. SEC Chair Paul Atkins characterized this move as an effort to make IPOs more attractive to companies.

Previously, the SEC viewed any provision that waived or impaired the protections of the federal securities laws as contrary to public policy and would not accelerate the effectiveness of a registration statement if the issuer required investors to arbitrate such claims. The SEC and other commentators believed that mandatory arbitration of shareholder claims would effectively put an end to securities class actions because they would require each investor to arbitrate their individual claims, which would be impractical for retail investors that suffered relatively small individual losses.

Senators Elizabeth Warren and Jack Reed expressed their concerns in a letter to Chair Atkins, contending that the new policy was inconsistent with prior SEC views and the securities laws, which do not permit investors to contractually waive the laws’ requirements. The letter posited that the SEC’s new position “would deprive investors of a key tool that allows them to hold companies accountable for misconduct.”

SEC Commissioner Caroline Crenshaw issued a similar statement, cautioning that the SEC’s new position will lead to under-enforcement of the securities laws and hurt stockholders.

Potential effects of mandatory arbitration provisions in registration statements

For issuers, the primary benefit of arbitration provisions is the ability to channel disputes into a confidential, less costly, and more efficient forum and avoid the uncertainty associated with securities class actions. Class actions often lead to in terrorem settlements based on the threat, however unlikely, of massive classwide damages if plaintiffs prevail at trial.

Unless an arbitration clause expressly permits classwide arbitration, claimants must proceed individually and are limited to their individual damages. See Lamps Plus, Inc. v. Varela, 587 U.S. 176, 187 (2019). To get around this roadblock, the plaintiffs’ bar has been filing “mass” arbitrations – pooling hundreds or thousands of individuals and bringing individual actions on behalf of each. While arbitration administrators such as the American Arbitration Association (AAA) and JAMS have recently implemented rules to streamline these mass actions and reign in filing fees, the cost to file these actions – for both claimants and companies – is significantly higher than court costs.

Arbitration clauses would likely limit securities defendants’ damages exposure by limiting the number of investors entitled to recover. They may deter low merit claims because the cost to file and prosecute an individual action often will exceed the potential recovery. They will likely curtail frivolous mass actions as well; plaintiffs’ counsel will need to front significant administrative fees to file hundreds or thousands of claims, which should encourage counsel to perform more robust initial investigations.

Arbitration may also favor defendants on the merits. Even in a mass arbitration, each plaintiff would need individualized proof to prevail on their claim, which may be more onerous than providing classwide proof on liability and damages issues.

At the same time, however, there are potential drawbacks of mandatory arbitration for issuers and other defendants. Arbitration does not offer the same finality as a class action, which allows companies to resolve the claims of all class members at once subject to the ability of individual class members to opt out. It also may require issuers to incur significant up-front costs, since companies typically pay most of the filing and arbitrator fees in such proceedings. Further, arbitration – especially mass arbitration – likely would not materially lessen the attorneys’ fees issuers would incur defending securities claims.

Additionally, arbitrators – at least initially – may be less experienced with federal securities claims than federal judges. Unless expressly provided for in an arbitration clause, there is no right of appeal in arbitration. This not only could leave issuers with poorly reasoned and unappealable decisions, but it also may stifle the evolution of the interpretation of the federal securities laws in ways that favor issuers or provide needed clarity. While these are important considerations, we suspect that on balance, arbitration provisions would be favorable to issuers by reducing the risk of securities claims and class actions.

Early adopters would face legal uncertainty

Given the prevalence of arbitration clauses in consumer and commercial agreements, issuers may seek to add arbitration clauses to registration statements to curtail the threat of investor class actions. However, early adopters are likely to face legal challenges.

The SEC’s policy statement did not express a view on whether issuer-mandated arbitration provisions are enforceable or appropriate for issuers or investors. Investors likely will challenge such provisions under Section 14 of the Securities Act of 1933 and/or Section 29(a) of the Exchange Act of 1934, both of which provide that “[a]ny condition, stipulation, or provision binding any person to waive compliance with any provision of this chapter . . . shall be void.” 15 U.S.C. § 77n; 15 U.S.C. § 78 cc. Older US Supreme Court precedent viewed anti-waiver provisions in securities laws as prohibiting mandatory arbitration. See Wilko v. Swan, 346 U.S. 427 (1953).

To counter these arguments, issuers likely would argue that the Federal Arbitration Act (FAA) generally mandates the enforcement of arbitration agreements. The Supreme Court has consistently expanded the reach of the FAA, upholding arbitration clauses even in unnegotiated contracts and in cases where individual arbitration might be uneconomical for plaintiffs. More recent Supreme Court decisions have held that parties can waive the jurisdictional provisions of the Exchange Act because such provisions merely limit jurisdiction but do not impose any statutory duties. See Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987); Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989). Issuers could argue that arbitration clauses are jurisdictional, rather than substantive, and are not prohibited by the anti-waiver provisions of the securities laws.

Given the Supreme Court’s recent favorable treatment of arbitration clauses in other contexts, issuers may expect the Court to have a similarly approving view of arbitration clauses in company by-laws or articles of incorporation that mandate arbitration of shareholder claims.

States may attempt to regulate issuer arbitration clauses

The new SEC policy also raises a critical question about the role of states in permitting such arbitration provisions. Because the state of incorporation is a party to articles of incorporation, the state may regulate the contents of corporate charters and bylaws. Unrelated to the SEC’s new policy, Delaware recently amended its corporate law to require access to courts in Delaware for certain types of stockholder claims. This provision might bar adoption of a mandatory arbitration provision. See 8 Del. C. § 115. Also, legal scholars have argued that mandatory arbitration provisions would violate the Delaware General Corporation Law because they are “inequitable as applied to shareholders.”

If Delaware law is interpreted to expressly prohibit or curtail mandatory arbitration provisions for public companies, other states such as Nevada and Texas may seek to attract corporations by adopting a more issuer-friendly, “freedom of contract” approach. Time will tell whether Delaware, California, or any other state expressly legislates to curtail such provisions and if this leads issuers to reincorporate in jurisdictions that are perceived to be more business friendly.

Key takeaways

Mandatory arbitration provisions may offer issuers a new, formidable defense to securities class actions and materially limit their potential exposure in securities cases. However, early adopters of these provisions are likely to face vigorous legal challenges from investors.

States also could impose limits on issuer use of such arbitration provisions (or expressly permit them), which could entice issuers to incorporate or reincorporate in states with more favorable corporate governance laws relating to arbitration clauses. In considering whether to adopt an arbitration clause, companies are encouraged to consult with their corporate counsel and litigation counsel regarding the potential legal and business implications of such a move.

For more information, please contact the authors.