The idea that companies might be able to avoid securities class action litigation through the adoption of bylaws requiring securities law claims to be submitted to arbitration has been around for years.

Traditionally, the SEC has opposed these types of bylaw provisions. However, in an interesting development, on September 17, 2025, the Commission, in a new policy statement approved by a 3-1 vote along party lines, announced that the decision whether or not to “accelerate the effectiveness of a registration statement” will “not be affected” by the presence of provision requiring the arbitration of investor claims arising under the federal securities laws.

This development suggests that in the future IPO investors could find themselves compelled to arbitrate securities law claims rather than being able to file a securities class action, although, as noted below, there is a lot more that is yet to be told on these issues.

A copy of the SEC’s September 17, 2025, press release about the policy change be found here. The September 17, 2025, policy statement itself can be found here.

Background

The idea that companies might be able to avoid securities class action litigation by the adoption of a bylaw requiring investor disputes to be arbitrated has been around for years. However, in the past, the SEC has thrown cold water on companies’ attempts to go public with this type of bylaw in place.

As discussed here, in 1990, when Franklin First Financial Corp that was planning its IPO sought to include an arbitration provision in its charter and bylaws, the SEC firmly objected to its inclusion. The SEC was of the view that it would be contrary to the public interest to require investors who want to participate in the nation’s equity markets to waive access to a judicial forum for vindication of federal or state law rights. In reaching this position, the SEC relied on anti-waiver provisions contained in federal securities law.

In 2012, when the private equity firm Carlisle Group sought to go public, its registration statement also contained bylaws with a mandatory arbitration provision. As discussed here, the firm faced pushback from activist investors, prospective investors, and the SEC, and ultimately withdrew the mandatory arbitration clause.  

The SEC’s position with respect to mandatory arbitration bylaws in has also influenced its action outside the IPO context. For example, as discussed here, in 2019, when a Johnson & Johnson investor introduced a shareholder proposal to amend the company’s bylaws to require arbitration of shareholder disputes, then SEC Chair Jay Clayton announced that the agency staff would allow J&J to block the shareholder proposal.  

The SEC’s Policy Statement on the Impact of Mandatory Arbitration Provisions

In the policy statement that the agency approved on September 17, 2025, the agency changed what it would do if presented with a registration statement for a company with a mandatory arbitration bylaw provision. Under the new policy, the agency’s decisions about whether to accelerate the effectiveness of a registration statement will not be affected by the presence of a provision requirement investor claims under the federal securities laws to be arbitrated.

For many IPO companies, accelerating the effective date of the registration is an important part of the IPO process. It allows the company to try to ensure that registration statement will be effective on a specific date and time. This is often done to align with market conditions or a planned offering schedule. If a company is unable to accelerate the effective date, it may result in delays in capital raising and market timing issues. It could scuttle the proposed IPO altogether. The SEC’s new policy ensures that the prospective IPO company’s inclusion in the registration statement of corporate bylaws including a mandatory arbitration provision will not affect the agency’s decision whether or not to accelerate the registration process.

The SEC’s new policy expressly is not an endorsement of investor arbitration requirements. The policy statement specifically says “nothing in this statement should be understood to express any views on the specific terms of an arbitration provision, or whether arbitration provisions are appropriate or optimal for investors.”

That said, there is no doubt that the Commissioners who voted in favor of the policy statement viewed what they were doing as supportive of arbitration bylaws and as favorable for IPO companies. Indeed, press reports about the agency’s new policy quote SEC Chair Paul Atkins as saying the agency’s prior policy “effectively strangled” IPO companies and that the agency’s new policy would “make IPOs great again.”

There is also no doubt that the agency’s action at least potentially opens the door for the possibility of prospective IPO companies adopting mandatory arbitration provisions. Many of the press reports about the SEC’s new policy have contained statements from observers saying that the agency’s approval of the new policy will “open the floodgates” to company’s adoption of mandatory arbitration provisions. However, before that happens, there are a number of things that are going to have to get sorted out.

For starters, the SEC may have changed what it will do if a prospective IPO company has a mandatory arbitration bylaw, but whether or not the company actually can adopt the bylaw in the first place is a matter of law of the state in which it is incorporated. It is highly relevant that many prospective IPO companies are Delaware companies. Under Delaware law, mandatory arbitration bylaws are effectively prohibited, as discussed here.  To be sure, there is an ongoing debate right now about whether or not companies should incorporate elsewhere, but for remaining Delaware companies, a mandatory arbitration bylaw may not be an option.

In addition, the agency’s new policy changes will at most affect future prospective IPO companies. The IPO market is looking relatively healthy now, but even in the current healthier market, it will take some time before the number of companies affected by the new policy would amount to an opening of the floodgates.

As for the “floodgate” possibilities, it is important to note that the agency’s new policy affects only prospective IPO companies. The policy says nothing about companies that are already public. For example, nothing about the new policy says what the agency would do if there were to be a shareholder proposal now – like the one discussed above about J&J in 2019 – to amend the company’s bylaws to provide for mandatory arbitration of federal securities claims. While we might expect the current lineup of Commissioners to take a more favorable position than the agency took in 2019, that is not certain.

In addition, everyone involved in these kinds of arbitration bylaw initiatives should understand that the enforceability of the bylaws will be challenged. For a very long time, the SEC itself viewed bylaws of this type as inconsistent with the anti-waiver provisions in the federal securities laws. It may be that a court or courts will also conclude that the mandatory arbitration bylaws violate the anti-waiver provisions.

There is one other practical consideration here. Not every company is going to conclude that mandatory arbitration bylaws are the best approach. For all of their flaws, class actions are efficient. Judicial proceedings, unlike arbitration proceedings, are subject to appeal.

In short, while the agency’s approval of the new policy unquestionably is very interesting, there is still more of this story to be told. For now, keep your eyes out for news that a prospective IPO company with a mandatory arbitration bylaw is seeking to go public. It will be interesting to see what happens next after that. How will investors react? How will the market react? We will get to see, probably soon, that is for sure.