The SEC’s Embrace of Mandatory Arbitration in IPOs: A Retreat from Investor Protection and Public Accountability
Tue 26th May 2026 | Posted by Glancy Law, on Publications
Authors:
Rebecca Dawson, Kara Wolke, and Jonathan Rotter
On September 19, 2025, the Securities and Exchange Commission (“SEC” or “Commission”) adopted a policy that potentially marks one of the most consequential shifts in U.S. securities regulation in decades, and at the very least will impose tremendous uncertainties and costs on investors and companies. In a unilateral announcement that bypassed the required rulemaking process, the SEC said that it would break from long-standing precedent to facilitate the inclusion mandatory arbitration provisions in corporate charters and bylaws.[1] Mandatory arbitration forces shareholders who have been victims of fraud to individually sue companies in a private, confidential forum, instead of a court, and without the benefit of proceeding alongside other investors in a class action. Former SEC Commissioner Caroline Crenshaw warned the change would “stack the deck against investors — [] primarily small, retail shareholders in public companies.”[2]
The change, framed as a mere procedural clarification, attempts to weaken investor protections, undermines the development and enforcement of securities law, erodes confidence in U.S. capital markets, and, paradoxically, will impose immediate costs on companies that attempt to impose arbitration, and in the long run hinder the companies it purports to benefit.
The Policy Shift: What Changed and Why It Matters
Under the Securities Act of 1933[3] the SEC is required to weigh “the public interest and the protection of investors” in deciding whether to declare a registration statement effective.[4] For decades, it had been the SEC’s position that mandatory arbitration provisions were counter to the public interest and investor protection.[5] SEC Commissioners, Republican and Democrat alike, voiced the SEC’s serious concerns about the compatibility of mandatory arbitration with federal securities law and investor rights.[6] These concerns were not merely theoretical: the SEC’s former approach recognized that forced arbitration may violate state and federal laws, including the SEC’s core enabling acts,[7] and threatened securities class actions which are an important market enforcement mechanism contemplated by Congress.[8]
But in September 2025, the SEC abandoned its previous position against forced arbitration of shareholder lawsuits under the banner of ‘making IPOs great again.’[9] Going forward, the SEC will assess only whether mandatory arbitration provisions are adequately disclosed, not whether they are appropriate, lawful, or consistent with the public interest.[10] That itself is a fundamental abandonment of the SEC’s investor protection role.
The Consequences: Wide-ranging Dangers of Gutting Investor Protections
Mandatory Arbitration Harms Investors. Mandatory arbitration forces shareholders into forums that lack basic protections associated with courts of law; they are not public, there are no juries, procedures vary widely, and arbitrators are not bound by precedent or, in many cases, even required to provide reasoned decisions.[11] In the securities context, where information asymmetry already heavily favors companies over investors, these deficiencies are especially troubling.
Mandatory arbitration provisions also typically prohibit plaintiffs from proceeding together in class actions, requiring each shareholder to pursue claims individually. For securities claims, where fraud often causes massive aggregate harm, but where individual retail investors’ losses may be too small alone to pursue a legal action, forced arbitration and the prohibition of class actions is a functional elimination of claims. This is precisely why dozens of Senators and Congressional members have voiced that prohibiting forced arbitration helps ensure protection for individual investors and the markets.[12]
The plaintiffs’ bar is stepping in as the SEC’s own enforcement is diminishing. In 2023, the SEC filed 784 enforcement actions.[13] In 2024, that dropped to 583 enforcement actions.[14] In 2025, in keeping with trends of the Trump administration, the SEC declined to publicly announce statistics, but private analysis concluded the SEC filed just 313 enforcement actions, the lowest level of SEC enforcement activity in 10 years.[15] Meanwhile, in 2025, 207 new securities class actions were filed by civil litigants, covering cutting edge claims including Artificial Intelligence, Cryptocurrency, and cybersecurity-related cases.[16]
Forced Arbitration of Securities Claims Runs Afoul of Federal and State Laws. The SEC’s Policy does not guarantee enforceability of an arbitration provision, and investor advocates surely will mount legal challenges to these provisions in venues around the country. Forced arbitration of securities claims violates a plethora of investor rights, including under the below laws, and companies that attempt to include mandatory arbitration provisions in IPO registration statements or corporate charters are thus likely to face serious and costly challenges.
Federal Securities Laws. The Securities Act prohibits issuers from imposing on investors “[a]ny condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision” of the securities laws.[17] For decades, the prevailing view was that these anti-waiver provisions created a bar to mandatory arbitration clauses in IPO documents and corporate charters.
Federal Arbitration Act (FAA). Arbitration clauses and class action waivers may be enforceable only if consent is obtained, and questions of the sufficiency of such consent and enforceability are typically governed by state contract law.[18] In the internet context, this includes requiring explicit clicks on arbitration agreements. Inclusion of arbitration provisions in IPO registration statements or corporate bylaws raises substantial doubt about consent.
Seventh Amendment. The 7th Amendment guarantees the right to a jury trial of federal civil claims. This constitutional protection has been underutilized in the arbitration context, but the Supreme Court’s 2024 decision in SEC v. Jarkesy[19] suggests that 7th Amendment challenges will have teeth. Quoting earlier Supreme Court cases and leading historical commentators, Jarkesy called the jury trial right, which arbitration destroys, “the glory of the English law”, and noted that it is “of such importance and occupies so firm a place in our history and jurisprudence that any seeming curtailment of the right . . . should be scrutinized with the utmost care.”[20] The Supreme Court held that the SEC could not force Jarkesy into an administrative tribunal without a jury.[21]
State Laws and Common Law. Forced arbitration provisions also may be unenforceable under state corporate law or fiduciary-duty principles. The Commission itself acknowledges that Section 115(c) of the Delaware General Corporation Law requires shareholders retain access to at least one Delaware court for internal corporate claims, calling into question whether Delaware-incorporated companies may lawfully adopt mandatory arbitration for securities claims.[22] The Policy may also violate fiduciary duty law as corporate governance documents raise unique questions of consent, privity, and equity that do not arise in bilateral contracts contemplated by the Arbitration Act.
The SEC’s About-Face Risks Damage to Capital Market Integrity Introduces Uncertainty. Public securities litigation serves a critical market function. Court proceedings generate precedent, promote consistent application of the law, and provide transparency that benefits all market participants. Arbitration, by contrast, operates in silence; claims, evidence, and outcomes remain confidential, so defrauded investors may never learn of misconduct. Markets cannot price risk accurately when wrongdoing is hidden. This lack of transparency undermines deterrence. For foreign investors drawn to the stability and predictability of U.S. markets, this shift signals a troubling retreat. The Policy also gives no reassurance that future administration would not simply reverse course. Notably, the SEC itself concedes that it does not know the economic consequences of its policy change.[23]
Moreover, arbitration regimes capable of handling mass claims are underdeveloped and untested. Two of the largest providers of arbitration services, JAMS (Judicial Arbitration and Mediation Services) and AAA (American Arbitration Association), only recently began to establish mass arbitration procedures and guidelines beyond the employment context in 2024.[24] These new procedures are untested, and questions regarding batching, bellwether cases, and procedural coordination remain unanswered.
Warnings from Experts and Early Market Signals
The dangers of the SEC’s new Policy have not gone unnoticed. Former SEC Commissioner Caroline Crenshaw issued a forceful warning that mandatory arbitration would prevent shareholders from vindicating their rights, leave markets under-policed, and undermine global confidence in U.S. capital markets.[25] Shortly thereafter, she resigned.[26]
Other experts echo these concerns. After the Policy was issued, proxy advisory firm Glass Lewis advised against adopting mandatory arbitration provisions, citing governance and investor-confidence risks.[27] Institutional Shareholder Services (“ISS”) similarly warned that the Policy might backfire, leading to “supercharged” securities cases as issuers “risk responding to multiple arbitrations, perhaps thousands, providing more opportunities for investors, opposed to the finality of a class action in court.”[28]
Large institutions like the California Public Employees’ Retirement System (CalPERS) also have expressed their opposition, warning that “[c]lass actions are a powerful deterrent for corporations against defrauding their investors, and such actions are embedded in federal and state laws.”[29] Even the defense bar is cautious; Skadden Arps has cautioned that there are “advantages of litigating in court” in part because of the “well-developed body of precedent.”[30]
So far, issuers have been slow to accept the SEC’s invitation to impose forced arbitration agreements upon investors, perhaps fearing blowback from powerful institutional investors like CalPERS. In early 2026, Zion Oil & Gas Inc., a firm that uses Bible verses to search for oil deposits in Israel, became the first IPO issuer to include a mandatory arbitration provision.[31] SpaceX’s recently-filed registration statement for its $75 billion IPO purports to prohibit shareholders from bringing a class action and states that its bylaws will contain requirements for mandatory arbitration.[32] Credible companies and discerning investors should be wary of the Musk playbook, as the litigious entrepreneur has been embroiled in a losing legal streak recently, having been found liable to Twitter shareholders in a fraud lawsuit over that company’s $44 billion takeover (after losing his legal battle attempting to back out of the Twitter acquisition) and losing his legal battle against Sam Altman over OpenAI. Earth-bound CEOs will want to think twice about following in Musk’s footsteps.
Conclusion: What Investors Should Watch For
Investors should be vigilant. Arbitration provisions will likely be accompanied by class action waivers, and may come alongside fee-shifting clauses, procedural hurdles, limits on simultaneous claims, or other mechanisms designed to suppress accountability and frustrate investor redress for fraud. These provisions may appear not only in IPO registration statements, but quietly in bylaw amendments at existing companies. This is an emerging and unsettled area. Courts, shareholders, and future regulators will shape its ultimate contours. What is already clear, however, is that the SEC’s Policy attempts a fundamental shift away from transparency, accountability, and investor protection.
If you are concerned about the inclusion of an arbitration provision in any IPO registration statement in which you are a prospective investor, or in any corporate charter or bylaw amendment for a company of which you are already a shareholder, please reach out to Kara Wolke, Esq. or Jonathan Rotter, Esq. or email us at shareholders@glancylaw.com.
[1] “Acceleration of Effectiveness of Registration Statements of Issuers with Certain Mandatory Arbitration Provisions,” Rel. Nos. 33-11389, 34-103988, Sept. 17, 2025 (the “Policy”).
[2] Caroline Crenshaw, “Mandatory Dis-Agreements: The Commission’s Policy of Quietly Shutting the Door on Investors,” Sept. 17, 2025.
[3] Securities Act of 1933, 15 U.S.C. § 77a et seq. (“Securities Act”).
[4] 15 U.S.C. 77h(a) (“Section 8(a)”) and 17 CFR 230.461 (“Rule 461”). The SEC will declare a registration statement effective if the standards in Section 8(a) of the Securities Act and Rule 461 thereunder are met.
[5] See e.g. SEC Associate General Counsel Thomas Riesenberg, “Arbitration and Corporate Governance,” Corp. & SEC. L. Advisor, Vol. 4, No. 8, Aug. 1990, at 2 (“[I]t 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, where such waiver is made through a corporate charter rather than an individual investor’s decision.”).
[6] See e.g. Jay Clayton “Statement on Shareholder Proposals Seeking to Require Mandatory Arbitration Bylaw Provisions,” Feb. 11, 2019; Robert J. Jackson “Keeping Shareholders on the Beat: A Call for a Considered Conversation About Mandatory Arbitration,” Feb. 28, 2018.
[7] Securities Act and the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq. (the “Exchange Act”) (collectively, the “Securities Acts”).
[8] Supra n. 6.
[9] Paul Atkins, “Open Meeting Statement on Policy Statement Concerning Mandatory Arbitration and Amendments to Rule 431 of the Commission’s Rules of Practice,” Sept. 17, 2025.
[10] Supra n. 1.
[11] The Federal Arbitration Act, 9 U.S.C. §§1-16 (the “Arbitration Act”) generally makes covered arbitration agreements enforceable in state and federal courts. The only textual requirement in the Arbitration Act is that an award must be in writing. 68 Pub. L. 401, 43 Stat. 883 (1925).
[12] See e.g. Letter from Elizabeth Warren and Jack Reed to Chairman Paul Atkins, Sept. 16, 2025. See also Letter to Chairman Jay Clayton from Twenty-Two U.S. Senators, May 3, 2018; Letter to Chairman Jay Clayton from Twenty-Six Members of Congress, March 12, 2018.
[13] SEC, Enforcement Results for Fiscal Year 2023, Nov. 14, 2023.
[14] SEC, Enforcement Results for Fiscal Year 2024, Nov. 22, 2024.
[15] Gerald Hodgkins, SEC Focused On Fraud As Actions Markedly Declined In 2025, Law360, Nov. 12, 2025.
[16] Cornerstone, Securities Class Action Filings, 2025 Year In Review, at 5, January 28, 2026.
[17] Section 14 of the Securities Act and Section 29(a) of the Exchange Act.
[18] See, e.g., Meyer v. Uber Techs., Inc., 868 F.3d 66, 74 (2d Cir. 2017) (“State law principles of contract formation govern the arbitrability question.”).
[19] Sec. & Exch. Comm’n v. Jarkesy, 603 U.S. 109 (2024).
[20] Id. at 110.
[21] Id. at 140.
[22] Supra, n. 1 at 3, n.5 citing Del. Code. tit. 8, § 115.
[23] Policy at 19-20 (“It is difficult to estimate . . . the ultimate economic impact”).
[24] JAMS, JAMS Mass Arbitration Procedures and Guidelines, effective May 1, 2024; AAA, Mass Arbitration Supplementary Rules FAQ, effective Apr. 1, 2024.
[25] Supra. n. 2.
[26] SEC, Statement on Departure of Commissioner Caroline Crenshaw, Jan. 2, 2026.
[27] Glass Lewis, United States Benchmark Policy Guidelines, 2026, at 77-78.
[28] Donald Grunewald, “Why Compulsory Arbitration will Supercharge Securities Litigation”, ISS SCAS, Dec. 2025.
[29] CalPERS, Letter to Paul Atkins, Sept. 16, 2025.
[30] The Informed Board, Could Mandatory Arbitration Spell the End pf Securities Class Actions?, Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates, Dec. 2025.
[31] See Mike Leonard, “Biblical Oil Firm First to Mandate Arbitration Since SEC Shift,” Bloomberg Law, Dec. 8, 2025.
[32] Space Exploration Technologies Corp Form S-1 Registration Statement, filed May 20, 2026, https://www.sec.gov/Archives/edgar/data/1181412/000162828026036936/spaceexplorationtechnologi.htm