Partner Lauren A. Ormsbee and Associate Jacqueline E. Lacovara are the authors of our latest Investor Alert, “Forced Arbitration One Year After the SEC Reversed Course.”  In this alert, the authors examine how the Securities and Exchange Commission’s (SEC’s) September 2025 policy statement allowing initial public offerings (IPOs) to feature mandatory arbitration provisions has impacted IPO filings and investors over the past year.

The SEC’s policy shift has opened the door for companies going public to require investors to resolve claims through arbitration rather than in federal court, reversing decades of policy.  Lauren and Jacqueline note that critics have cautioned that these provisions could “force investors into costly, individual proceedings and weaken protections under the federal securities laws.”  Former SEC Commissioner Caroline Crenshaw, the sole opposing vote at the time of the policy change, warned that the shift would “open the floodgates” to mandatory arbitration, deny shareholders their rights, allow alleged misconduct to remain private, and place financial constraints on investors who may not be able to sue if they cannot share legal costs through a class action.

The authors emphasize that, before the reversal, companies attempting to include mandatory arbitration clauses in their IPO registrations were “met with firm SEC resistance,” pointing to the long-held view that forced arbitration can “give companies too much control over the forum, rules, and location of disputes.”  For companies, forced arbitration can also create risks by enabling multiple individual claims to arise from the same alleged conduct.  Unlike federal securities cases, individual arbitrations may require repeated testimony without a single judgment to resolve the dispute, and they are not subject to heightened pleading rules under the Private Securities Litigation Reform Act (PSLRA).  On the other hand, class actions make it easier for investors with similar claims to pool costs and pursue relief together, and without this option, many individual claims may be too small to justify the expense. 

Despite the anticipated increase in mandatory arbitration provisions, the rush toward private arbitration has not materialized.  The authors note that of the 330 IPO filings submitted since the SEC’s policy shift, only one company, SpaceX, has included a forced-arbitration provision in its registration statement, and this is generally view this as an outlier.  Lauren and Jacqueline posit that most boards “appear unwilling, at least for now, to leave the federal court system or risk alienating investors,” as forced arbitrations undermine the crucial role private lawsuits have played in enforcing securities laws since the passage of the PSLRA in 1995.  The authors highlight that, since the enactment of the PSLRA, private lawsuits have enabled investors to recover approximately $100 billion through securities class actions.

Lauren and Jacqueline emphasize that, for investors, the practical takeaway is straightforward:  While mandatory arbitration has not yet become common, it is now an option, and investors should “review IPO documents for provisions that require arbitration or restrict class claims.”