The SEC will now permit IPO issuers to include mandatory arbitration of federal securities claims, potentially steering disputes out of court and weakening securities class actions. Delaware law currently bars such clauses, but shifts in incorporations toward states like Texas, or a reversal in Delaware, could curtail investors’ ability to seek collective redress. The ultimate impact is uncertain, yet the change may erode investor protections and, while aimed at easing IPOs, risks denting the U.S. governance reputation and capital markets. In contrast, while the class action mechanism is generally not available in European jurisdictions, consumer and investor-protection principles will generally render arbitration clauses unenforceable when imposed unilaterally by issuers, particularly if they restrict access to public courts or collective redress mechanisms.
The SEC has changed its long-standing stance on arbitration provisions in IPOs.[1] In a policy statement approved by Commission vote along party lines, the Commission announced that it will no longer refuse to accelerate the effectiveness of a registration statement solely because the issuer’s charter or bylaws require investors to arbitrate federal securities claims. Practically, this opens the door for newly public companies to include mandatory arbitration clauses that would route securities disputes to private arbitration rather than federal court.
For decades, the SEC viewed these clauses as at odds with investor-protection principles embedded in the federal securities laws. The new posture reframes the issue as a matter of disclosure adequacy rather than public-policy incompatibility, with the stated aim of reducing perceived “hassles” of being public and making IPOs more attractive. Proponents argue that decreasing litigation friction could bolster public market participation. Critics counter that the practical effect of individual arbitration requirements, especially when paired with class action waivers, would be to make collective redress economically infeasible for most shareholders, thereby weakening a key enforcement mechanism against financial misstatements and other misconduct that depress share prices.
State corporate law remains a critical gatekeeper. Most public companies continue to be incorporated in Delaware, where mandatory arbitration of securities claims has effectively been prohibited.[2] That constraint tempers immediate, widespread adoption. But two paths could quickly change the landscape: a continued shift of new incorporations to states more permissive of arbitration, such as Texas, or a Delaware policy change to stem outflows. Either development could meaningfully erode the availability of securities class actions by replacing public, precedential litigation with individualized, private proceedings.
There are additional uncertainties. Courts may still be asked to evaluate whether particular arbitration provisions conflict with federal anti-waiver doctrines.[3] Market practice will depend on how underwriters, institutional investors, and proxy advisors react to issuers proposing arbitration clauses. Some issuers may decide that, despite the SEC’s new policy, the signaling cost to governance-focused investors outweighs the litigation benefits. Others may judge the trade-off differently and test the limits.
In short, while the SEC’s goal of easing the path to the public markets is understandable, the means carry significant investor-protection risks.
It remains too early to know the ultimate impact on investors’ ability to bring class actions for corporate misconduct that affects share prices. Nonetheless, the change may negatively affect their ability to do so. Weakening core enforcement tools in the name of capital formation risks eviscerating investor protections and may undermine the United States’ reputation for strong governance. This is an outcome that could, paradoxically, impair the long-term health and depth of our capital markets.
Comparative Perspective: Europe’s Approach to Arbitration in Securities Disputes
Across the EU, consumer and investor-protection principles will generally likely render arbitration clauses unenforceable when imposed unilaterally by issuers, particularly if they restrict access to public courts or collective redress mechanisms. In several Member States, for example, domestic rules (reflecting Directive 93/13/EEC on unfair contract terms) treat pre-dispute arbitration clauses in “weaker-party” contracts as potentially unfair or voidable.
In Germany, while arbitration is permitted in commercial contracts, it is rarely used for securities disputes. Under German law, arbitration agreements operate inter partes, so pre‑dispute clauses in prospectuses or company statutes bind only parties who have validly agreed to them and will not typically bind secondary‑market investors absent a specific arbitration agreement with the issuer (and, for consumers, compliance with § 1031(5) ZPO). Collective actions under the Capital Markets Model Case Act (KapMuG) are exclusively civil court-based, reflecting the aim to maintain judicial oversight of capital-market misconduct.
The Netherlands likewise relies on the civil courts for securities litigation. Under Dutch law, an arbitration clause that obliges a consumer to resolve disputes through arbitration is presumed to be unreasonably onerous and may therefore be voided. Although professional investors do not qualify as consumers in the strict sense, Dutch courts would likely extend this reasoning to situations involving a clear imbalance of power or information, such as between issuers and investors in a securities offering. A valid arbitration agreement must be based on genuine mutual consent and cannot be unilaterally imposed where one party has no real opportunity to agree, particularly in the context of retail investors subscribing to shares in an IPO.
In the United Kingdom, arbitration is a well-established mechanism for commercial disputes but plays virtually no role in securities litigation. Investor claims under the Financial Services and Markets Act or via Group Litigation Orders proceed in court, and any issuer-imposed arbitration clause would likely be deemed an unfair term under UK consumer law.
Overall, the European framework seems to stand in contrast to the SEC’s new policy direction.While U.S. policymakers see arbitration as a way to ease the path to the public markets, Europe continues to view court-based enforcement as essential to maintaining investor confidence and market integrity.
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[1] https://www.law360.com/articles/2402662/investor-advocates-criticize-sec-s-new-arbitration-stance;
[2] https://www.dandodiary.com/2025/09/articles/securities-laws/sec-revises-policy-on-arbitration-provisions-in-ipo-companies-bylaws/
[3] Ibid.
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