On September 17, 2025, the SEC reversed its previous position and issued a policy statement announcing that the presence of mandatory arbitration provisions in corporate documents, will not affect the SEC’s determination as to whether to declare registration statements effective.
Background
The SEC Division of Corporation Finance (CorpFin) reviews and comments upon filings made under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). The purpose of a review by CorpFin is to ensure compliance with the disclosure requirements under the federal securities laws, including Regulation S-K and Regulation S-X, and the general anti-fraud provisions, all of which require disclosure of material information necessary to make required disclosures, not misleading. The standard for required disclosure is generally the materiality of the information. In TSC Industries, Inc. v. Northway, Inc., the U.S. Supreme Court defined materiality as information that would have a substantial likelihood of being viewed by a reasonable investor as having significantly altered the total mix of information available.
Neither the SEC nor CorpFin evaluates the merits of any transaction or makes an assessment or determination as to whether a transaction or company is appropriate for any particular investor or the marketplace as a whole. The purpose of a review is to ensure compliance with the disclosure requirements of the securities laws. In that regard, CorpFin may ask for increased risk factors and clear disclosure related to the merits or lack thereof of a particular provision, but it does not have the authority to assess or comment upon those merits beyond the disclosure. However, the SEC does have the power to refuse to declare a registration statement effective based on specific public policy concerns.
The presence of mandatory arbitration provisions in corporate governance documents (articles of incorporation, bylaws, etc..) requiring arbitration for investor claims arising under the Federal securities laws, has been a controversial subject of discussion for many years. Mandatory arbitration provisions are favorable to companies as a means of requiring shareholders to arbitrate individual securities claims rather than litigate costly securities class action cases in court.
Over the years, the SEC has indicated that it finds mandatory arbitration provisions to be objectionable based on public policy concerns by using one of the few powers it could on the subject, to wit: refusing to accelerate the effectiveness of registration statements. The SEC does not have unfettered authority to refuse to declare a registration statement effective based on public policy concerns, but rather is limited to considering only those matters over which it has authority under the Federal securities laws. In lieu of the SEC declaring a registration statement effective, a company would have to rely on Section 8(a) of the Securities Act providing for automatic effectiveness after a twenty (20) day period. I’ve included a refresher on Section 8(a) at the end of this blog.
On September 17, 2025, the SEC issued a public policy statement indicating that the presence of an issuer-investor mandatory arbitration provision will not impact decisions whether to accelerate the effectiveness of a registration statement under the Securities Act. The change in policy is a result of recent Supreme Court decisions ruling that the federal securities laws do not override the Federal Arbitration Act’s (FAA) policy favoring enforcement of arbitration agreements, nor do the federal securities laws require that shareholders be able to proceed with their claims through a class action.
Mandatory Arbitration Provisions
As indicated, companies favor mandatory arbitration provisions for investor claims as a way of reducing litigation costs in general and avoiding class action lawsuits. The FAA itself gives strength to such contractual provisions stating that they are “valid, irrevocable and enforceable.” Under the FAA arbitration clauses must be contained in a valid and enforceable written agreement, and it is well settled that articles of incorporation and bylaws are valid and enforceable contracts between a company and its officers, directors and shareholders.
As these arbitration provisions rose in popularity, many states enacted legislation preventing the inclusion of mandatory arbitration clauses in corporate constituent documents, resulting in a slew of litigation. In many cases, the FAA won the battle with courts finding that a state law that “target[s] the enforceability of [mandatory] arbitration agreements either by name or by more subtle methods, such as by ‘interfering with fundamental attributes of arbitration’” may be preempted by the FAA.
The SEC then considers whether the Federal securities laws preempt the FAA. The SEC had previously believed they could argue that the securities laws do override the FAA because: (i) issuer-investor mandatory arbitration provisions could violate the anti-waiver provisions of the Federal securities statutes by foreclosing a judicial forum; and (ii) such provisions could unduly impede the ability of investors to bring private actions to vindicate their rights under the Federal securities laws by foreclosing class action litigation in courts.
However, in light of years of case law, including supreme court decisions, the SEC now concludes that the Federal securities laws do not preempt the FAA. In particular, nothing in the text of the anti-waiver provisions or any other provisions of the Federal securities statutes could be construed as a clearly expressed congressional intention that the FAA would not apply to Federal securities laws claims. Further, the FAA cannot be overrode merely because mandatory arbitration provisions may undermine the economic incentive of some people to bring private Federal securities law claims.
In light of the analysis, including reliance on case law, the SEC has now determined that the presence of an issuer-investor mandatory arbitration provision will not impact decisions regarding whether to accelerate the effectiveness of a registration statement.
As the SEC notes in its public policy release, “[T]he applicability of the FAA to a particular issuer-investor mandatory arbitration provision is a legal matter implicating the intersection of a Federal statute that Congress did not authorize the Commission to administer, and the unique laws of the state or other jurisdiction governing the provision.” That is, the enforceability of an arbitration provision is simply beyond the SEC’s power and authority.
Refresher on Section 8(a)
Section 8(a) of the Securities Act provides for the effectiveness of registration statements and amendments. In particular, the statute provides that a registration statement shall automatically go effective on the 20th day after its filing or such earlier date as the SEC may determine. Section 8(b) gives the SEC the power to issue a stop order to prevent a registration statement from going effective in accordance under Section 8(a) if the registration statement is “on its face incomplete or inaccurate in any material respect.”
In practice, companies avoid the Section 8(a) effectiveness by relying on Rule 473(a) to add language to their registration statements known as the “delaying amendment.” The typical language for a delaying amendment is similar to the following:
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.
… and with that provision, Section 8(a) is avoided. A company then goes through a comment, review and amendment process with the SEC which ultimately results in the SEC informing the company that it has cleared comments. Thereafter, a company files a letter with the SEC, relying on another rule (Rule 461) requesting that the registration statement become effective. Technically the request is that the SEC accelerate the effectiveness of the registration statement so that a company does not have to file a final amendment removing the “delaying amendment” language and adding Section 8(a) language and then waiting 20 days for the registration statement to go effective.
The reasons that Section 8(a) is not used in practice are twofold. The first is that a company and its attorneys, auditors and underwriters believe that there is too much risk of litigation associated with forgoing SEC review. If the registration statement disclosures are later shown to have shortcomings, the unusual lack of SEC review adds fuel to the plaintiff’s lawyer’s claims.
The second is that the S-1, which will go effective after 20 days, must be totally complete, including pricing information. In a traditional IPO or follow-on offering, the company does not file the final amendment with pricing information until the day it goes effective. This allows a company to judge the market at the moment of sale to choose the best price, which is especially important in a firm commitment underwritten deal where the underwriter buys all the company’s registered stock in the IPO and immediately resells it to customers and syndicated broker-dealers. A company also may get feedback during its roadshow, which typically occurs in the 10-15 days prior to effectiveness that affects pricing decisions.
However, when the SEC refused to declare a registration statement effective, or cannot due to a government shutdown, as we have seen recently, the risk-reward balance shifts and 8(a) becomes a viable option.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony, Linder & Cacomanolis
A Corporate and Securities Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony, Linder & Cacomanolis, PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALC legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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