SEC Adopts Landmark Rule to Restrict Shareholder Class Actions in Bid to Revive IPO Market

In a significant policy shift, the U.S. Securities and Exchange Commission (SEC) now authorizes public companies to include provisions barring shareholders from pursuing class-action lawsuits, equipping issuers with a potent new tool to limit collective litigation.

By overturning a decades-old, unwritten practice, the SEC has endorsed mandatory arbitration of shareholder disputes, thereby moving conflicts out of the public court system. SEC Chair Paul Atkins declared that the agency aims to “make IPOs great again,” assuring that companies will no longer face IPO roadblocks solely because their charter or bylaws prohibit class actions, and emphasizing that the change is intended to reduce compliance burdens on issuers.

Commissioner Hester Peirce voiced support for the amendment, contending that market-based mechanisms can better assess the appropriateness of compulsory arbitration than regulatory mandates.

Nevertheless, the rule change provoked immediate concerns about investor protection. Senators Elizabeth Warren and Jack Reed warned the SEC that allowing firms to circumvent class actions “would be a grave mistake” that risks undermining shareholder rights and eroding the trust that has long attracted global capital to U.S. markets.

At its core, the SEC’s initiative seeks to enhance the appeal of U.S. capital markets by streamlining regulatory requirements. Chair Atkins explained that the agency intends to eliminate compliance obligations that offer no meaningful investor safeguards, minimize legal uncertainty, and simplify the overall rulebook to make public listings more attractive to a broader range of companies.

Atkins further indicated that forthcoming proposals will focus on expanding support for newly public and smaller issuers and facilitating existing public companies’ access to additional capital. These efforts reflect a pro–business orientation among regulators appointed during the previous administration and signal a rollback of the stringent enforcement agenda enacted under President Biden.

The financial stakes underpinning this debate are substantial. Data from Stanford Law School and Cornerstone Research show that, in 2024, U.S. public companies paid approximately USD 3.7 billion in securities-class-action settlements, while SEC enforcement actions returned just USD 345 million to investors. Opposing Commissioner Caroline Crenshaw has highlighted that class actions have historically served as the primary vehicle for investor recovery in cases of corporate wrongdoing.

Implementation of the new policy will hinge in part on state incorporation laws. Delaware—the charter state for most U.S. public companies—explicitly prohibits arbitration in federal securities claims. Yet mounting competition from jurisdictions such as Texas and Nevada, which may embrace more arbitration-friendly statutes, could prompt some firms to relocate, thereby broadening the practical reach of the SEC’s rule change.