From the moment he took the helm as SEC chairman last summer, Jay Clayton voiced a desire to reverse the long-term decline in IPOs. (Since reaching 949 in 1996, they slid to 237 last year.) Anyone wondering just how serious Chairman Clayton’s SEC is about spurring IPOs should take note of recent news that the agency is mulling a radical concession to firms that undertake public offerings: namely, the ability to block investor lawsuits.
Bloomberg put the potentially Earth-shaking development in context: “The Securities and Exchange Commission in its long history has never allowed companies to sell shares in initial public offerings while also letting them ban investors from seeking big financial damages through class-action lawsuits. That’s because the agency has considered the right to sue a crucial shareholder protection against fraud and other securities violations.”
Nonetheless, the idea is now in the public sphere, thanks to confidential sources – who may be floating a trial balloon. Regardless, while Bloomberg’s reporting that securities class actions have prevented fraud is accurate, the SEC could just as easily respond that allowing issuers to sidestep such lawsuits will be a net positive for “Mr. and Mrs. 401(k).” Chairman Clayton’s primary argument for reducing disincentives to IPOs – including regulation and, yes, exposure to securities class actions – is that they cut Main Street investors out of valuable economic opportunity.
This recent news is not the first signal that the SEC is serious about lowering barriers to IPOs. In June, it allowed companies to submit IPO registration statements on a confidential basis. And in July, SEC Commissioner Michael Piwowar may have tipped the agency’s hand. Before a Heritage Foundation crowd, he said: “For shareholder lawsuits, companies can come to us to ask for relief to put in mandatory arbitration into their charter.”
Requiring investors to take their disputes to arbitration would indeed be a “sea change,” as Simpson Thacher partner Kevin Kennedy characterized it. At least one previous attempt proved highly controversial – and unsuccessful. In 2012, the Carlyle Group submitted an IPO plan that would have required shareholders to take their disputes to arbitration, but then bowed to opposition from investors, lawmakers and the SEC itself.
Six years and one presidential administration later, the SEC appears to be on board with the idea. Another trend could be at play too, as mandatory arbitration clauses are having something of a moment. In January, Republicans axed a regulation that would have prevented credit card companies from inserting mandatory arbitration clauses in contracts. Meanwhile, an appeal now pending before the Supreme Court is testing the ability of employers to require arbitration – and, by implication, avoid class actions – in employment disputes. Justice Breyer said a ruling for employers would cut out “the entire heart of the New Deal.”
If the SEC were to take this contemplated action, the implications for issuers and investors would, for better or worse, be equally significant.