The Securities and Exchange Commission (“SEC”) has never allowed publicly traded companies to ban investors from participating in class action lawsuits as a pre-condition for buying shares in an initial public offering (“IPO”). The right to sue has been considered an important protection for shareholders in companies against securities law violations. However, according to sources familiar with the agency’s operations, the SEC is now privately considering whether to allow companies to force investors to settle disputes through arbitration rather than litigation.
The SEC is considering this move in response to an ongoing trend in which less U.S. companies are going public. In 2017, just 237 U.S. companies had IPOs, compared to 450 in 2014. Eliminating the risk of litigation, which can cause bad publicity and high legal costs for companies, would remove a major inhibition in companies’ decisions on whether or not to go public. The potential change has caused argument along partisan lines. The Council of Institutional Investors, a trade group, said the change would be “a potential threat to principles of sound corporate governance that balance the rights of shareowners against the responsibility of corporate managers to run the business.” On the other hand, the U.S. Chamber of Commerce, a business lobby, claims that class-action lawsuits are devastating to the U.S. economy because of the huge costs they impose on companies, and that the real beneficiaries of such suits are plaintiff’s lawyers.
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