Enacted on March 25, 2025, SB21 was widely viewed as an effort to win back companies considering corporate relocation in response to recent decisions by Delaware courts. Among other changes, SB21 contained important amendments to DGCL Section 144’s safe harbor provisions for conflicted transactions, clarifying what constitutes a conflicted transaction and setting forth the steps that must be taken for the safe harbor protection to apply.[1] While Cooley has cataloged elsewhere the full set of changes to Section 144, the Clearway case focused on two amendments:

1. The addition of language protecting directors and officers against “equitable relief, or … an award of damages … by reason of a claim based on a breach of fiduciary duty” where the safe harbor is satisfied.
2. A retroactivity provision specifying that the changes to Section 144 apply retroactively except as to proceedings pending on or before February 17, 2025 (the date SB21 was introduced).

In its recent Clearway opinion, the Delaware Supreme Court rejected constitutional challenges to both provisions. Read on to learn more.

Constitutional challenges

Background

Shortly after being signed into law, SB21 came under attack in a trio of derivative actions, including Clearway, challenging the validity of the two amendments discussed above on state constitutional grounds. In Clearway, Vice Chancellor Lori Will certified the following questions to the Delaware Supreme Court:

1. “Does … eliminating the Court of Chancery’s ability to award ‘equitable relief’ or ‘damages’ where the Safe Harbor Provisions [of Section 144] are satisfied [] violate the Delaware Constitution of 1897 by purporting to divest the Court of Chancery of its equitable jurisdiction?”

• “Does … applying the Safe Harbor Provisions to plenary breach of fiduciary claims arising from acts or transactions that occurred before the date that Senate Bill 21 was enacted—violate the Delaware Constitution of 1897 by purporting to eliminate causes of action that had already accrued or vested?”

In other words, do the amendments run afoul of the Delaware Constitution by ruling out money damages and equitable relief for safe harbor transactions, and applying these substantive changes retroactively? The Delaware Supreme Court accepted the two certified questions on June 11, 2025. Briefing closed in September, and oral argument was held on November 5, 2025.

The parties’ arguments

Remedies: On the first question, the plaintiff’s arguments focused on Section 10 of Article IV of the Delaware Constitution. Section 10 provides, in relevant part, that the Court of Chancery “shall have all the jurisdiction and powers vested by the laws of this State in the Court of Chancery.” The seminal case on point, DuPont v. DuPont, 85 A.2d 724 (Del. 1951), explains that Section 10’s grant of “general equity jurisdiction of the Court of Chancery … is a constitutional grant not subject to legislative curtailment.” Thus, attempts by the legislature to strip the Court of Chancery of jurisdiction are presumed invalid, unless some non-Chancery tribunal is available to provide “the equivalent of the remedy available in the Court of Chancery.” The plaintiff in Clearway argued that the elimination of equitable remedies and money damages for safe harbor transactions improperly impinged the “jurisdiction and powers” granted to the Court of Chancery.

In response, the defendants – as well as Delaware’s governor, who intervened to defend SB21’s constitutionality – sought to emphasize the amendments’ limited scope. In particular, they argued that the elimination of certain remedies should be viewed, not as a curtailment of the Court of Chancery’s jurisdiction, but rather as an adjustment to the standard of review the court applies to conflicted transactions. They also argued that the plaintiff’s argument would threaten the viability of other provisions of the DGCL.

Retroactivity: On the second question, the plaintiff in Clearway argued that, by applying the changes to pre-amendment acts and occurrences, the legislature was depriving would-be-plaintiffs of a vested right, in contravention of due process and Section 9 of Article I of the Delaware Constitution. The defendants countered that no one has a vested right in particular remedies, and that, in any event, the retroactivity provision did not violate due process because it reflected a rational legislative purpose.

The Delaware Supreme Court’s decision

On February 27, 2026, the Delaware Supreme Court upheld the constitutionality of the two challenged amendments in a unanimous en bancopinion.

Remedies: As to the plaintiff’s first claim – that SB21’s elimination of equitable relief and damages for safe harbor transactions represented unconstitutional jurisdiction-stripping – the court answered in the negative. Among the key reasons underlying the court’s analysis were the following:

• Delaware recognizes a “strong judicial tradition” of presuming the constitutionality of legislative enactments, which will be upheld unless their “invalidity is beyond doubt.”
• Because fiduciary duty claims are still adjudicated by the Court of Chancery – even where the safe harbor requirements are satisfied – the amendment “does not strip the court of its jurisdiction over equitable claims.” In this regard, the court distinguished its decision in DuPont. The court reasoned that in DuPont, unlike here, the statute purported to grant to the Family Court exclusive jurisdiction over support and maintenance actions, depriving the Court of Chancery of the ability to adjudicate such claims. The court likewise distinguished the plaintiff’s other main case, In re Arzuaga-Guevara, 794 A.2d 579 (Del. 2001), on the grounds that it too concerned a statute that purported to vest exclusive jurisdiction in the Family Court.
• The court accepted the defendants’ framing of the amendments as a change to the standard of review for fiduciary claims, noting that, “Rutledge’s claim itself remains with the Court of Chancery’s jurisdiction.”
• Adopting the plaintiff’s more expansive view of jurisdiction stripping and DuPont would imperil other settled provisions of the DGCL, including the short-form merger procedures upheld in Glassman.
• Pulling back, “adopt[ing] DGCL provisions that shape the contours of equitable claims and affect the relief available in intra-corporate litigation” is a core prerogative of the legislative branch.

Retroactivity: The court’s analysis of the retroactivity provision rejected the plaintiff’s contention that the amendment effected an unconstitutional deprivation of a vested right. Key points included the following:

• SB21 “does not extinguish [a would-be plaintiff’s] right of action,” even if “the court must now review the challenged transaction under [different] statutory standards.”
• Although the court stopped short of resolving the question of whether the amendment effected the extinguishment of a vested right, it characterized the proposition as “highly questionable” and observed that the plaintiff’s interest instead “appears to be more ‘an anticipated continuance of the existing law.’”
• In any event, even if a would-be-plaintiff did have a vested right in the availability of particular remedies, for economic legislation like SB21, due process only “requires that the statute bear a reasonable relation to a permissible legislative objective.” And the court easily concluded that SB21 was designed to further a permissible legislative objective, namely the exercise of the General Assembly’s “constitutional authority to create and modify the general corporate law of Delaware.”

Moving forward

Key takeaways for practitioners:

• The principal takeaway here is, of course, that the safe harbor amendments and retroactivity provision of SB21 remain intact, providing corporate decision?makers with greater dealmaking certainty via the statutory safe harbors.
• More broadly, the Delaware Supreme Court has in recent years repeatedly served as a ballast to the Chancery Court, paring or rejecting some of the Chancery Court decisions that had driven companies to consider other alternatives for incorporation. This decision is in line with that trend. SB21 provides much needed clarity to dealmakers undertaking conflict transactions.  As always, however, we can expect the plaintiffs’ bar to continue probing for avenues to challenge conflicted transactions.
  • Accordingly, it remains critical for companies considering strategic transactions that could implicate material conflicts to consult with experienced counsel as early as possible in transaction planning, and ensure corporate/M&A counsel is working hand in glove with their litigation colleagues to devise appropriate processes to mitigate risk from the outset.
• The court’s decision also reflects some measure of deference to legislative decision-making. In so doing, it highlights one of the advantages that Delaware can offer to corporate decision-makers: namely, the ability of the Delaware legislature to respond to concerns of practitioners and corporations.   

[1] For guidance on navigating conflicted transactions in Delaware and Nevada, see this February 25 Cooley article.

The Court of Chancery’s 2024 decision prompted Delaware’s legislature to amend the Delaware General Corporation Law (DGCL) to expressly authorize the type of stockholder agreement challenged in Moelis. However, the new statutory provision (Section 122(18)) does not apply to litigation already pending prior to its enactment, such as Moelis. In a footnote, the Delaware Supreme Court noted that while Section 122(18) might reflect the “public policy of Delaware,” the legislature’s express carve out of then-existing litigation “require[d]” the court to “ignore that public policy” in reaching its decision.

Background

As discussed in our April 8, 2024 blog post, the Moelis case was brought by certain minority stockholders in the investment bank Moelis & Company and arose from a stockholder agreement entered into between the investment bank and its founder (Ken Moelis) before the investment bank’s initial public offering. The stockholder agreement granted the founder certain rights and protections, including veto rights over certain corporate actions and decision making over the composition of the board. The defendants argued that the challenged provisions were valid and that the plaintiff’s challenge was time-barred, either by the three-year statute of limitations or under the doctrine of laches.[1]

The Court of Chancery rejected the defendants’ timeliness argument, holding that the challenged provisions were “void” because they violated Section 141(a), and void provisions are not subject to equitable defenses such as laches. The Court of Chancery also held that even if the defense of laches were available, it would not apply because the plaintiff’s claim was “based on an ongoing statutory violation.” In a separate opinion, the Court of Chancery concluded that several of the challenged provisions were facially invalid because they substantially limited the directors’ ability to exercise their best judgment on behalf of behalf of the company’s stockholders on management matters, in violation of Section 141(a) of the DGCL. The Court of Chancery, however, recognized that the provisions deemed facially invalid would have survived challenge if they were included in Moelis’s charter. The Court of Chancery later awarded the plaintiff’s counsel $6 million in attorney’s fees.

Delaware Supreme Court’s reversal

The Delaware Supreme Court reversed the Court of Chancery’s decision, holding that the plaintiff’s suit was barred by laches. In reaching that holding, the Supreme Court ruled that:

1. The challenged provisions are voidable, not void, and therefore challenges to such provisions could be subject to equitable defenses such as laches.
2. The plaintiff’s claim as to the facial invalidity of the challenged provisions accrued when the stockholder agreement was executed in 2014.

The court concluded that the claim was “time barred under the doctrine of laches,” and thus, the defendant was entitled to summary judgment and the plaintiff was not entitled to attorney’s fees.

Void versus voidable

The Delaware Supreme Court first reversed the Court of Chancery’s determination that the challenged stockholder agreement was void rather than voidable. Acknowledging that the distinction between “void” and “voidable” has “long vexed courts and legal scholars alike,” the court explained that in the corporate governance context, void acts are “illegal acts or acts beyond the authority of the corporation,” whereas voidable acts are those that “the corporation can lawfully accomplish” if done in the appropriate manner. The Delaware Supreme Court rejected the Court of Chancery’s “categorical rule” that “any contractual provision adopted in a manner that exceeds the board’s or management’s authority” is void, even if such provision “could be ratified or enacted in an authorized manner.” Thus, whether the stockholder agreement was void or voidable hinged upon whether there were any lawful means by which Moelis could have accomplished the agreement’s purposes.

The court answered that question in the affirmative, noting that the Court of Chancery recognized that Moelis could have used “alternative methods” to achieve the same governance arrangements provided for in the stockholder agreement (such as by amending its charter). In other words, it was not “beyond the authority of the corporation” to adopt those provisions, thus rendering the provisions voidable, not void. Because the plaintiff failed to meet its “burden of establishing that the challenged provisions are void,” the court rejected the Court of Chancery’s conclusion that equitable defenses like laches were unavailable.

Laches

The Delaware Supreme Court then proceeded to hold that the plaintiff’s suit was barred by laches. To determine whether the plaintiff’s delay in bringing its claim was unreasonable, the court looked to the “statutory limitations period for bringing an analogous legal claim,” which is three years. Because the complaint was filed nine years after the stockholder agreement was adopted in 2014, the timeliness analysis turned on when the claim “accrued.”

The Delaware Supreme Court rejected the Court of Chancery’s conclusion that the claim had not yet accrued because there was an “ongoing statutory violation.” Instead, it held that “the only wrongful conduct alleged in the complaint was the execution of the stockholders agreement,” and that “all the elements of the plaintiff’s claim were present and complete relief was available in 2014.” The court also held that the plaintiff failed to rebut the presumption that Moelis was prejudiced “as a matter of law” due to the plaintiff’s delay.

The court emphasized that its opinion does not provide blanket immunity for stockholder agreements. Rather, facial challenges are timely if filed within three years of the execution of the agreement, and as-applied challenges may be brought even after the three-year limitations period has expired. Indeed, the court noted that Moelis stockholders could still bring as-applied challenges to the stockholder agreement in the future.

Takeaways

Effect of Statutory Amendments: The Court of Chancery’s decision in Moelis was among the cases that prompted Delaware-incorporated companies (especially controlled companies) to consider reincorporation in a different state, a trend commonly referred to as “DExit.” In response, the Delaware Legislature made significant amendments to the DGCL, including adding Section 122(18) to allow for certain stockholder agreements similar to the one at issue in the Moelis case and amending Section 144 to provide for certain safe harbors for controlled transactions. The Delaware Supreme Court’s Moelis opinion sidestepped DExit considerations and the ongoing policy debate in Delaware. Indeed, the court noted that it consciously ignored any public policy reasons behind Section 122(18).

Practically speaking, the adoption of Section 122(18) means that there is a statutory bar on facial (but not as-applied) challenges to stockholder agreement provisions that fall within its scope and were not the subject of existing litigation claims as of August 1, 2024. Provisions not within the scope of 122(18) may still be subject to future facial and as-applied challenges by plaintiffs.

Future Challenges to Stockholder Agreements: Moelis makes it more difficult for stockholders to bring facial invalidity challenges to long-standing corporate governance documents. The Delaware Supreme Court’s opinion first provides valuable guidance on which corporate acts may be deemed void (if the acts are illegal or beyond the corporation’s authority) versus merely voidable (if they can be lawfully accomplished). The opinion then makes clear that a corporate defendant may raise a laches defense whenever a plaintiff challenges a provision in a corporate instrument that is: (1) voidable and not void; and (2) more than three years old. Even when both criteria are met, plaintiffs will argue that case-specific circumstances warrant allowing a particular suit to proceed. But, as a general matter, Moelis gives would-be defendants a potent weapon for side stepping such suits.

[1] As the Delaware Supreme Court explained in its recent opinion, laches is “an affirmative defense that the plaintiff unreasonably delayed in bringing suit after learning of an infringement of his or her rights” that applies to equitable rather than legal claims.

Overall, the updates reflect the current SEC administration’s focus on engagement and transparency – indeed, “engagement” has been added to the Manual’s mission statement, which states that the SEC intends to “engag[e] with harmed investors and other members of the public in a professional manner.” Also, in the press release announcing the changes, the SEC stated that it encourages “open, informed, and thoughtful dialogue between SEC staff and potential respondents and defendants.” On their face, these statements suggest that companies and individuals facing SEC investigations may be provided more meaningful opportunities through proactive engagement and effective advocacy during the investigative process to persuade the SEC not to bring an enforcement action or to settle on more favorable terms.

Below, we summarize the most important updates in the Manual.

Updates to Wells process

The Wells process is triggered with a formal notice from the staff that it has made a preliminary determination to recommend an enforcement action against the individual or entity. Thereafter, that individual or entity under SEC investigation is entitled to submit a written or video statement to the Division of Enforcement, typically with the intent of convincing the staff that no enforcement action is warranted. In October 2025, SEC Chairman Paul Atkins previewed procedural changes to the Wells process to promote fairness and transparency, including an extended timeline for submission, opportunities for Wells meetings and access to the SEC’s investigation files.

The Manual incorporates these changes and several other procedural updates.

Additional approval required before issuing a Wells notice.

The Manual requires the staff to obtain approval from the Office of the Director (in addition to an associate director or unit chief) before issuing a Wells notice. This additional approval requirement provides the director with the opportunity to weigh in on potential charges and remedies earlier in the process, and in some cases, they might recommend changes to reflect consistency across the Division of Enforcement and more closely align with Commission priorities.

Circumstances in which a Wells notice is issued.

The Manual states that a “Wells notice will be provided in most cases” in which the staff makes a preliminary determination to recommend that the Commission file an action or institute a proceeding. The previous manual did not provide any prescriptive guidance concerning how often Wells notices should be issued, and traditionally practices have varied among the staff and across different administrations. The Manual also limits the circumstances in which the staff should consider not providing a Wells notice to “parallel covert criminal investigation(s)” as opposed to parallel criminal investigation more generally. Historically, the staff often did not issue a Wells notice when there was a parallel criminal investigation, even if it was overt, due to a concern that undertaking the process could lead to a delay in the filings. This change will mean that either the staff will issue Wells notices earlier in the process in order to build in enough time to coordinate the timing of SEC charges with criminal charges, or the SEC will file charges following their criminal counterparts.

Extended time period for Wells submission.

Recipients of a Wells notice will now be allowed four weeks to make a Wells submission and can seek extensions, although the staff could deny such requests for “good cause.” This change isn’t likely to have a significant impact on the process, as historically the staff gave recipients two weeks to respond, but generally granted extensions.

Sharing of other evidence not known to Wells recipients.

While Wells recipients were often given the opportunity to review material produced to the SEC by third parties, there was no written policy regarding the sharing of such evidence with potential respondents or defendants. The updated Manual changes that, directing the staff to inform Wells notice recipients of “salient, probative evidence” that the staff reasonably believes the recipients may not know, subject to “confidentiality or other constraints” for information sharing.

Access to SEC’s investigative files.

Previously, the staff had discretion whether to allow Wells recipients access to its investigative files. Now, the Manual directs the staff to be “forthcoming about the content of the investigative file” and to “make reasonable efforts” to allow recipients to review the files. This change will likely lead to more consistency in practices across the Division of Enforcement, which historically have varied with some staff providing substantial access and other staff providing none. However, the Manual still provides the staff some discretion in determining whether and how much to share. Among other things, the staff may consider whether the Wells recipient “was unresponsive to staff requests, failed to cooperate, or otherwise refused to provide information during the investigation.”

Requests for Wells meetings are ‘typically granted.’

As former staff noted early last year (see our March 18, 2025 blog post), the current SEC administration is more receptive to Wells meetings compared to the previous one. The Manual provides that requests for Wells meetings are “typically granted” and should be scheduled within four weeks of the Wells submission. However, what has not changed is that Wells recipients generally will only be accorded one post-Wells notice meeting. The Manual also states that the post-Wells notice meeting will include a member of senior leadership at the associate director level or above, so it will not necessarily include the director or a deputy director.

Guidelines for ‘helpful’ Wells submissions.

The updated Manual now includes guidelines for “helpful” Wells submissions, including that they should “focus on disputed factual or legal issues, or raise significant legal risks or policy or programmatic concerns.” Among other things, submissions are deemed helpful when they “[a]cknowledge and address evidence and precedent in support of the staff’s position, while highlighting exculpatory evidence and adverse precedent.” This guidance provides helpful transparency concerning the factors the staff considers “helpful,” potentially leading to a more productive dialogue during the Wells process.

White papers will be provided to the Commissioners.

Outside the Wells process, persons may voluntarily submit materials (such as white papers and legal memos) to the staff. Materials accepted by the staff “will generally be provided to the Commission along with any recommendation from the staff for an enforcement action against the submitting party.” The previous manual did not require staff to share white papers with the Commission, although the general practice was to do so. This change will likely encourage parties to submit white papers and similar materials more frequently during the Wells process, as they are sure to garner a broader review audience.

These updates increase transparency and balance the information playing field between the staff and Wells recipients.

Simultaneous consideration of settlement offers and waiver requests

As explained in this October 22, 2025 Governance Beat blog post, the Division of Enforcement is tasked with negotiating settlement terms with potential defendants and respondents where the staff determines there were violations of the securities laws. If a settlement in principle is reached, the staff presents its recommendation to bring an enforcement action and the proposed settlement terms to the Commission. Certain settlement terms can result in statutory disqualifications with significant collateral consequences to a settling party’s business, such as loss of “well-known seasoned issuer” status or disqualification from relying on Reg D safe harbor.

To avoid these consequences, parties may submit waiver requests to the Division of Corporation Finance, which evaluates the requests and makes a recommendation to the Commission whether to grant or deny the waiver. Since 2021, settlement negotiation and the waiver process have proceeded in parallel workstreams, with each division making separate recommendations to the Commission. In practice, however, parties typically await feedback on their waiver requests before submitting signed settlement offers.

In September 2025, Chairman Atkins announced the SEC will restore its pre-2021 practice of “permitting a settling entity to request that the Commission simultaneously consider an offer of settlement that addresses both an underlying Commission enforcement action and any related waiver request.” The new process is now documented in the Manual, which provides that if the Commission accepts the settlement offer but rejects the waiver request, the respondent has five business days to decide whether to move forward with the settlement.

Revised process for formal orders of investigation

As discussed in our March 18, 2025 blog post, the SEC adopted a final rule reversing the process for formal orders of investigation that had been in place for the past 15 years. The new rule requires a majority of the Commissioners to agree before the SEC formally opens an investigation. Previously, that power was delegated to the director of the Division of Enforcement.

The new rule is incorporated into the Manual, which provides that the staff must obtain two levels of approval – first from the Office of the Director, then from the Commission – before a formal order can be issued. In practice, this may lead to staff seeking information on a voluntary basis for a longer time period while they await subpoena authority.

Formalized criminal referral policy

In June 2025, the SEC issued a Criminal Referral Policy Statement pursuant to Executive Order 14294. The policy statement identified factors the staff should consider when deciding whether to refer potential securities law violations to the US Department of Justice for criminal prosecution. Those factors include harm to victims, potential gain to defendants, the defendants’ knowledge and expertise, recidivism and whether a criminal referral could provide more investor protection. These factors are now incorporated into the Manual.

In addition, the Manual establishes formal procedures for criminal referrals. For non-urgent matters, the staff must obtain approval from the director of the Division of Enforcement for the referral decision. For expedited matters, the associate director or unit chief has discretion to notify leadership after the referral has been made. The staff generally will not refer conduct that solely implicates strict liability offenses to criminal authorities. The previous manual did not contain formal referral procedures and allowed the staff to “informally refer a matter to federal or state criminal authorities.”

Expanded cooperation framework

Since 2001, the SEC has relied on the analytical framework set forth in the Seaboard Report to evaluate a company’s cooperation in an SEC investigation. The Seaboard Report identifies four measures for evaluation: self-policing, self-reporting, remediation and cooperation. Compared to the 2017 version, the updated Manual expands upon each of the measures and provides detailed guidance to companies on the steps they can take to potentially receive cooperation credit.

• Self-policing – The Manual makes clear that self-policing requires not only “establishing” an effective compliance program but also “implementing” said program.

• Self-reporting – Self-reporting credit is generally not available if the misconduct has already received media attention, if the staff learned of it from another source or if there is an “imminent threat of disclosure or government investigation.”

• Remediation – The Manual provides a list of “effective” remediation measures, including disciplining employees, strengthening internal controls, clawing back executive compensation, making corrective disclosures, hiring new staff and improving training.

• Cooperation – To receive cooperation credit, companies must go beyond merely complying with subpoenas. “Exemplary cooperation” could include summarizing internal investigation findings, identifying key documents and witnesses, translating foreign language documents or providing experts’ financial analyses.

The Manual emphasizes the importance of “timeliness” of cooperation and encourages companies to provide assistance during the early stages of investigation.

In addition, the Manual states that the SEC’s cooperation program is overseen by the Division of Enforcement’s “Cooperation Committee” that will approve “all cooperation agreements, deferred prosecution agreements, non-prosecution agreements, and immunity requests.” While this committee and process is not new, its mention and description in the Manual provides additional transparency to the public.

Preservation, document production and privilege log

Although document preservation notices are not new, there has been no formal policy regarding the form and timing of such notices – until now. The updated Manual directs the staff to “consider sending a document preservation letter as early as is appropriate in an investigation,” and requires the letter to “explicitly request the preservation of all relevant communications” on messaging apps, including those on personal devices. Notably, for the first time, the term “document” is defined to include text and other electronic messages. Thus, while the current SEC administration may be retreating from enforcement over off-channel communications, it is not overlooking text messages in the gathering of evidence.

The Manual also updates guidance for production cover letters, requiring the producing party to describe the steps taken to identify responsive documents, including who searched and reviewed the documents, what sources were searched, the location of the original documents and who maintained them.

The previous manual did not include any specific requirements with respect to the content of privilege logs. The updated Manual now requires that, for each document withheld for attorney-client privilege, the privilege log must identify the attorney and client involved. For each document withheld under the work product doctrine, the privilege log must identify the anticipated litigation at issue.

Takeaways

The significant updates to the Manual reflect the SEC’s commitment to engagement, transparency and fairness. They also reflect an effort to increase consistency in practices across the Division of Enforcement. Companies and individuals facing SEC investigations should take advantage of the enhanced Wells process – including access to third parties’ productions and the SEC’s investigative files, as well as Wells meetings – to present their case effectively before any enforcement recommendation is made. Early and proactive cooperation, including self-reporting and timely remediation, can yield significant benefits. Overall, these updates present an opportunity for respondents to engage more constructively with the staff and potentially achieve more favorable outcomes.

As for subject matter trends, both firms reported that artificial intelligence-related filings continued to rise and accounted for a disproportionate share of potential investor losses. Healthcare sector filings also increased, and new categories of filings tied to tariffs and immigration began to emerge.

NERA’s review of case outcomes reflected that dismissals rose 32% from 105 in 2024 to 139 in 2025, while the number of settlements declined. The median settlement value reached $17 million – the highest since 2016. And the 10 largest settlements in 2025 (seven of which crossed the $100 million mark) accounted for more than half of the year’s total settlement value. In a separate report on settlements, Cornerstone attributed the overall rise in median settlement value to an increase in settlements for cases that only alleged violations of Section 11 and/or Section 12(a)(2) (not Section 10(b)). For those Securities Act of 1933 cases, the median settlement amount in 2025 was three times more than 2024 and reached an all-time high of $32.5 million.

Record-breaking market capitalization losses despite fewer new filings  

Cornerstone recorded 207 new securities class actions in 2025 alleging violations of Sections 10(b), 11 or 12,[1] down from 226 filings in 2024. The number of Section 10(b)-only cases declined from 198 (in 2024) to 176 (in 2025), an 11% decrease. Despite a 25% increase in initial public offerings (IPOs) on major US exchanges, there was only one more IPO filing in 2025 than in 2024. Cornerstone noted that IPO filings typically lag IPOs by approximately 300 days, suggesting any increase in IPO-related litigation may not appear until 2026.

Although fewer cases were filed in 2025, those cases involved significantly higher measures of potential investor losses. Cornerstone reported that the Disclosure Dollar Loss Index (DDL Index)[2] rose to a record $694 billion (a 61% increase from 2024), while the Maximum Dollar Loss Index (MDL Index)[3] climbed to $2.86 trillion (a 75% increase from 2024). Filings with an MDL of at least $10 billion accounted for 89% of the total MDL, even though the number of such filings rose only slightly (36 in 2025 versus 34 in 2024).

Cornerstone also observed that filings against tech companies and AI-related filings involved a much higher MDL than other types of filings. While only 15% of filings in 2025 were against companies in the technology sector, those cases accounted for 44% of the total MDL Index (and increased by 260% compared to 2024). Similarly, AI-related filings made up 8% of total filings but were responsible for 57% of the total MDL Index.

[1] Defined as “core filings” in the Cornerstone report and “standard cases” in the NERA report. For simplicity, this article omits the words “core” and “standard” when discussing such filings.

[2] The DDL Index measures the “dollar-value change in the defendant firm’s market capitalization” between the two days immediately before and after the end of the putative class period.

[3] The MDL Index measures the “dollar-value change in the defendant firm’s market capitalization” from the day with the highest market capitalization during the putative class period to the end of the putative class period.

Key filing trends by subject matter and sector

Cornerstone recorded 16 AI-related cases in 2025, up slightly from the 15 filed in 2024.  Dismissal rates for AI-related cases increased, likely as a result of courts becoming more familiar with the subject matter and how to apply securities law doctrines to AI-related disclosures. AI-related cases filed in 2021 and 2022 were dismissed at lower rates than other filings (38% and 33% for AI cases versus 56% and 51% for non-AI cases, respectively). But that trend reversed for cases filed in 2023, with 57% of AI cases dismissed compared to 46% of non-AI cases. It remains to be seen whether that trend continues for cases filed in 2024 and beyond, given that the vast majority of those motions have yet to be decided. (See this Law360 article authored by Cooley attorneys to learn more about how courts are applying securities law doctrines to AI-related disclosures.)

COVID-related filings reached a historical low, with only three cases filed in 2025. Cornerstone noted that COVID-related filings have consistently been dismissed at a higher rate than other filings, which, along with timing considerations, might explain the decrease in filings.

Cornerstone recorded 10 filings related to special purpose acquisition companies (SPACs), the lowest level in five years and down from a peak of 33 in 2021. At the same time, NERA noted that SPAC IPO activity rebounded, “with 144 SPAC IPOs in 2025 compared to 57 in 2024 and 31 in 2023.” Given that SPACs typically have 18 to 24 months to complete a deSPAC merger, it remains to be seen whether the resurgence of SPAC IPOs will lead to renewed SPAC-related litigation.  

Both Cornerstone and NERA observed growth in healthcare-related filings. Cornerstone recorded 13 filings in the “healthcare-products” sector, up from nine in 2024. NERA, using a different classification system, reported that filings in the “health technology and services” sector accounted for 31% of total filings in 2025, the highest share in five years.

In 2025, the Trump administration implemented a series of tariff and immigration policies – and plaintiffs are beginning to file securities cases against companies that were negatively affected by them. NERA recorded four filings with tariff-related claims and one filing related to visa restrictions in 2025.

More than half of filings included allegations of false forward-looking statements

According to Cornerstone, 56% of 2025 filings involved allegations of false forward-looking statements, up slightly from 2024 (53%). NERA similarly observed that 43% of filings included allegations related to missed earnings guidance, and 41% included allegations related to misleading future performance statements – both five-year highs.

Ninth Circuit filings fell while Third Circuit filings surged

The Second, Third and Ninth Circuits continue to account for about 66% of filings recorded by Cornerstone in 2025. But while Second Circuit filings remained steady (63 in 2025 compared to 64 in 2024), Ninth Circuit filings declined sharply from 69 in 2024 to 48 in 2025. At the same time, Third Circuit filings increased from 19 in 2024 to 26 in 2025, which Cornerstone attributed to increased filings against biotech and pharmaceutical companies. The Eleventh Circuit also saw filings nearly double, from seven in 2024 to 13 in 2025.

Section 11 filings in state courts continued their decline – with four state court filings in 2025, down from a peak of 52 in 2019. In New York state courts, more than 70% of the filings over the past five years (25 of 35) were against non-US issuers.

Dismissals rose as settlements declined

NERA recorded 139 dismissals of Sections 10(b), 11 or 12 cases in 2025, up 32% from 2024. NERA observed that defendants filed motions to dismiss in 96% of cases filed and resolved between 2016 and 2025. Among cases where a decision was reached, 62% of the motions were granted (with or without prejudice) while 38% were denied in part or in full. The median time from filing of the first complaint to dismissal was 1.6 years in 2025, down from 1.9 years in 2024.

With dismissal rates up, it may not come as a surprise that settlements declined. The number of settlements fell from 94 (in 2024) to 79 (in 2025). Aggregate settlement value also declined, from $3.9 billion (in 2024) to $2.9 billion (in 2025). The vast majority of settlements (84%) were under $20 million, and the median settlement value was $17 million – the highest since 2016. The 10 largest settlements in 2025 ranged from $80 million to $433.5 million and accounted for $1.7 billion (59%) of the $2.9 billion aggregate settlement value. The median time to settlement remained steady at 3.3 years.

Cornerstone also noted that the number of settlements may remain low going forward considering the “relatively stable” number of securities filings in the last five years and the high rate of dismissal for COVID-19 cases.

Just one day later, on January 9, the Supreme Court agreed to review a circuit split regarding the standard the SEC must meet when seeking an award of disgorgement in a civil action. The question before the Supreme Court is whether the SEC must show that investors suffered actual financial loss (pecuniary harm) to obtain disgorgement, or whether it is enough to show that the defendant profited from alleged violations of the securities laws. This will be the third time the Supreme Court will consider SEC disgorgement in the past decade, following Liu v. SEC in 2020 (which addressed whether the SEC could seek disgorgement through its power to award equitable relief) and Kokesh v. SEC in 2017 (which addressed the applicable statute of limitations). The Supreme Court’s decision should be consequential, as the SEC obtained $6.1 billion in disgorgement and prejudgment interest in fiscal year 2024.

Supreme Court to review circuit split on SEC disgorgement powers

Background

In Sripetch v. SEC, both the petitioner – a stock trader who was ordered to disgorge more than $3 million in profits and prejudgment interest – and the government asked the Supreme Court to grant review, recognizing a square split between the US Court of Appeals for the Second Circuit and the US Court of Appeals for the Ninth Circuit related to the scope of the SEC’s remedial authority. 

As the petitioner put it, the question is “whether the SEC may seek equitable disgorgement in civil-enforcement suits without showing investors suffered pecuniary harm.” In the petitioner’s case, the Ninth Circuit sided with the First Circuit in holding that the SEC does not need to show that investors suffered pecuniary harm. The Ninth Circuit acknowledged that its ruling diverged from the Second Circuit’s 2023 opinion in SEC v. Govil, which held that disgorgement in this context does require a finding that investors suffered pecuniary harm.

A key point of disagreement centers on a question left open from the Supreme Court’s 2020 opinion in Liu – the definition of “victim” in this context. In Govil, the Second Circuit determined that here, a victim is “one who suffers pecuniary harm from the securities fraud.” In doing so, it relied in part on language from Liu referencing “return[ing] the funds to victims,” which the Second Circuit found “presupposes pecuniary harm.” Among other things, the Second Circuit found support for the “centrality of pecuniary harm to victimhood” in other “profit-stripping remedies” discussed in Liu, including constructive trust and accounting. The court also drew comparison with private securities fraud actions under Section 10(b) of the Securities Exchange Act of 1934, which require that an investor suffer economic loss.

While the Ninth Circuit in Sripetch agreed with the Second Circuit that disgorgement requires a victim (or victims), it disagreed that “victim” is “narrowly defined as an individual or entity that has suffered pecuniary harm.” The Ninth Circuit reasoned that a pecuniary harm requirement is inconsistent with disgorgement at the common law, which only required showing interference with “the claimant’s legally protected interests,” not loss. The Ninth Circuit also disagreed with the Second Circuit’s reading of Liu and its reliance on private securities actions, which the Ninth Circuit observed are different “by design” from SEC civil enforcement actions, given that “Congress imposed an economic loss requirement” in private actions specifically “to address ‘abusive litigation by private parties’” (citation omitted) – a consideration that does not apply to SEC actions.

For its part, the government has taken the position that the Ninth Circuit “correctly resolved the question presented,” and that the applicable statutes “authorize[] a court to award disgorgement in an SEC suit without a finding of pecuniary harm to investors.”

Govil on remand: A broad reading of pecuniary harm

Just over a week after the Supreme Court granted review in Sripetch, the district court in Govil issued its opinion on remand from the Second Circuit. The district court’s January 20 decision reflected a broad reading of what can be considered “pecuniary harm” and who may be considered a “victim.” The upshot is that even if the Supreme Court ultimately determines that the SEC must demonstrate pecuniary harm to obtain disgorgement, expansive interpretations of such harm by lower courts may allow the SEC to still make that showing in many cases.

Having held that disgorgement requires a showing of pecuniary harm, the Second Circuit in Govil instructed the district court to determine whether, as a factual matter, the defendant’s conduct caused pecuniary harm. On remand, the district court considered testimony and expert reports offered by the SEC and found that both investors and the company itself experienced pecuniary harm due to the defendant’s fraud.

First, the court determined that investors suffered pecuniary harm on multiple fronts, including (1) artificially inflated stock prices and trading losses, and (2) capital raising activities (a secondary offering and a rights offering) that were needed due to the defendant’s misappropriation and that had a “dilutive effect” on existing shareholders.[2] Second, the court found that the company also qualified as a victim and suffered pecuniary harm when the defendant “misappropriated proceeds reserved for corporate use,” creating “a shortfall in funds available for operating expenses, financing, and investments.”

Takeaways

The Supreme Court’s decision in Sripetch may have significant implications for the SEC’s ability to seek ill-gotten gains from defendants and respondents in connection with enforcement actions. The scope of the SEC’s ability to seek disgorgement is significant, to say the least: In fiscal year 2024, disgorgement and prejudgment interest accounted for nearly 75% of the financial remedies for which the SEC obtained orders ($6.1 billion of $8.2 billion in total) and was the highest amount on record. If the Supreme Court rules that the SEC must show that investors suffered pecuniary harm as a precondition to obtaining disgorgement, it will certainly limit the SEC’s remedial reach. It will also impact how individuals and companies assess potential exposure and navigate SEC investigations and enforcement actions. At the same time, the effect of a “pecuniary harm” requirement will turn on how that term is defined – and as seen in the district court’s opinion in Govil on remand, courts may be inclined to read it broadly, thus allowing the SEC to make the showing in many cases.

How the Supreme Court will decide this case remains to be seen, but we expect it will be heard this term.    

District court rules that SEC can seek industry bans in administrative proceedings

Background

On January 8, the US District Court for the District of Columbia dismissed Sztrom v. SEC, a lawsuit brought by two investment advisors challenging the constitutionality of an SEC follow-on administrative proceeding. The advisors previously settled an SEC enforcement action brought in federal court. As part of that settlement, the advisors each paid $25,000 in civil penalties and consented to an entry of final judgment barring them from violating certain securities laws, without admitting liabilities. After the entry of final judgment, the SEC commenced a follow-on administrative proceeding seeking to ban the pair from the securities industry. The advisors alleged that the follow-on administrative proceeding was unlawful because it:

1. Violated due process by adjudicating charges that were prosecuted by the same agency.
2. Violated Article III because only federal courts have the power to adjudicate this type of matter.
3. Violated the Fifth and Seventh Amendments because the government cannot deprive the advisors of “their rights to pursue their chosen profession” except through a jury trial.
4. Denied the advisors their rights to a hearing under the Advisers Act and Administrative Procedure Act.

The district court’s analysis

The court first addressed the plaintiffs’ jury trial and statutory hearing rights claims. The court agreed with the SEC that Congress has impliedly removed district courts of subject matter jurisdiction over these claims. The Advisers Act explicitly provides that a party may seek review of an SEC administrative order in the US courts of appeals. The court further determined that meaningful judicial review remained available through the appellate process, and that the claims at issue were not “wholly collateral” to the statutory review scheme, nor outside the SEC’s expertise. As such, the district court lacked subject matter jurisdiction over these claims.

With respect to the due process claim, the court held that it was “squarely foreclosed by D.C. Circuit precedent” – namely, the 1988 case Blinder, Robinson & Co. v. SEC. In Blinder, the DC Circuit held that a regulator’s combination of prosecutorial and adjudicative functions through its in-house tribunal did not violate the Constitution. The court was unpersuaded that Jarkesy changes the outcome, reasoning that Jarkesy is limited to monetary penalties.

As to the advisors’ Article III claim, the court held that the SEC’s follow-on proceeding – which seeks remedial sanctions in the public interest – falls within the “public rights” exception and does not violate Article III.

Takeaways

This is the second time that the DC District Court upheld the viability of SEC follow-on administrative proceedings. Last year, in Lemelson v. SEC, another judge in the DC District Court considered similar arguments when an investment advisor – who was found liable for securities fraud by a jury – challenged the legality of a follow-on administrative proceeding that sought to ban him from the securities industry. The Lemelson court reached the same conclusions as the Sztrom court, and Lemelson appealed. While the appeal was pending, the SEC dismissed the administrative proceeding on the grounds that “further proceedings … would not be in the public interest,” because the district court that imposed the initial injunction thought that “it would be excessive” for the SEC to impose a lifetime ban on Lemelson in any follow-on proceeding.

Taken together, Lemelson and Sztrom indicate that the DC District Court is unlikely to expand Jarkesy beyond monetary penalties, and SEC follow-on administrative proceedings are – at least for now – here to stay.

[1] Under the Investment Advisers Act of 1940 (Advisers Act), the SEC can censure, suspend or ban a person associated with an investment adviser if it finds, “on the record after notice and opportunity for hearing,” that such penalty is “in the public interest,” and that the person “is enjoined” by a court from “engaging in or continuing” certain securities-related activities. Such proceedings are referred to as follow-on administrative proceedings. Follow-on administrative proceedings accounted for between 16% to 25% of all SEC enforcement actions during fiscal years 2019 to 2024. (The SEC has not released enforcement data for fiscal year 2025.)

[2] It remains to be seen whether other courts will adopt this interpretation. With respect to the finding that artificially inflated stock prices constitute pecuniary harm, for example, it is worth noting that in Sripetch, the Ninth Circuit observed that the SEC’s argument that paying artificially inflated prices alone causes pecuniary harm is “in tension” with the Supreme Court’s decision in Dura Pharamaceuticals v. Broudo. In Dura, the Supreme Court explained that “an initially inflated purchase price might mean a later loss” but “that is far from inevitably so.” (emphasis added)

With 2025 ending, it appears that Atkins followed through on his promise to realign the SEC’s enforcement priorities to return to the SEC’s core mission of pursuing clear-cut rule violations in an effort to bolster investor protection, with a focus on traditional fraud as opposed to technical violations, such as books-and-records infractions. This resulted in a sharp decline in public company enforcement. A recent Cornerstone report[1] showed that in FY 2025, the SEC initiated 56 actions against public companies and their subsidiaries, 52 of which were initiated prior to Chairman Gary Gensler’s departure on January 20. Only two enforcement actions were initiated after Atkins became chairman, and he recused himself with respect to one of the charging decisions.

In addition to a decrease in new public company enforcement actions, 2025 also saw the SEC retreating from Gensler-era initiatives in crypto and cybersecurity enforcement. Since January, the SEC has closed most of its crypto investigations and enforcement actions, which Atkins has characterized as “the previous administration’s regulation-by-enforcement crusade.” On November 20, the SEC terminated its long-running litigation against SolarWinds and its chief information security officer relating to SolarWinds’ cybersecurity disclosures.

Looking ahead to 2026, we expect the SEC to prioritize charging individuals responsible for misconduct rather than imposing corporate penalties. We also expect a continued focus on insider trading, especially in the biotech sector. Finally, as discussed in our October 28 blog post, foreign issuers listed on US stock exchanges will likely face continued close scrutiny, particularly where “pump and dump” schemes are suspected.

Sharp decline in public company enforcement actions in FY 2025 amid leadership change

The Cornerstone report compared the FY 2025 statistics to three prior fiscal years that also involved a change in SEC administration (FY 2013, FY 2017 and FY 2021). While enforcement actions in those three prior years were distributed fairly evenly between the periods before and after the departure of the incumbent chairman, FY 2025 saw a stark contrast between the incoming and outgoing administrations. As noted above, 52 of the 56 public company enforcement actions in FY 2025 happened prior to Gensler’s departure in January. In addition, the SEC initiated 29 public company actions in Q1 (which ran from October 2024 to December 2024) – the highest Q1 number in the SEED database, which goes back to FY 2010. By contrast, there was only one public company enforcement action in September 2025, compared to 35 in September 2024.

SolarWinds lawsuit dismissed

The SEC’s voluntary dismissal of the SolarWinds lawsuit marked the end of a two-year litigation that arose from the 2020 SUNBURST cyberattack. The SEC alleged that SolarWinds overstated its cybersecurity practices while understating its cybersecurity risks, and that SolarWinds minimized the scope and severity of the SUNBURST attack. (Read more about the SolarWinds litigation and an amicus brief Cooley submitted on behalf of 50+ cybersecurity leaders and organizations.)

In July 2024, Judge Paul A. Engelmayer of the US District Court for the Southern District of New York dismissed most of the SEC’s claims, except for a securities fraud claim based on a Security Statement on the company’s website, which was published a year before its initial public offering. The defendants moved for summary judgment in April 2025, arguing that the SEC had conceded in the parties’ joint statement of undisputed material facts that SolarWinds implemented each of the policies described in its Security Statement. The court never ruled on this motion, as the SEC chose to dismiss the case entirely.

The parties’ stipulation of dismissal stated that the SEC’s decision to dismiss this action “does not necessarily reflect the Commission’s position on any other case.” Indeed, the SEC is still focused on cybersecurity disclosures, as reflected by its creation of a Cyber and Emerging Technologies Unit, which – among other things – will “combat misconduct as it relates to … [p]ublic issuer fraudulent disclosure relating to cybersecurity,” as discussed in our February 25 blog post. Consistent with Atkins’ stated goal of focusing on “genuine harm,” we can expect the SEC to continue to police material cybersecurity misrepresentations and omissions that led to investor harm.

Individual accountability over corporate penalties

The relatively slow pace of SEC enforcement activity this year can be attributed to several factors. Atkins assumed his role in April, followed by Enforcement Director Meg Ryan in September. In October, the federal government commenced its longest shutdown in history, which only recently concluded. During this transitional period, the Division of Enforcement is likely working to align its priorities, case theories and remedies with the new SEC leadership. This alignment is critical for novel or “first-of-their-kind” matters, as the staff assesses the SEC’s position on new types of charges and relief before formally recommending action. Once the Division of Enforcement has clarity on the SEC’s direction, subsequent cases of a similar nature are expected to proceed more swiftly.

For public companies, the early signals suggest that the SEC will likely favor holding individuals responsible for misconduct, rather than pursuing large corporate settlements. As an example, on November 7 (during the government shutdown), the SEC charged the founder and CEO of a trade finance platform for engaging in a fraudulent scheme in connection with the company’s de-SPAC merger in 2020. The SEC alleged that the defendant overstated the amount of activity on the platform in order to induce the special purpose acquisition company (SPAC) investors to approve the merger, which generated $60 million for the defendant. Ultimately, the investors suffered “substantial losses” when the company’s stock price fell below $1 and all the public securities were acquired for $0.1 per share by a company owned and controlled by the defendant and the SPAC’s former CEO.

Insider trading – especially in biotech stock – has been a focus

Over the summer, the SEC charged a number of individuals for insider trading in biotech stock:

• In an August 7 complaint, the SEC alleged that an individual learned through his investment in a private biotech company that the private company was going to merge with a public biotech company. The individual purchased the public company’s stock in 15 accounts belonging to him and his family members. When the merger was announced, the price of the public company’s stock rose by 215%, resulting in approximately $160,000 in trading profits for the individual.
• In an August 18 complaint, the SEC alleged that two men traded in the stock of six public companies based on material nonpublic information (such as drug trial results and upcoming mergers) that their friend obtained as a consultant to pharmaceutical and biotech companies. The defendants made more than $500,000 through those trades.
• In an August 22 complaint, the SEC charged a former director of a biopharmaceutical company, along with his two family members and two friends, with insider trading ahead of a merger announcement. The defendants collectively made more than $500,000 in profit.

The price of biotech stock can fluctuate dramatically in response to clinical trial results, US Food and Drug Administration decisions and merger activities. This makes biotech companies particularly susceptible to insider trading. The SEC and the Financial Industry Regulatory Authority employ sophisticated surveillance tools to monitor trading patterns around significant corporate announcements, enabling regulators to detect suspicious trades. Given the SEC’s apparent focus on insider trading in the biotech sector, biotech companies should consider strengthening their insider trading compliance programs, including implementing appropriate blackout periods around major events.  

Foreign issuers will continue to face scrutiny

There is one notable exception to the SEC’s generally restrained approach to public company enforcement. Foreign issuers whose stock primarily trades on US stock exchanges will continue to be a focus of this SEC administration. As we explained in our October 28 blog post, the SEC has suspended securities trading of a number of Asia-based Nasdaq issuers due to suspected “pump and dump” schemes. The SEC appears to be closely coordinating with Nasdaq such that when the SEC suspension period expires, Nasdaq issues its own trading halt pending its request for information from these companies. In addition, as we discussed in our September 18 blog post, the SEC is expected to use its newly created Cross-Border Task Force to scrutinize foreign issuers and their disclosures to US investors. Therefore, foreign issuers should consider evaluating and enhancing their compliance programs, as well as ensuring the accuracy of their disclosures, to mitigate the heightened enforcement risks.

[1] The findings of the report are based on the Securities Enforcement Empirical Database (SEED), which tracks and records SEC enforcement actions against public companies and their subsidiaries based on data from the SEC’s website.

Atkins emphasized the SEC’s commitment to establishing a regulatory framework that promotes fairness, predictability and innovation while maintaining robust investor protections. The goal, he noted, is to move beyond ad hoc enforcement and offer a clear roadmap for market participants navigating the evolving crypto landscape.

From uncertainty to clarity

For the past decade, the SEC’s approach to crypto has focused on enforcement actions with only limited guidance or rulemaking, which has created a fog of uncertainty around the application of securities laws to crypto. 

The prior SEC administration’s focus on determining whether crypto assets themselves are investment contracts fundamentally misapplied the securities laws and US Supreme Court precedent, which focus on transactions and relationships between parties – not on an object. Yes, tokens can be sold as part of investment contract transactions. But investment contracts end – they don’t last forever just because a token is trading on a blockchain.

The flawed application of securities laws muddied the waters and ultimately hurt the US economy:

• Innovation flight: US projects relocating to friendlier jurisdictions offshore.
• Compliance chaos: Convoluted legal structures and pervasive litigation risk.
• Investor confusion: Uncertainty over what qualifies as a security.

Atkins made clear: That era is over. The objective now is to replace ambiguity with clarity, while continuing to pursue fraud and market manipulation aggressively.

Core principles of ‘Project Crypto’

Before outlining the details, Atkins introduced two guiding principles for the SEC’s crypto framework:

1. Form does not change substance: A stock remains a stock, whether represented on paper, through a DTCC entry or as a blockchain token.
2. Economic reality over labels: Calling something a “token” or a “non-fungible token (NFT)” does not exempt it from securities laws. Conversely, just because a token was part of a capital raise does not mean it is permanently a security.

Bottom line: Economic reality governs – labels do not.

Token taxonomy: Four buckets

Atkins previewed a classification framework for digital assets:

1. Digital commodities/network tokens: Decentralized, functional networks where value is not tied to managerial efforts – likely not securities.
2. Digital collectibles: NFTs and similar items purchased for enjoyment rather than profit, such as art, music, memes or in-game items – not securities.
3. Digital tools: Tokens providing access or credentials, such as membership passes or tickets. If sold for use rather than speculation, these are not securities.
4. Tokenized securities: Traditional financial instruments – such as stocks and bonds – issued on chain. These remain securities.

What’s next?

Atkins outlined the SEC’s roadmap:

1. Classification framework: Formal guidance on the four buckets, grounded in the Howey This will likely replace the Framework for Investment Contract Analysis, published in 2019.
2. Regulatory roadmap: Atkins outlined a vision for a regulatory framework that balances investor protection with innovation. In the coming months, and in alignment with legislation currently before Congress, the SEC is expected to consider a package of exemptions to create a tailored offering regime for crypto-assets that are part of or subject to an investment contract. The roadmap also emphasizes cross-agency coordination with the Commodity Futures Trading Commission (CFTC) and banking regulators, as well as alignment with congressional initiatives, to ensure a harmonized approach that supports innovation while maintaining market integrity.
3. Fraud enforcement: Atkins underscored that “fraud remains fraud,” and the SEC – alongside other regulatory bodies – will continue to take aggressive enforcement action against fraud, market manipulation and other illicit conduct. His warning was clear: “If you raise money by promising to build a network, and then take the proceeds and disappear, you will be hearing from us, and we will pursue you to the full extent of the law.” 

Why it matters

• Issuers: Begin mapping tokens to the new taxonomy.
• Trading platforms: Non-security tokens may gain a clear path to listing outside SEC-regulated venues.
• Investors: Expect greater transparency regarding what constitutes a security versus a collectible or utility token.

The big picture

Atkins’ remarks signal a pivotal shift in the SEC’s approach to digital assets – from “regulation by enforcement” to structured, predictable rules. For crypto innovators and investors, this represents a significant step toward clarity and stability in the US market.

To be clear, the policy statement does not express a view on whether mandatory arbitration provisions are “appropriate or optimal for issuers or investors.” And Atkins explained that the SEC will not weigh in on the second-order question of whether a company should adopt mandatory arbitration provisions, noting that he expects “robust public debate on this issue among various interested parties.” Indeed, since the SEC issued its policy statement, stakeholders have already begun debating the costs and benefits of mandating arbitration in this context – an issue we anticipate will be litigated on multiple fronts.  

SEC neutral on mandatory arbitration provisions

The SEC’s policy statement emphasized two main takeaways. First, the SEC is taking a neutral stance on mandatory arbitration provisions – specifically, “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.” Second, disclosure remains paramount. The SEC made clear that it will “focus on the adequacy of the registration statement’s disclosures, including disclosure regarding issuer-investor mandatory arbitration provisions.”

The SEC concluded that mandatory arbitration provisions are not inconsistent with the federal securities laws. But the SEC left open key questions related to state law preemption – an area that will be closely watched going forward.

Federal securities laws not inconsistent with mandatory arbitration

The SEC addressed whether the federal securities statutes “override” the Federal Arbitration Act of 1925 (FAA), which establishes “a liberal federal policy favoring arbitration agreements.” The SEC identified two ways that issuer-investor mandatory arbitration provisions were previously considered to be “inconsistent” with the federal securities statutes:

1. They “could violate the anti-waiver provisions of the Federal securities statutes by foreclosing a judicial forum.”
2. They “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.”

After examining relevant US Supreme Court jurisprudence, the policy statement ultimately concluded that neither of these potential issues superseded the FAA’s policy in favor of enforcing arbitration agreements.

The anti-waiver provisions essentially void contractual provisions that bind parties to waive compliance with the securities laws or related SEC rules and regulations. According to the policy statement, a Supreme Court case from the 1950s (Wilko v. Swan) held that the anti-waiver provisions prohibited these types of arbitration agreements. But later Supreme Court decisions from the 1980s (Shearson/American Express v. McMahon andRodriguez de Quijas v. Shearson/American Express) held that the anti-waiver provisions only relate to waiver of “substantive obligations,” not procedural or jurisdictional provisions, and thus do not preclude enforcing arbitration agreements. While those two cases addressed agreements between broker-dealers and their customers, the SEC “discern[ed] no reason to believe that any different result should follow” in the context of issuer-investor mandatory arbitration provisions.

The SEC also noted that for federal statutes enacted after the FAA, the Supreme Court has explained that the FAA may be superseded only by a “clearly expressed congressional intention” – which the SEC determined is not present in the federal securities statutes. The SEC thus determined that, “there is no basis to conclude that either the anti-waiver provisions or any other provision of the Federal securities statutes displaces the primacy of the [FAA] in the context of issuer-investor mandatory arbitration provisions.”

Regarding the second issue, the SEC also rejected arguments that the FAA should be displaced on the basis that mandatory arbitration provisions impede investors’ ability to bring private securities claims by foreclosing class actions and/or reducing the economic incentives to bring private claims. Among other things, the SEC relied on a Supreme Court opinion (American Express Co. v. Italian Colors Restaurant) in a case where it would cost the plaintiff more to individually arbitrate its antitrust claims than it could potentially recover. According to the SEC, the Supreme Court rejected arguments related to the plaintiff’s economic incentives because “nothing in the Federal antitrust statutes affords a right to bring a class action,” and “in fact, those statutes were enacted years before class actions were even authorized in Federal courts.”

The SEC observed that, as with the antitrust laws, “no provision in the Federal securities statutes ‘guarantee[s] an affordable procedural path to the vindication of every claim.’” It further noted that, as with the antitrust laws, both the Securities Act and the Exchange Act were enacted “before class-action proceedings were permitted,” so “it stands to reason that ‘the individual suit’ based on claims under those acts that was considered adequate and consistent at the time those statutes were enacted remains so notwithstanding the advent of class-action litigation.” As such, the SEC concluded that even if issuer-investor mandatory arbitration provisions were to “diminish, or even eliminate” investors’ economic incentives to bring private claims, the federal securities statutes would not displace the FAA’s command to enforce arbitration agreements.

Potential conflict with state law

Separate from its analysis of the federal securities laws, the SEC identified “potential uncertainty … regarding the intersection of the FAA and state law,” but determined this question was ultimately outside its reach. Though the SEC declined to take a position, whether the FAA preempts state laws that prohibit these types of mandatory arbitration provisions will likely be contested in future litigation.

Specifically, in the policy statement, the SEC explained that whether the FAA applies to a particular arbitration agreement “turns in the first instance on whether there is a valid and enforceable written agreement to arbitrate,” which is “generally determined based on ‘the contract law of the state governing the agreement.’” At the same time, as the SEC observed, the Supreme Court has held that the FAA may preempt state laws that “target arbitration either by name or by more subtle methods, such as by ‘interfering with fundamental attributes of arbitration.’” Given that whether the FAA applies to a 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,” the SEC declined to consider it further.

To illustrate the potential conflict with state law, the policy statement noted a recent change to the law in Delaware, the place of incorporation for 81% of US initial public offerings in 2024. As the SEC explained, “Delaware recently amended its General Corporation Law in a way that may prohibit certificates of incorporation or bylaws from including an issuer-investor mandatory arbitration provision.” The SEC here was referring to DGCL Section 115(c), which as of August 1, 2025, provides that certificates of incorporation or bylaws may designate a forum or venue for a set of claims that are not internal corporate claims, but only if the provision “allows a stockholder to bring such claims in at least [one] court in this State that has jurisdiction over such claims.” (Emphasis added.) Put another way, it does not allow for the possibility that such claims could be heard in arbitration. The SEC did not weigh in as to whether this provision conflicts with the FAA, which would raise significant questions related to preemption.

It is worth noting that in his remarks at an October gala at the University of Delaware, Atkins stated that he was “disappointed” by this Delaware law amendment, which “prohibited mandatory arbitration with respect to [federal securities law] claims” in Delaware. But he recognized that the amendment was passed before the SEC issued its policy statement and urged Delaware to reconsider: “With the benefit of clarity under the federal securities laws, I hope that the Delaware legislature will revisit the prohibition of … mandatory arbitration … with respect to federal securities law claims.”

Scope

The policy statement specified that the SEC’s conclusion that “the Federal securities statutes do not override the FAA in the context of issuer-investor mandatory arbitration provisions” extends not only to decisions regarding whether to accelerate the effectiveness of registration statements under the Securities Act, but also to determinations regarding whether to: “(i) accelerate the effectiveness of registration statements filed under the [Exchange Act]; (ii) declare effective post-effective amendments to registration statements; and (iii) qualify an offering statement or a postqualification amendment under [Regulation A].” It also extends to other contexts, including “if an Exchange Act reporting issuer were to amend its bylaws or corporate charter” to adopt such a provision.

But the SEC declined to address the question of any “[c]onditions or restrictions that are part of the issuer-investor mandatory arbitration provision that may impact investors’ substantive rights under the Federal securities laws.” (Emphasis added.) Likewise, the SEC did not take a position on “whether arbitration provisions are appropriate or optimal for issuers or investors.”

Implications

While the SEC’s policy statement in some ways breaks new ground, Atkins explained that in his view the SEC is “at least a decade too late in taking this action,” stating that the law as to “whether the federal securities statutes override” the FAA “has been clear since at least 2013.” Now that the SEC has provided clarity on the issues within its ambit, however, questions remain regarding how state contract law (including, significantly, the recent change to Delaware law) will factor in the equation. We anticipate that this issue, among other things, will be the subject of future legal challenges.

The higher-order question remains whether companies will choose to adopt mandatory arbitration provisions. There are many factors to consider, including (as the SEC pointed out) “concern about potential negative reactions from shareholders and other investors” and “[a]ctions or potential actions by others, including proxy voting advice businesses, stock exchanges, and institutional investors.”

Companies considering the relative merits of arbitration for resolving shareholder disputes will need to weigh myriad issues – including, but not limited to, the ability to have a meritless action dismissed early in the proceeding, the cost of discovery, the potential for confidentiality, the availability of precedential decisions and appeals, the familiarity of an arbiter or judge with the federal securities laws, the desirability of resolving claims on an individual basis (and the potential for “mass arbitration”), the likelihood of settlement, and the effects on directors and officers (D&O) insurance, as well as potential litigation exposure related to the adoption of the clause itself. (It is worth noting that the SEC’s policy statement is not binding on courts – which means that its conclusion that mandatory arbitration provisions do not conflict with federal law may also be subject to challenge.)

One thing remains clear: The SEC will be “focus[ed] on the adequacy” of disclosures related to mandatory arbitration provisions – so companies that do adopt such provisions should pay careful attention to related disclosures. While it remains to be seen what real-world effect the SEC’s new policy will have, we anticipate a range of reactions and legal challenges will follow.