Arbitration, Venue and Jury Waiver Clauses in a Syndication Operating Agreement
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Most syndication operating agreements and subscription agreements include a dispute resolution section. It usually names the governing law, the place where disputes must be heard (venue), whether disputes go to binding arbitration or to court, and often waives a jury trial. For an investor, these clauses decide where and how a claim could be brought, who pays, and what appeal rights exist. They do not, and cannot, waive the federal securities laws' protections. Read them before you sign, since you rarely get to negotiate them afterward.
This post is general information, not legal advice. Have a securities attorney read the documents for any investment that matters to you.
The clauses, one at a time
| Clause | What it does | What to ask |
|---|---|---|
| Governing law | Chooses a state's law to interpret the agreement | Is it the state where the deal is formed, often Delaware, Texas or the property's state? |
| Venue or forum | Names the court or city where a case must be filed | How far is it, and is it exclusive? |
| Arbitration | Sends disputes to an arbitrator or panel under named rules | Which rules and provider? Who pays the fees? |
| Jury waiver | Both sides give up a jury trial | Does it apply to all claims? |
| Class or collective action waiver | Claims must be brought individually | Does it apply to claims by all investors together? |
| Fee shifting | The losing party pays the winner's legal fees | Is it one way or mutual? |
| Mediation first | A step before arbitration or suit | Is it required, and how long? |
| Limitation period | Shortens the time to bring a claim | Is it shorter than the statute of limitations? |
What arbitration changes
In arbitration, one or three arbitrators decide the case, usually under rules of a provider such as the American Arbitration Association or JAMS. Compared with court, arbitration is typically private, discovery is narrower, and the decision can be reviewed only on limited grounds under the Federal Arbitration Act. Costs differ: filing and arbitrator fees can be substantial, and the agreement may say who bears them.
Many investors like the speed and privacy; others see the limited appeal and the cost as a disadvantage. Neither is right for everyone. The point is to know it before signing.
What these clauses cannot do
Section 14 of the Securities Act of 1933 and section 29(a) of the Securities Exchange Act of 1934 make void any condition that waives compliance with those acts. The Supreme Court has nonetheless held that claims under the securities acts can be sent to arbitration if the agreement says so, because the right to a court is a forum choice, not a waiver of substantive rights (for example, Rodriguez de Quijas v. Shearson/American Express, 490 U.S. 477 (1989)). State law can also limit how far such clauses go, and a court may refuse to enforce a clause it finds unconscionable.
Regulators are not parties to your agreement. The SEC and your state securities regulator can investigate a sponsor whatever the agreement says. See investor rights in a syndication.
Where the clause shows up
- The operating agreement, usually near the end under "Miscellaneous" or "Dispute resolution".
- The subscription agreement, which may have its own forum clause. If the two conflict, ask which controls.
- The private placement memorandum, which may describe the clause as a risk factor. See how to read a PPM and the subscription agreement.
Interaction with other protections
- Exculpation and indemnification. The agreement may limit the sponsor's liability except for fraud, gross negligence or willful misconduct, and require the company to cover the sponsor's legal costs. See exculpation and indemnification.
- Removal for cause. A dispute clause may govern how a removal is challenged. See removing a sponsor for cause.
- Information rights. A demand for books and records may be pursued in the named forum. See what to do when a sponsor stops responding.
A short review checklist
- Find governing law, venue and arbitration in both documents.
- Note whether the sponsor and investors are treated alike or the sponsor has carve-outs.
- Look for a shortened claims period.
- Check who pays arbitration fees and legal fees.
- Compare with the cost of a claim relative to your investment size; a small investment may not justify a distant arbitration.
- Ask a securities attorney to confirm how the clauses interact with the offering's other terms.
How DoorRaise fits in
On DoorRaise, investors read the operating agreement and subscription agreement in the signing flow before they sign, and a sponsor's own added terms appear in a labeled section. Read the dispute terms there like any other. DoorRaise is software and administration, not a law firm, broker-dealer, investment adviser, funding portal, bank or escrow agent, and we do not hold investor money: investors wire funds to the deal's escrow account at Enterprise Bank & Trust, which acts only as escrow agent. Sponsor fees are on the pricing page.
FAQ
Can I be forced into arbitration?
If you sign an agreement with a valid arbitration clause, a court will generally enforce it. Whether a specific clause is enforceable depends on its wording and state law.
Does an arbitration clause stop me from complaining to the SEC?
No. Regulators are not bound by your agreement.
Can a clause waive my securities law rights?
No. Waivers of compliance with the securities acts are void, though the forum for a claim can be changed.
What is a jury waiver?
An agreement by both sides to have a judge decide, instead of a jury.
Can I negotiate these terms?
Sometimes with larger investments or a side letter; see side letters. Most investors accept them as written.
Sources
- 15 U.S.C. 77n: Securities Act section 14
- Rodriguez de Quijas v. Shearson/American Express, 490 U.S. 477 (1989)
- 9 U.S.C. Chapter 1: Federal Arbitration Act
This article is general information, not legal advice. Talk to your own securities attorney. Every investment can lose money. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.