A new regulated share trading platform for private companies
Author/Key contact: Johnathan Rees
This Autumn is expected to see the launch of PISCES, a new regulated share trading platform for private companies. The new regime is designed to provide liquidity for private company investors and broaden the potential investor pool for companies, within a lightly regulated structured framework. This briefing considers the key features of the new system and the potential benefits for both investors and investees.
Executive summary
- The government’s private intermittent securities and capital exchange system (PISCES) finalised in June established the legal framework for a new hybrid private stock market incorporating public market features facilitating the trading of shares in private companies
- The Financial Conduct Authority (FCA) has established bespoke disclosure and transparency rules for PISCES platforms
- PISCES platform operators can determine admission requirements for their markets, including eligibility criteria and minimum corporate governance requirements
- Within the confines of the PISCES regime, participating companies will have discretion on when their shares are traded, who is permitted to buy their shares and the price at which their shares are traded
- Trading will be restricted to certain types of investors and most retail investors will be prohibited from trading
- Only shares in companies whose shares are not admitted to trading on a public market (UK or overseas) can be traded
- Companies will not be able to raise capital through the issue of new shares on PISCES.
What is PISCES?
PISCES – short for the Private Intermittent Securities and Capital Exchange System – establishes a new regulated trading mechanism allowing shareholders in unquoted companies to buy and sell their shares through regulated PISCES platforms.
The regime will be monitored by the government over the next five years, when it is likely to make the legislation permanent (with or without modifications) or extend the trial period.
What’s the timeline?
With the regulatory framework in place potential platform operators can start applying for approval. The likelihood is that the initial platforms will become operational from Autumn 2025 when eligible companies will be able to apply for their shares to be admitted to their chosen platform.
Why has it been introduced?
The background to PISCES is the government’s ongoing reform of the UK’s capital markets. The absence of a liquidity mechanism for investors to realise their gains coupled with restricted access to private fast-growth companies were perceived as major gaps in the UK’s early-stage funding ecosystem.
Against this backdrop, PISCES has been introduced. Its objectives include:
- Provide a standardised structure for private company shareholders to realise their gains and, in turn, help companies rationalise their shareholder base
- Help unquoted companies access new institutional investors without needing to obtain admission to a public market
- Enable investors to access larger scale private companies
- Support companies to scale and stay in the UK
- Provide a bridge between the private and public markets.
How will PISCES work?
Potential PISCES platform operators will be required to apply for authorisation to the FCA.
The FCA has published its final rules for PISCES – these are relevant not only to potential operators but also to investors, private companies intending to use PISCES and professional advisers.
Once authorised, operators will be able to set their own rules – including eligibility criteria, admission arrangements, governance standards and trading rules – subject to the FCA’s over-arching regulatory framework.
The London Stock Exchange has launched its new Private Securities Market (pending regulatory approval) in anticipation of it becoming an operator of a PISCES platform. A number of other organisations have declared an interest in becoming operators.
Which companies can participate in PISCES?
Only shares in companies whose shares are not admitted to trading on a public market in the UK or abroad can be traded on PISCES. This includes UK-based private and public limited companies and overseas companies. It is not relevant whether the company is headquartered in the UK.
The shares of a participating company will need to be freely transferable – PISCES companies are likely to need to adopt new articles of association to facilitate PISCES trading events and will also need to review shareholder agreements.
Who can buy shares?
The regulations include a detailed definition of a “specified PISCES investor”. This includes institutional and professional investor and high net worth or sophisticated investors as well as a new category of PISCES certificated investors.
In principle, any existing shareholder (founders, early-stage investors or employee shareholders) will be able to sell shares unless they are subject to contractual restrictions.
There are a number of factors that companies will need to consider:
- The classes of shares which can be sold
- Whether to set any minimum or maximum price
- In the case of employees: who should be permitted to sell, what proportion of their holding they can sell, and the information to be provided to enable them to make an informed decision and how this is communicated.
A participating company will not be permitted to use a PISCES platform to conduct buyback of shares.
What information will companies need to disclose?
A participating company will not have to disclose all “inside information” on a continuous basis in the way that listed companies are required per the UK Market Abuse Regulation.
Before the start of each trading window, companies will be required to make available a base level of “core information”. This will include a business and management overview, financial and share capital information, material contracts, employee incentives, transactions with directors, details of the traded price and volume on the last PISCES trading event, details of any future trading events and risk factors specific to the company.
PISCES has a bespoke disclosure regime, and each PISCES operator will be required to ensure that its disclosure requirements are appropriate for the efficient and effective functioning of its market. Operators will be able to set additional disclosure requirements according to the type of company and investors they serve. Platform operators will specify when the required information must be made available ahead of a trading window and for how long.
Platform operators will specify when the required information must be made available ahead of a trading window and for how long.
A participating company will not have to disclose all “inside information” on a continuous basis in the way that listed companies are required per the UK Market Abuse Regulation.
Trading on PISCES
Before any trading event, the operator must ensure that specified information is made available publicly, including the timing and length of the trading event, the shares available for trading and any restrictions on those permitted to buy shares.
What’s the tax position?
Transfers of shares made via a PISCES platform will be exempt from stamp duty and stamp duty reserve tax.
Can companies raise new capital?
Only existing shares will be traded – companies will not be able to raise fresh capital through the issue of shares. That said it is anticipated that increased liquidity will enhance a company’s attraction to primary investors. There is an added expectation that the ability to exit positions introduced by the regulations will change the risk profile for private companies and encourage broader investor participation.
Benefits for companies
Subject to the relevant participators’ platform rules, companies will enjoy significant flexibility and influence including:
- Controlling who can buy their shares – enabling them to protect their commercial interests by, for example, excluding competitors. Similarly, companies are likely to be able to specify the type(s) of investors who can purchase shares and so control the profile of their shareholder base
- A more orderly process for the trading of its shares than multiple shareholders selling individually
- Determining the frequency and duration of trading windows
- Setting parameters for the price at which their shares are traded
- Choosing the class of shares to be traded.
The regime will also provide incentives to staff by providing a means to realise share options. Historically, options under such schemes have been granted on exit only basis – exercisable only on a sale of the business or IPO. Instead of waiting for an exit, founders and employees will be able to realise cash for shares in the PISCES company, meaning employee share options will become a more effective form of employee incentivisation. The government is introducing legislation to facilitate necessary amendments to scheme rules to avoid adverse tax consequences arising from any consequential changes to scheme documentation.
Summary
On a macro level, if its primary objectives are achieved – liquidity for investors and support for companies to scale and grow in the UK – PISCES will play a significant role in plugging a perceived gap in the UK’s early stage equity finance ecosystem and ultimately help rejuvenate the UK equity markets.
When operational, the new regime will create potentially significant benefits for private companies, their shareholders and new investors. There is significant dry powder available in the private equity community, supplemented by the commitment from UK pension funds to invest in private markets. All this being said, the reality is that investor interest will ultimately be influenced by the quality of companies joining the PISCES market.
There are a range of matters to be considered by companies contemplating joining a PISCES market, particularly those with employee incentive schemes.
If you would like to explore how PISCES might benefit your business, please contact a member of our corporate team.
