The Private Intermittent Securities and Capital Exchange System (PISCES)

This blog considers the recent HM Treasury (HMT) consultation on the proposed trial of a new ‘Private Intermittent Securities and Capital Exchange System’ (PISCES).  How would the PISCES platform work, and how does it fit in with the wider reforms of the public offer and admission to trading regime in the UK?

What is PISCES?

As proposed, PISCES will allow privately held companies to open ‘intermittent trading windows’ in which shareholders can sell existing shares through its platform.  PISCES will not allow participating companies to raise new capital by the issue of new shares, and it is not expected to permit share buybacks: the platform would support secondary trading only. 

HMT intends the proposed PISCES platform to support companies to scale up and grow by providing liquidity, allowing shareholders to realise their gains and providing an opportunity for companies to rationalise their shareholder base, but with less onerous compliance obligations attached to being public companies, and ultimately transition to public markets more easily. PISCES is expected to support the pipeline for future IPOs in the UK, by improving the interface between private companies and UK public markets, and complementing the government’s wide ranging and ongoing reforms to boost the UK as a listing destination.

Who will be able to buy and sell shares on PISCES?

Buyers in the trial period are likely to be limited to institutional and professional investors, such as pension funds or private equity firms.  HMT is considering allowing certain retail investors to buy on the platform, but only self-certified sophisticated investors, high-net worth investors and employees of participating companies.  On the sell-side, it is expected that any shareholder in a participating company would be able to sell shares on the platform.  This is likely to be particularly attractive to employee shareholders who previously have not been able to realise the value of their awards, often for many years.  

The consultation envisages allowing participating companies to set trading permission restrictions on the types of investor eligible to buy their shares, which would be an important feature for those who want to retain some control over share ownership and the flow of confidential company information (see further on disclosure below). 

When and how can shareholders sell shares on PISCES?

As the name suggests, trading windows are intended to be available on an intermittent basis. PISCES operators and companies will have flexibility as to the frequency and the length of trading windows (e.g., weekly, monthly, biannually, etc.).

It is also envisaged that companies will be able to set price parameters for their shares, with a potential requirement to disclose the basis of those parameters to investors. 

What type of company can participate?

PISCES is aimed at early-stage companies.  It will be open to any company, wherever incorporated, provided it does not already have shares admitted to trading on any public market. No maximum or minimum market capitalisation is envisaged.

For UK companies, the focus of PISCES extends to private limited companies (as well as unlisted plcs).  Private limited companies cannot use traditional public markets because they are prohibited from making a public offer of their securities.  The consultation proposes modifying the Companies Act 2006 to clarify that use of PISCES would not breach that prohibition.  Further modifications will give private companies access to public company tools to investigate who has an interest in their shares, to help manage a wider shareholder base. 

For shares to be traded on PISCES, they need to be freely transferable. This means that companies will need to review their articles of association for any transfer restrictions. Companies interested in utilising PISCES for their employee shareholders will also want to conduct a comprehensive review of their share-based arrangements (e.g. vesting, option exercisability, and transfer provisions), as well as any contractual transfer restrictions in shareholder agreements, to ensure that relevant waivers and permissions are granted to permit shareholders to trade on PISCES.  

Will participating companies need to make information public?

In contrast to public markets, PISCES will not require participating companies to disclose information to the public: the ability to avoid publication of sensitive information preserves a key advantage of a company’s private phase. 

PISCES will require ‘initial disclosures’ in advance of a trading window, but they can be kept within a ‘private perimeter’ of investors who may trade during the upcoming event.  Disclosure obligations will then end after the close of the trading window, with no continuous disclosure obligations. 

The content of the initial disclosures will be determined by operators, but the consultation envisages certain minimum content including all inside information, details of share ownership and transactions by senior management.  Disclosure of inside information will not be capable of delay (in contrast to the public market position under the UK Market Abuse Regulation (UK MAR)), as the initial disclosures are intended to be a comprehensive source of information.  If new inside information is identified or arises after the initial disclosures (the consultation is considering initial disclosures three days before trading begins), trading will not go ahead or will be suspended. 

Will the market abuse regime apply?

HMT proposes a tailored market abuse regime for PISCES that will apply only between the time of initial disclosures to the end of the associated trading window.  The scope of the tailored regime would be more limited than UK MAR, covering on-PISCES trading of the shares themselves only (not trading in the shares elsewhere, and not related instruments) and the dissemination of false or misleading information outside trading windows only if it impacted trading in a PISCES window.  The market abuse offences of unlawful disclosure of inside information, market manipulation and insider dealing would apply, and issuers would also be subject to both criminal and civil liability in connection with dishonest or reckless false or misleading statements.

What kind of trading venue is PISCES?

Although it is a multilateral system, PISCES will not fall within any of the existing categories of regulated trading venue (i.e. regulated market, multilateral trading facility (MTF) or organised trading facility (OTF)).  Rather, it will be a new standalone category subject to a bespoke regulatory regime that will bring together elements of the existing regimes together with new provisions.

HMT is proposing to trial PISCES within a new ‘financial markets infrastructure (FMI) sandbox’ established under the Financial Services and Markets Act 2023 (FSMA 2023), referred to as the ‘PISCES Sandbox’. This will give the government time to calibrate the regulatory requirements for PISCES before finalising the regime. 

Firms wishing to apply to operate PISCES in the sandbox will need to be a legal entity established in the UK with either (1) an FCA permission under Part 4A of the Financial Services and Markets Act 2000 (FSMA 2000) to arrange deals in investments, operate an MTF, or operate an OTF, or (2) exempt person status as a recognised investment exchange (RIE) under FSMA 2000.

The sandbox arrangements applying to PISCES operators will be based on the requirements that currently apply to MTF operators, with some modifications to reflect the unique features of PISCES. The FCA will have the discretion to determine the regulatory requirements that will apply to firms operating PISCES in the sandbox.

To date, the London Stock Exchange and other organisations have indicated that they intend to launch their PISCES platforms later this year.

How does PISCES fit into wider reforms of the UK public offers and admissions to trading regime?

The PISCES proposal is a separate element to the wider reform of the UK prospectus regime: it is anticipated that under those wider reforms the UK Prospectus Regulation will be repealed and replaced with a new UK public offers and admissions to trading regime at some point in 2025.  Further FCA consultation is expected on the detail of that new regime in the course of 2024.  As PISCES will not have a role in capital raising, its role will be distinct from that of other operators within the new regime, such as the new category of ‘public offer platforms’.  Public offer platforms will allow primary issuance but will not support secondary trading.

Next steps

The consultation seeks views on an initial five-year period for the PISCES Sandbox, which would be subject to extension or an earlier decision to make the platform permanent.  The HMT consultation is open until 17 April 2024, after which the government plans to lay a statutory instrument before Parliament providing the legal framework for the PISCES Sandbox. A further FCA consultation on the sandbox will be required before it is established by the end of 2024.