The Treasury has published a consultation on creating a new private trading framework, to be known as the Private Intermittent Securities and Capital Exchange System or, more evocatively, PISCES.

The framework would allow sophisticated investors to buy and trade securities in public and private companies in a controlled environment and subject to a more proportionate disclosure and market abuse regime.

Why the need for a new framework?

Currently, UK private companies are unable to admit their shares to trading on a public trading venue. Public companies can do so, but they are limited to certain types of market.

These include regulated markets, such as the London Stock Exchange Main Market, and multilateral trading facilities (MTFs), such as AIM and the AQSE’s Growth Market.

These platforms provide access to investment from institutional investors and a source of liquidity for securities. In the right circumstances, they can also facilitate participation by retail shareholders.

But companies that admit their securities to a regulated market are subject to significant reporting and governance requirements. This includes the full gamut of the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules (DTR) and Market Abuse Regulation (MAR), as well as the need to publish a prospectus. Admission to a regulated market will usually also involve obtaining a listing on the FCA’s Official List and, in turn, compliance with the FCA’s Listing Rules.

The junior markets present a lighter-touch option, but issuers still need to comply with a considerable amount of regulation. Companies on an MTF are subject to MAR and many provisions of the DTR, as well as the rules of the relevant securities exchange (e.g. the AIM Rules for Companies or the applicable AQSE Growth Market rulebook).

In addition, neither regulated markets nor MTFs provide liquidity for securities issued by private companies, which are prohibited from offering their shares to the public.

This creates a hole for companies seeking liquidity for their shares, but which wish to avoid the weight of regulation attached to the public markets or perhaps prefer to stay out of the public eye.

How would PISCES work?

PISCES would be a brand-new kind of framework for trading shares. Rather than a trading venue per se, PISCES would be a regulatory perimeter within which operators can establish their own platform.

Rather than being available to buy and sell at any time, shares on a platform within the PISCES framework would trade intermittently during so-called “trading windows”. The platform operator would set the frequency of trading windows (e.g. monthly or quarterly).

The framework would employ a bespoke regulatory regime designed to provide greater protection than that which applies to off-market, bilateral trades, but with a lighter touch than the public capital markets. Some aspects of that regulatory regime would apply at all times, but many elements would apply only during or immediately before a trading window.

Shareholders would still be permitted to trade in shares outside trading windows. However, any trades would need to take place on a bilateral basis, with buyers and sellers coming together independently to agree the trade.

The framework would be designed with sophisticated investors in mind. Whilst anyone would be able to sell shares on a PISCES platform, only investors meeting certain pre-defined criteria would be eligible to buy shares.

This asymmetry is intended to provide liquidity to existing shareholders who would otherwise be unable to sell through a settlement system, but, given the proposed lighter disclosure requirements, limit exposure to buyers with sufficient resource, experience and risk absorption capacity.

A key advantage touted by the consultation is that existing employee shareholders of private companies may be able to realise the value of their holdings by selling through PISCES. In this way, PISCES could provide an appealing complementary facility alongside employee share schemes.

At the same time, the Treasury believes PISCES will provide investors with better access to start-ups that have not yet reached the stage of seeking an IPO, allowing them to seek investment to scale up and creating a future pipeline for IPOs on the UK’s junior and senior public capital markets.

The PISCES framework would be trialled initially within a financial services sandbox, allowing the Government to flex financial markets and company legislation to see whether the concept works. If successful, participants in the framework would be given the option at the end of the trial to graduate to the permanent framework or to bow out. The duration of the PISCES trial is yet to be decided.

PISCES in a nutshell

The key elements of the new framework would be as follows:

• Platform operators. Firms would need to apply for permission from the FCA to operate a trading platform within PISCES. Once granted, a firm would establish its own rules for its platform, including frequency of trading windows, within pre-defined parameters.
• Secondary market. PISCES platforms will operate as secondary markets only, facilitating trading in existing shares but not serving as a venue for raising new capital. In other words, it would not be possible to conduct an IPO on a PISCES platform. Similarly, it would not be possible to conduct share buy-backs through PISCES (although this would remain possible off-market).
• Eligible securities. Only shares in limited companies (whether UK or overseas) would be eligible for admission in PISCES, provided they are freely transferable and are not already admitted on a public market in the UK or abroad. Debt securities, depositary receipts and derivatives will not be admissible within PISCES.
• Eligible companies. The Government does not envisage placing any minimum or maximum market capitalisation requirements for companies wishing to participate in PISCES. However, a platform operator may impose minimum corporate governance requirements, leading to an admission process not dissimilar to that for the UK’s primary markets. The Government will modify company law to make it clear that private companies can admit their shares into PISCES.
• Eligible investors. Anyone could sell shares through PISCES, but only sophisticated and informed investors (such as private equity firms and pension funds) would be permitted to buy. Although closed to retail investors during the trial, the Government is seeking views on whether to allow certain individuals to buy through PISCES, such as self-certified sophisticated investors, high net worth investors, and employees of a company admitted to a PISCES platform.
• Trading windows. Trading in shares through PISCES would occur only during trading windows set by the relevant platform operator, which may occur monthly, quarterly, biannually or at other intervals. Operators would also be able to set the duration of each trading window, as well as minimum and maximum execution sizes during the window.
• Price discovery. The consultation contemplates that the operator of a PISCES platform would determine how share price is discovered. This might include by using price parameters on the platform set by the participant issuers, with the basis of those parameters being disclosed. For example, participant companies could be required to set a floor and ceiling price for the share that is being traded, with an algorithm finding the uncrossing price based on orders received.
• Intermediation. The Treasury expects that most platform operators would allow trading under an intermediated model, with PISCES member firms trading shares on behalf of end investors (as currently happens on the UK’s public capital markets). However, in theory a platform could operate on a non-intermediated basis, with end investors trading with each other directly.
• Clearing systems. The consultation specifically proposes to leave it open to platform operators whether to require participant company shares to be placed with a central securities depository (CSD). However, it does not specifically state whether shares would need to be cleared through a settlement system, such as CREST. In practice, we suspect that placement into some kind of clearing and settlement system would be necessary or desirable in most cases.
• Trading disclosures. Operators would need to put adequate systems in place to ensure investors have access to timely disclosures by participating companies. The Government expects information disclosed within a platform to stay within the platform. In particular, pre- and post-trade information would be available to PISCES participants and the FCA, but not the general public.
• Interests in shares. The Government would modify company law to allow private companies participating in PISCES to find out who holds an interest in their shares, using the procedure set out in section 793 of the Companies Act 2006. (Currently, only public limited companies (PLCs) are able to utilise this procedure.)
• Inside information. The inside information regime under the Market Abuse Regulation would apply to companies on PISCES. However, there would be no requirement to publish inside information outside of trading windows. Rather, participating companies would publish all accumulated inside information at the start of a trading window. Participant companies would not be able to delay disclosure of inside information in the way primary market issuers currently can.
• Market abuse. Subject to this, a market abuse regime similar to that in the Market Abuse Regulation would apply to PISCES companies, including restrictions on insider dealing, unlawful disclosure of inside information, and market manipulation. However, for the most part, the regime would apply only between the point of pre-trading disclosures up to closure of the trading window.
• Other disclosures. Participant companies would also be required to make certain other disclosures, including in relation to ownership of their shares, transactions by senior managers in the company’s shares (similar to PDMR transaction reporting), and details of trading restrictions imposed by the company. Platform operators would be able to require further disclosures.

What does this mean and what happens next?

The proposals in the Treasury’s consultation are exciting.

For many companies, the sheer weight of administration and regulation that comes with admission to the UK’s more senior public markets is daunting, off-putting and a disincentive from listing. Even junior markets, such as AIM, whilst less heavily regulated, represent a gear shift for issuers in terms of disclosure, governance and compliance.

On top of this, there is a large middle bloc of capital-hungry companies that have outgrown their initial seed phase but not yet reached the size or maturity to contemplate an IPO. Access to these companies for investors currently relies on investment associations and personal connections.

Private platforms under a framework such as PISCES could well provide a much-needed missing link, presenting investors with a selection of developed investment opportunities with potential for significant growth, providing companies with access to ready-to-be-deployed capital, and creating tantalising liquidity for existing investors and shareholders.

Indeed, if the Government is minded to extend full participation in PISCES to employee-shareholders, who will potentially be in a position of better understanding of their company’s dynamics, platforms could also facilitate trading between employees themselves, something that is currently possible only in employer-facilitated grey markets, in turn enhancing stakeholder ownership.

By delegating responsibility for setting disclosure and governance requirements to platform operators, but, at the same time, setting minimum standards and overseeing those operators, there is an opportunity to create a competitive landscape within a safe regulatory environment.

The key focus here will be regulation. The Government and FCA will need to strike the right balance. Any disclosure and governance requirements for PISCES participants will need to be sufficiently distinct from – and less onerous than – those for the UK’s primary markets to make admission through PISCES worthwhile.

A mere replication of the requirements that already apply to regulated markets and MTFs, coupled with intermittent trading and restrictions on the types of eligible security and investor, would not seem a particularly attractive proposition. There is a strong argument that governance and disclosure obligations for PISCES should be set at the very minimum, with operators being left to augment those requirements as they see fit.

In this regard, one problem the consultation creates involves the inability for companies participating in PISCES to delay the disclosure of inside information.

An issuer on a regulated market or MTF is currently permitted to do this where disclosure would prejudice the issuer’s legitimate interests, provided that the issuer can maintain the confidentiality of the information. This is invaluable, as it allows the board of an issuer to investigate and negotiate transactions in confidence, in the knowledge that discussions will not need to be announced publicly until the deal is finalised.

Removing this ability from the PISCES framework would appear to force PISCES participant companies to diligence, negotiate and conclude transactions wholly between trading windows. Depending on the frequency of the trading windows, this could be a significant challenge and, hence, a disincentive to seeking an admission on a PISCES platform.

We look forward to seeing the Government’s next steps in this exciting development.

Read HM Treasury’s consultation on a Private Intermittent Securities and Capital Exchange System (PISCES) (opens PDF)