In this two-part article series, we provide an overview of the new Private Intermittent Securities and Capital Exchange System (PISCES).
In part one we covered what PISCES is, why it's been developed, and who can use it. Below we cover how PISCES operates, its disclosure and regulatory requirements, and the tax and incentives considerations involved.
Operational mechanics
How will a PISCES auction work?
PISCES platforms will operate intermittent trading windows (for example, monthly, quarterly, biannually, or ad hoc). Subject to the PISCES operator’s rules, PISCES companies would elect the frequency of potential trading windows, as well as the duration of the window.
However, that election would not necessarily mean there would be a sale of shares in each possible auction window – as any sale would depend on whether there were existing shareholders wanting to sell their shares. Either the PISCES operator or participant company would typically set a minimum and maximum execution size and price for a trading window . If these thresholds are not met, unless auction extensions are generated, the auction fails.
How will shares traded on PISCES be held?
It is left for a PISCES operator to determine whether shares on its platform may be held in certificated form (with transfer by stock transfer form and issue of shares certificates) or through a central securities depositary (CREST in the UK), or both.
Holding shares in CREST may complicate transfer restrictions, whereas (depending on the requirements of the PISCES operator) physical share certificates may make it easier for companies to control share transfers. We understand that the LSE has been collaborating with CREST on an escrow solution to facilitate reimposing transfer restrictions between trading windows.
As the only current PISCES operator, the LSE has stipulated in its rules that shares must be eligible for electronic settlement via a central securities depositary. It remains to be seen whether any subsequent PISCES operators will follow suit.
How would price formation happen?
PISCES platforms must implement a formalised and regulated framework for pricing transparency. Participating companies retain the ability to establish 'price parameters', specifying minimum and maximum thresholds for transactions occurring on the platform.
Can PISCES be used for buybacks or sales out of treasury?
A company won't be permitted to buy or sell its own shares on PISCES, meaning that PISCES can't be used for share buybacks or the sale of treasury shares. The government will continue to consider whether to allow buybacks after the PISCES sandbox launch.
Disclosure and regulatory requirements
How will disclosure work on PISCES?
There will be a bespoke disclosure regime for PISCES.
The objective of this new disclosure-focused regime is to ensure that PISCES companies provide sufficient information for informed investment decisions whilst minimising costs and administrative burdens.
Liability
Investors will be able to seek appropriate recourse from PISCES companies for issues related to the completeness and accuracy of disclosures. PISCES companies face different levels of responsibility depending on the type of information they provide. Additionally, companies are not responsible for statements made by independent experts, provided the expert has given proper consent and certain other requirements are satisfied. PISCES operators can implement a 'private perimeter' whereby sensitive corporate information is accessible exclusively to investors authorised to participate on the platform, rather than being released to the general public.
There is a requirement on companies to disclose a core set of information, which is standardised to broadly reflect the details a purchaser would generally seek in a private market context. Operators may impose further disclosure requirements depending on the nature of the company and the investor profiles that their PISCES platform serves.
Core disclosures
The core disclosure information required by the PISCES Regulations includes the below.
- Financial information: including three years of financial statements (or, if shorter , for as long as the PISCES company has existed).
- Trading and ownership details: including major shareholders (with the threshold set by the operator , up to 25%), prior share capital raises, and any employee share schemes.
- Risk and market information: such as material contracts and any significant changes since the latest balance sheet.
There are provisions permitting omission of information in certain circumstances.
Additional disclosure
PISCES operators bear responsibility for establishing disclosure standards adequate to support the proper and efficient operation of their trading venues. In circumstances where core disclosure provisions prove inadequate for this purpose, operators must implement mechanisms that either mandate or enable participating companies to provide supplementary information beyond the minimum requirements. Whilst not an exhaustive list, the PISCES sourcebook gives the following examples.
- Expanded requirements: additional information categories beyond core disclosures.
- Catch-all provision: board disclosure of any information considered relevant for investor decisions.
- Enquiry-based system: arrangements for investors to request specific information directly from companies.
Will a prospectus be required?
No prospectus will be required in relation to an offer of securities to the public or admission to trading on a PISCES.
Will a PISCES market abuse regime apply?
PISCES companies, and any other market participants, won't be required to identify or disclose all inside information in the same manner as mandated for public markets. However, the criminal offences of misleading statements and misleading impressions will apply to PISCES, and an operator will be expected to notify the FCA if it suspects participating company disclosures could constitute misleading statements.
Tax and incentives considerations
Are there any tax exemptions?
The transfer of PISCES shares in connection with trading activity on a PISCES is exempt from stamp duty and stamp duty reserve tax (SDRT).
Employee share options and awards
Qualifying individuals will include employees, directors or other officers, consultants, and other individual contractors. Whilst they may therefore be eligible to buy shares on PISCES, as well as sell shares, many employees won't own their shares outright. Instead, they will be holding them as options or other types of share award.
In order to participate in PISCES trading then, there will first need to be a mechanism for employees to have their shares delivered or released to them. Many private company share options and awards are offered under 'exit-only' plans, meaning they can typically only be exercised in connection with a full exit such as a company sale or IPO. This structure aligns exercise with liquidity events when shareholders can realise value from their shares, however PISCES now offers a new route to liquidity.
When looking at amending share plans to accommodate this, an important point to note is that there can be tax challenges with changes to terms of existing UK tax-favoured options, including enterprise management incentives (EMIs) and company share option plans (CSOPs) . The good news is that the government is introducing legislation so that option terms can be amended if needed, to enable exercise and sale of the shares on PISCES, without loss of valuable tax benefits.
Companies considering trading their shares on PISCES will therefore need to review their share plans to ensure employees will be able to exercise their options and have shares released to them in advance of a full exit, if that is not currently the case and they would like to offer employees a way of realising value from their shares through PISCES trading. For EMI and CSOP options, they will need to take care to do this within the framework of the new legislation.
Key takeaways
The benefits of PISCES
- can offer additional liquidity events to attract and retain talent
- can offer additional liquidity events for founders, angel investors, and others
- reduced disclosure requirements compared to public markets
- exemption from stamp duty and SDRT
- potential stepping stone toward public markets without a full IPO
- more flexible trading arrangements compared to traditional private share sales and secondary sales.
Possible challenges of using PISCES
- Liquidity and pricing: will sufficient trading volumes be achieved and will pricing be representative?
- Risk and cost: a company will be exposing itself to a statutory liability regime and incurring fees in facilitating a market which does not give it access to new capital.
- Complexity and governance: companies will need to adapt their articles and capital structures to fit with PISCES requirements, also posing challenges around the balance between ensuring freely transferable shares in a trading window and maintaining ongoing control of the share register/cap table.
- No new capital: the PISCES market won't itself facilitate the raising of new capital in conjunction with a partial liquidity event. This would need to be factored in separately, increasing complexity.
- Tax and social security: while there is a welcome exemption from stamp duty and SDRT, companies trading shares on PISCES will likely have PAYE and NI obligations in relation to employee shares which may not have been the case previously and, in particular, the added cost of employer NI could be significant (currently at 15%).
- Foreign securities law: any structure involving non-UK investors would potentially raise questions of foreign securities law, with the innovative nature of PISCES possibly raising new points for consideration.
Our specialist teams are monitoring these developments closely and are available to discuss how these changes could benefit your company and employees. Please contact us to discuss any queries.
