PISCES – liquidity through secondary transactions – UK Treasury consultation

On 6 March 2024 the UK Treasury published a consultation paper giving further definition to proposals for a platform to allow liquidity windows for trading in private companies' shares at pre-determined intervals. Responses are invited by 17 April 2024.

For background, see our briefing earlier this year.  

What is the consultation about?

The new regime is to be known as PISCES (Private Intermittent Securities and Capital Exchange System). The consultation focuses on requirements for a regulatory 'sandbox', proposed to last five years, to relax securities regulation to enable the testing and adoption of new technologies and practices before the regime is made permanent.

Why is a sandbox needed?

There is currently no route through which securities may be admitted to trading on a multilateral system on an intermittent basis, such that market abuse, transparency and disclosure arrangements would apply only during those intermittent windows. The sandbox would temporarily modify relevant legislation (including the Financial Services and Markets Act 2000, the Companies Act 2006 and legislation relating to market abuse and markets in financial instruments) to facilitate this.

Who would be eligible to trade on PISCES?

It is proposed that only institutional and professional investors (such as pension funds or private equity firms) should be able to buy shares on PISCES in the first instance. This would likely include any person who meets the definitions of eligible counterparty or professional client in the Markets in Financial Instruments Directive (MiFID).

Under the proposal, existing shareholders would be able to sell their shares on PISCES subject to the conditions of the company’s articles of association and any other relevant employment-based agreements where employees hold shares in the company. Other limitations (such as transfer restrictions contained in a shareholders' agreement) would also continue to apply as a matter of contract law.

The government is considering separately whether certain categories of retail investors may also be permitted to buy shares through PISCES, including any of the following categories:

• Self-certified sophisticated investors.
• High-net worth investors.
• Employees of a company participating on PISCES.

What would be the requirements for companies with shares traded on PISCES?

The government does not currently envisage placing admission requirements, such as a minimum or maximum size cap on companies wishing to use PISCES. However, there may be requirements, such as minimum corporate governance requirements, placed on companies by a PISCES operator as a condition of admission.

For shares to be traded on PISCES, they will need to be freely transferable and must not otherwise be admitted to trading elsewhere. Companies will need to undertake the necessary steps to ensure that this is the case, for example agreeing with shareholders to amend their articles of association, if necessary. 

It is hoped that the consultation will consider how the proposals will impact private companies (in particular, growth and venture-backed companies), where restrictions on share transfers are typically included in articles of association as a customary investor protection. In practice, the proposal as its stands currently may mean that an intermittent listing on PISCES would be undertaken by only larger, more mature, privately held companies which are willing to forgo restrictions of that type. Even then however, if such companies are contemplating a future IPO, concerns may remain as to whether an intermittent listing would introduce too many new stakeholders onto the company's cap table (which, in turn, may complicate a future IPO planning process). 

What are the main proposals for disclosure and transparency on PISCES?

Unlike public markets (such as the Main Market of the London Stock Exchange), PISCES operators will be permitted to establish a ‘private perimeter’, whereby detailed company disclosures and pre- and post-trade data are only required to be made available to eligible investors participating on the platform, and not disseminated publicly. This will be achieved by applying a modified Market Abuse Regulation (MAR) and other applicable disclosure requirements within the PISCES sandbox. 

The government envisages that, at a minimum, companies would be required to disclose:

• all inside information
• information on share ownership, such as a share capitalisation table
• information on transactions by the participant company’s senior managers in their own company’s shares
• information on any price parameters, and
• information on any trading permission restrictions imposed by a participant company. 

The government seeks views on what would be a reasonable timeframe for disclosure ahead of a trading window (eg 3 days ahead of a trading event).

There would also be requirements on PISCES operators to ensure full pre- and post-trade transparency to intermediaries and end-users. The extent to which pre- and post-trade information is made public outside the private perimeter would be at the discretion of the PISCES operator.

The government proposes to give all companies whose shares are traded on PISCES powers to require disclosure of information about interests in their shares.

Would share buybacks be allowed on PISCES?

As a private company can already undertake ‘off market’ share buybacks, the government does not currently envisage that share buybacks will be permitted on PISCES, but welcomes the views of stakeholders on this.

Timeline for launch

The Treasury intends to legislate by statutory instrument later this year, to provide the legal framework for the PISCES sandbox. Before the sandbox is established at the end of 2024, the FCA also intends to consult on the applications and approvals processes for participating in the sandbox, and the FCA rules that will apply to firms within the sandbox.

Conclusion

We welcome this consultation, which maintains the momentum to establish a UK trading venue to promote liquidity in private capital. The plans appear flexible and pragmatic, but there are clearly some challenges around levels of disclosure, confidentiality and the free transferability of shares which ought to be considered further to maximise the potential for an intermittent listing on PISCES to be an attractive option for private companies.

As we noted previously, with the UK's 34,000 strong scale-up community, generating over £1 trillion of turnover a year, there is a definite potential audience.

Contact

To hear more about the plans for PISCES, or to discuss options in relation to carrying out a secondary transaction which utilises a platform outside the UK, please contact Paul Thorpe.