UK Government consults on new platform for trading private company shares

Why should I read this?

One announcement you may have missed in the Chancellor’s budget is that HM Treasury are consulting on key aspects of a proposed Private Intermittent Securities and Capital Exchange System (PISCES). This is part of the government’s programme of capital markets reforms.

The government has set out details around the proposed design of the trading platform (previously referred to as an “intermittent trading venue”), which was originally announced as part of the 2022 Edinburgh Reforms and then in the Chancellor’s Mansion House Speech in 2023.

PISCES will provide a platform for the intermittent trading of private company shares, providing shareholders in certain private companies with liquidity and a route to exit. Trading windows will take place at defined intervals. PISCES will facilitate the trading of existing shares. It is not a capital raising platform, so companies will not be able to use it to raise funds through the issue of new shares, and it will not permit the trading of other instruments such as bonds.

Who can trade on PISCES and how will trading work?

Under the proposals set out for consultation, PISCES will be open to private and public limited companies whose shares are not admitted to trading on a public market in the UK or abroad. This includes overseas companies.

There will be restrictions on the categories of investors that can buy shares on PISCES. This may be limited to institutional and professional investors (eg pension funds and private equity firms). Most retail investors will be excluded. The consultation considers whether limited categories of retail investors, such as self-certified sophisticated investors, high-net worth investors and employees of participating companies, should be able to buy shares through PISCES. 

The government expects that many PISCES operators will establish a similar model to public markets, where direct membership of the PISCES platform will be limited to registered intermediaries, such as brokers and investment banks who will trade on behalf of clients.

PISCES will operate intermittent trading windows, for example monthly or quarterly.

The consultation envisages that determination of share pricing may be done in different ways on a PISCES platform, including the use of pricing parameters, potentially using floor and ceiling prices set by the participant company. 

Who will operate PISCES?

PISCES will initially be established using the Financial Markets Infrastructure Sandbox under powers granted by the Financial Services and Markets Act 2023.  The operation of PISCES will be subject to its own regulatory requirements within the PISCES sandbox. Regulated firms that wish to run a PISCES platform will require specific authorisation from the FCA. The government expects that existing trading venue operators will be eligible to operate PISCES. London Stock Exchange Group has previously indicated that its venue is ready to launch, subject to FCA approval.  

Chapter 3 of the consultation considers the regulatory requirements for PISCES operators in further detail.

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

For shares to be traded on PISCES, they will have to be freely transferable, so, for example companies would need to make appropriate amendments to their articles of association. This is unlikely to be attractive to private equity-owned companies seeking to limit share ownership to incentivised management teams. The government’s view is that any additional corporate governance requirements on private companies beyond those required by the Companies Act 2006 (2006 Act) should be at the discretion of PISCES operators.

Under the PISCES sandbox, the government can temporarily modify or disapply existing legislative provisions. This will include modification of provisions of the 2006 Act relating to the prohibition on offers of shares to the public by private companies to ensure that private companies can participate on PISCES. This is due to a concern that where new shares are offered to investors outside of PISCES, this could be regarded as an indirect offer to the public where the company knew the same shares may be subsequently traded on PISCES. The consultation does not currently envisage that share buybacks will be permitted on PISCES but requests views on this. 

PISCES will have a bespoke disclosure and market abuse regime, initially created as part of the sandbox. The market abuse regime (further detailed in Chapter 5 of the consultation) will be based on the UK Market Abuse Regulation (UK MAR) but tailored to reflect the intermittent nature of trading and the specific risks posed by the model. The requirements will only apply shortly before and after each trading window, and there will be no requirement for information to be disclosed to the public. Instead, information will only have to be made available to investors that may trade during the window. 

The consultation also envisages disclosure of information on share ownership and information on transactions by senior managers in the company’s shares (similar to transaction reporting by Persons Discharging Managerial Responsibilities under UK MAR). 

The consultation is silent as to whether shares traded on PISCES will benefit from the stamp duty exemption that applies to growth markets such as AIM. 

Next steps and impact

The consultation is open until 17 April 2024. Interested parties should review the list of consultation questions and consider responding. 

The Treasury intends to lay a statutory instrument before Parliament later this year providing the legal framework for the PISCES sandbox. The FCA will also consult on the process for taking part in the sandbox and the FCA rules that will apply to firms within the sandbox.

At the end of the sandbox trial (which may last for five years), HM Treasury will assess whether any permanent changes to legislation are required to accommodate a long term PISCES model.

The PISCES model should improve later-stage liquidity for private company shareholders. PISCES is likely to be attractive to business angel and venture capital-backed companies, as well as companies with a large employee shareholder base. The government intends PISCES to be an intermediate step to listing on public capital markets that will support the pipeline for future IPOs in the UK.

From a VC sector perspective, this is an interesting intervention given that the relative illiquidity of private company investments is a hot topic right now. The reduction in M&A activity last year has meant that VC investors and business angels have not been able to exit positions, and in turn this means that there is less capital being deployed in terms of new investments. 

The challenge will be that the institutional and professional investors that this may be aimed at will normally want to negotiate (or at least be provided with) some bespoke minority protections, for example, information rights and consent rights, and board or observer positions. Whilst the platform may help in the origination of small secondary transfers, more significant deals will likely still remain in the private market given the governance arrangements within private companies that the fact that one size is unlikely to fit all.

Further reading on PISCES