Introduction
Invigorating capital markets in the UK has been at the forefront of the previous and current government’s agendas. Notably the previous ‘Edinburgh Reforms’ that have set about changing the prospectus regime and the Financial Conduct Authority’s (FCA) listing rules. Part of this push to invigorate capital markets, which the previous government initiated and has been continued by the current government is PISCES – the proposed new regulated market for private company shares.
PISCES is a new type of regulated trading platform that allows for the intermittent trading of private company shares on a multilateral system. In launching PISCES, the government is aiming to respond to the growth of private secondary markets by providing a regulatory framework for structured trading events that can then be accessed by broader pools of investors using the currently available public market infrastructure to support these private markets. The goal is to incorporate elements from public markets such as multilateral trading and elements from private markets such as greater discretion over how company disclosures are distributed and when trading occurs.
Background
In March 2024, the previous government consulted on a proposal to establish the regulatory framework for PISCES to be implemented through a Financial Market Instructure (FMI) sandbox1. The current government intends to proceed with the approach originally set out in the March 2024 consultation. However, with the main difference that, as a result of responses to the consultation, they will not be proceeding with the originally proposed PISCES market abuse regime (market abuse regimes are a feature of the UK’s capital markets) and instead proceed with a different disclosure based regime to be set out in the FCA rules.
The government has now just published a further consultation for PISCES, linked here. This article sets out some the key points and takeaways regarding how PISCES will work and be operated as well as its proposed implementation, including that:
It is intended to operate as secondary market i.e. to facilitate the trading of private companies’ existing shares and will not facilitate capital raising through the issuance of new shares;
It is intended to only be used by/available for institutional investors, employees of participating companies and investors who can meet the definition of high net-worth individuals and self-certified or certified sophisticated investors under the Financial Promotion Order 2005 (FPO);
It will not include a public market style abuse regime but the FCA is to be given rule-making powers to create a new and bespoke disclosure regime for PISCES;.
There will be a new FPO exemption to cover PISCES disclosures;
There will be no transaction reporting requirements but with the FCA still considering whether to set rules related to record-keeping to support their supervision of the market;
Companies will not be able to carry out buybacks; and
Operators will have the discretion to decide whether or not shares must be recorded in a Central Securities Depository (CSD).
Together with the consultation, the government has published a draft statutory instrument (Draft Statutory Instrument) with an accompanying policy note to provide further details as to how the Treasury intends to set up the PISCES regime.
Legal framework – FMI Sandbox Powers
The March 2024 consultation sought views on the sandbox2 arrangements which will cover the types of firms who are eligible to participate in the PISCES sandbox3 and operate a PISCES platform as well as views on the duration of the PISCES sandbox regime. As proposed in the March 2024 consultation, the government intends to use its powers under the FSMA 2023 to put PISCES in place as an FMI sandbox. Therefore, a firm that wishes to operate a PISCES platform will need to seek FCA approval to do so.
Only firms that have certain FCA permissions will be eligible to apply to the FCA to enter the sandbox and the FCA will also be setting out in their rules or guidance information about the application process. The government intends to set a period of 5 years for the PISCES sandbox and will work with the FCA to monitor outcomes during the lifetime of the sandbox and retain the ability to terminate or make the sandbox arrangements permanent at an earlier stage if appropriate (and subject to parliamentary approval).
Investors Eligible to Trade on PISCES
As a result of the feedback from the consultation the government intends to allow the following parties to purchase shares on PISCES:
Institutional investors;
Those who meet the definitions of self-certified sophisticated investors, certified sophisticated investors and high net-worth investors in the FPO;
The employees of participant companies; and
The employees of companies in the immediate corporate group of participant companies, where their employment is connected to the participant company’s business.
Further the government announced it intends to allow for purchasing of shares through bare trustees, nominees or custodians. More information can be found in the Draft Statutory Instrument.
PISCES Market Abuse Regime
Based on the feedback to the March 2024 consultation, the government has decided not to implement a bespoke market abuse regime for PISCES. The feedback received highlighted the undue burden and issues with implementing such a regime. Instead, it is proposing a disclosure based approach modelled on private markets that sits somewhere between existing public and private markets. The government intends to give the FCA rule-making powers to create a new and bespoke disclosure regime for PISCES.
The FCA will still retain its role in enforcing the criminal market abuse regime as it applies to PISCES, but it is not intended they have a role comparable to the one they have in public markets in enforcing a MAR-like civil market abuse regime for PISCES. Instead, the FCA will be given rule-making powers concerning the detection and prevention of abusive trading behaviors on PISCES.
PISCES Operating Requirements
PISCES will operate as a multilateral system but it will not be a trading venue as defined under MiFIR4. This means PISCES will not automatically be subject to all the requirements that trading venues are subject to under legislation and the FCA rules. The government intends to proceed with a flexible regulatory framework which allows operators to tailor their PISCES platform to suit their commercial objectives.
When applying to the FCA to operate a PISCES platform, the potential operators would need to demonstrate that their proposed platform meets the regulatory requirements set out in the legislation and FCA rules. The March 2024 consultation provides illustrative examples of how PISCES operators could design their platforms, including price parameters, permissioned trading events and others.
The FCA intends to consult further on the detailed requirements that will apply to PISCES operators.
Disclosure within a ‘Private Perimeter’
The government has set out that it will proceed with the proposal set out in the March 2024 consultation. PISCES operators and companies will not be required to publicly disclose information in relation to the trading of shares on PISCES. Instead, on PISCES, operators will be permitted to establish a ‘private perimeter’ where detailed company disclosures are only required to be made to investors participating in a PISCES trading event and not publicly disseminated. Operators will need to ensure they have adequate rules in place to carry out this out and ensure investors have timely access to information.
The FCA will be consulting on rules regarding disclosure requirements including core mandated disclosures and the requirements for operators to ensure that company disclosures are shared with all investors able to participate in PISCES trading events.
Pre- and Post-Trade Transparency
The government has highlighted that, in the context of PISCES, there is a need to ensure that those within a ‘Private Perimeter’ have access to complete information (even if there is only limited publicly available information about the company). The approach to be adopted from the consultation is that operators would be required to ensure investors that are able to participate in a PISCES trading event have access to full pre- and post-trade transparency information. The FCA will be consulting on the detailed requirements related to the pre- and post-trade transparency requirements for PISCES.
Transaction Reporting
As set out above, the government is no longer intending to have a bespoke market abuse regime for PISCES, therefore, the transaction reporting regime is no longer appropriate. The government has outlined that the FCA will be given rule-making powers concerning the detection and prevention of abusive trading behavior on PISCES and will also be consulting on the recording keeping requirements for orders and transactions on PISCES.
Responsibility for Managing Access to Trading on PISCES
As set out above, participation in PISCES trading is only open to certain investors. As a result of the [March 2024] consultation, the government intends to place the obligation to check the eligibility of the investor to participate, on the person taking an order to trade, namely, the PISCES operators. The March 2024 consultation noted this is not dissimilar to existing obligations on regulated intermediaries who should also be able leverage their existing know your customer (KYC) procedures or rely on investors self-certifying to make it less onerous. It is intended this obligation will be set in legislation. The Draft Statutory Instrument includes this obligation, and the government is seeking feedback on this draft legislation.
Corporate Requirements to Trade on PISCES
Based on feedback received to date, the government intends to proceed with the position set out in the March 2024 consultation. That is, to not place any or require any additional corporate governance requirements on companies through legislation. It was noted that PISCES operators would be best placed to assess whether further corporate governance requirements are required for the companies trading on their PISCES platform.
Modification to the Companies Act
The March 2024 consultation discussed and set out proposed changes to the Companies Act 2006 (CA 2006) in order to implement the PISCES trading platforms. Section 756 of the CA 2006 sets out when a company can offer its shares to the public. As a result of the PISCES consultation, it will be proposed to modify section 756 to allow private companies to participate in PISCES. Secondly, the consultation proposed modifying section 793 of the CA 2006 to give participant companies powers to require information from investors that they believe have an interest in their shares.
The government intends to proceed with both these proposed modifications to sections 756 and 793 of the CA 2006 within the PISCES sandbox.
Share Buybacks
Under the March 2024 consultation, the government acknowledged that while there are potential benefits to allowing companies to undertake share buybacks on PISCES, there are also risks that buybacks on PISCES would pose. Therefore, they are not allowing them at this time and will continue to consider whether to allow buybacks on PISCES following the launch of the PISCES sandbox.
Shares Traded on a PISCES Platform
The government has confirmed it will be possible for participant companies to have different classes of shares admitted to a trading event on PISCES. Subject to shareholder agreements, articles of association and the rules of the operator, the legislation will not prevent a company with different share classes from electing to only have certain classes of their shares traded on a PISCES platform. It is noted that any shares must also not be admitted to trading on a public market in the UK or abroad and that the government has also stated that it would expect shares to be free of restrictions affecting transfer(s) at the time of a PISCES trading event so as to ensure, fairly, orderly, and efficient trading.
Financial Promotions
As a result of the March 2024 consultation, the government has confirmed that it will modify the FPO to create a new exemption specifically for the purposes of the PISCES sandbox based on existing exemptions available for promotions included in mandated public market disclosures. This new PISCES sandbox exemption will provide that any disclosures that are required or permitted by the FCA or the rules of the operator are exempt from the financial promotion restrictions.
In addition, the government has confirmed that it will make the necessary legislative changes to ensure that shares on PISCES are considered ‘shares in an unlisted company’ under the FPO, so that this would mean that the exemptions for high-net-worth individuals and self-certified sophisticated investors can be used.
Settlement
The government has confirmed that as proposed in the March 2024 consultation, it will be up to the operator to decide whether a company needs to have their shares recorded on a CSD in order to participate on their PISCES platform.
Further Issued Raised
There were some other further issues raised in the March 2024 consultation including:
Primary Capital Raising: The government has acknowledged the calls to allow primary issuances on PISCES, but it will not be doing so at this time with the focus of the first phase of PISCES being to provide a regulated secondary market for private companies.
Tax Treatment: As announced in the Autumn Budget 2024, the government will exempt PISCES transactions from stamp duty and from stamp duty reserve tax. It is understood this exemption will be introduced on a similar timeline to the wider legislation establishing the PISCES regulatory framework.
Takeover Code: The Takeover Code will not apply to a company solely by virtue of its securities being admitted to trading on PISCES as it would not be categorised as regulated market, a multilateral trading facility or an organised trading facility.
Timeline for Implementation
As set out above, alongside the consultation the Treasury has published a Draft Statutory Instrument and accompanying policy note. These set out how the government intends to set up the PISCES regime and regulatory framework.
Subject to technical feedback on the Draft Statutory Instrument, the Treasury intends to introduce the PISCES legislation by around May 2025 and the FCA will be publishing a consultation on its proposed rules for PISCES in due course. In response to such consultation, the FCA will then finalise these rules before opening the PISCES sandbox for applications.
How Laytons Can Help
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