On 6th March, on the same day as the UK Chancellor of the Exchequer announced his 2024 Budget, he also published a consultation paper on the long-heralded Private Intermittent Securities and Capital Exchange System (PISCES).

The UK’s role as a global financial services centre has begun to dwindle in recent years and PISCES is intended to be an innovative step to reverse that trend.

PISCES, first announced in 2022 as part of the “Edinburgh Reforms” of UK financial services, is a proposed platform for private companies to trade securities within a controlled “public” environment on an intermittent basis.

PISCES will allow secondary trading in existing (not new) shares (and not other securities) in private companies (both UK and overseas) within a [walled environment] during specified trading windows (monthly or quarterly).  PISCES will be established under the auspices of a ‘financial markets infrastructure (FMI) sandbox’ under the Financial Services and Markets Act 2023. The sandbox regime allows the UK Government to temporarily modify or disapply parts of the existing regime to support market operators to rival innovative FMI technology or practices, whilst still achieving appropriate regulatory outcomes.  The PISCES-related FMI sandbox will allow the UK Government to check that the detailed regulatory requirements for PISCES operate correctly, by modifying or disapplying the relevant, including the Financial Services and Markets Act 2000 (FSMA 2000), the Companies Act 2006 and legislation relating to market abuse and markets in financial instruments before the regime is made permanent.  The UK Government remains to decide how long the FMI sandbox for PISCES will last.

Much of the quasi-regulatory framework under PISCES will be delegated to and set by the PISCES operators and will draw on the obligations that apply to Multilateral Trading Facility (MTF) operators. These will include:

• minimum corporate governance requirements, placed on companies by a PISCES operator as a condition of admission, with the expectation that companies may find the application process to have their shares traded on PISCES similar to some of the admission requirements imposed by operators of primary markets;
• disclosure arrangements to provide, or be satisfied that there is access to, sufficient information to enable the system’s users to form an investment judgement, taking into account both the nature of the users and the types of instruments traded; and
• ensuring that only eligible investors are able to participate in a trading event.

Trading on PISCES will be restricted, with most retail investors prohibited at least during the trial phase due to higher risks.  Those eligible to buy may include retail investors who fall within certain of the exemption categories relevant to financial promotions under FSMA 2000, (for example, high net worth individuals and sophisticated investors), but may also include employees of a relevant company.  Relevant companies would not be permitted to buyback their own shares through PISCES.  Eligible sellers may include employees holding shares in relevant companies.

Since a private company whose shares trade on PISCES will not be able to raise funds itself, PISCES does not directly allow the capital growth of such companies; instead it is an intermediate step to public capital markets, and indirectly assists growth, through granting private companies access to a wider investor base (and vice versa), making such companies familiar with the disclosure requirements for a public listing and allow there to be greater confidence in their calculation.

The proposed conditions to trading include bespoke disclosure requirements to eligible investors (and not the wider public) of:

• inside information before and after trading windows, with such information available only to eligible investors. “Inside information” is all information that could significantly impact share price and includes information shared outside of trading windows in private markets;
• information on share ownership, such as a share capitalization table and significant transactions since the last trading event (presumably both on and off PISCES);
• transactions by the company’s senior managers in its shares, both on and off PISCES;
• price parameters for shares traded on PISCES; and
• any restrictions imposed by companies on trading permissions.

There would be requirements on PISCES operators to ensure full pre- and post-trade transparency to intermediaries and end-users, for example, through a disclosure platform, within the private perimeter.  It is also expected that PISCES operators will want to consider the minimum standard of pre- and post-trade transparency information made publicly available outside the private perimeter to attract potential investors.  The expectation expressed in the consultation paper is that PISCES operators will pass liability for accurate compliance with such restrictions on to the companies themselves.

Currently, publicly traded companies can demand ownership information under the Companies Act 2006 from a person they know, or believe, has an interest in their shares.  This power ensures that persons who have significant influence over a company’s shares, which could be relevant to a takeover or other significant corporate action, can be identified.  The consultation paper proposes that companies with shares traded through PISCES would have the same power. 

At this stage of the consultation process, a number of aspects of PISCES remain unclear:

- if inside information on a private company is released to an investor trading on PISCES, and that investor subsequently trades shares privately in the same company, it will have an information advantage over a buyer or seller who has not had access to that inside information;

We discussed this inside information issue with Peter Kemp, Co-CEO of Flint Digital, which provides websites and micro-sites tailored to enable companies to comply with existing regulatory disclosure burdens.  He also raised the concern that an investor may participate in PISCES in order to obtain inside information but not to buy, and then use that information to make an off-platform share purchase from another shareholder who may or may not have access to that information. “One way around this will be for PISCES participating companies being mandated to maintain a protected IR microsite (similar to that required under Rule 26 of the AIM Rules for Companies) so as not to disenfranchise any shareholder.  How else would, for example, employees who hold shares get access to the same information which surely they would be as entitled to as a potential holder?”

- the consultation paper proposes that shares in a private company traded on PISCES must be freely transferable in order to permit founders and other early investors to exit.  It is unclear at this stage whether this is a blanket prohibition on transfer restrictions or whether it would be possible for the common transfer restrictions (such as rights of first refusal and put or call options) intended to ensure that early investors retain control of growing private companies can be in force outside trading windows;

- how the UK Takeover Code may apply, if at all, to private companies whose shares are traded through PISCES, given the consultation paper’s proposal to grant such companies the power to demand information on interests in their shares;

- how the UK PISCES regulatory system will operate in relation to overseas companies which may have incompatible share transfer or regulatory disclosure restrictions;

The UK Government intends to lay a statutory instrument before Parliament later in 2024, which will provide the legal framework for the PISCES Sandbox. The UK’s Financial Conduct Authority (FCA) also intends to consult on the processes for taking part in the Sandbox and the FCA rules that will apply to firms within the sandbox before the Sandbox is established at the end of 2024.

ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.