HMT consults on new secondary market for private company shares

What does this mean?

The increased use of private markets presents challenges for firms looking to rationalise their shareholder base, or for shareholders seeking an exit route. Investors also lack a standardised way to access companies that are not yet operating on public markets.

HMT’s proposals were announced as part of the Edinburgh Reforms package in December 2022 and form part of the government’s wider agenda to increase the competitiveness of the UK’s capital markets. The Government aims for PISCES to combine elements from public markets with the greater discretion and more proportionate requirements of private markets.

Key features of the proposed framework include:

Legal framework: Firms that want to operate a PISCES platform will need to apply to the FCA, and be a regulated entity (or be exempt from authorisation). The FMI Sandbox regime allows market operators to trial new or developing FMI technology or practices, while still achieving appropriate regulatory outcomes. The PISCES framework, under the Sandbox, will temporarily modify or disapply a range of regulatory provisions. HMT’s consultation does not commit to a specific timeframe for the duration of the PISCES Sandbox, but promises to ensure there is no gap between the sandbox ending and the permanent regime being available.

Eligible investors: Eligible counterparties and professional clients, using the existing MiFID II definitions, will be eligible to trade shares on a PISCES platform in the first instance. Retail investors will generally not be able to participate, subject to some exceptions.¹ The FCA is likely to take into account a PISCES operator’s ability to ensure that ineligible investors do not participate in trading events when deciding whether or not to grant applications for the FMI Sandbox.

A bespoke disclosure and market abuse regime: Company disclosures, and pre- and post-trade transparency will only need to be made available to investors participating in PISCES (a ‘private perimeter’) rather than to the wider public. PISCES will have a tailored and proportionate market abuse regime that draws on existing definitions and concepts under the Market Abuse Regulation (MAR). The market abuse regime will apply:

• From the time when company disclosures are made available prior to a trading window until the end of that event.
• To shares traded on PISCES, but not to related financial instruments.
• To on-PISCES trading but not off-market private transactions. However, requirements regarding the dissemination of false or misleading information will apply to information outside the trading window where it impacts the trading of shares on PISCES.

The existing MAR offences of unlawful disclosure of inside information, market manipulation, and insider dealing, will apply to the PISCES framework and apply to both firms and individuals.

Requirements on private companies/PLCs: Disclosures will only need to be made on an intermittent basis to eligible investors, and must include at a minimum, all inside information; information on share ownership, and transactions in senior management’s own company shares; information on price parameters; and any other disclosures as required by the PISCES operator.

HMT proposes that the FMI Sandbox will modify certain aspects of the Companies Act 2006 to reflect the requirements of the PISCES framework. For example, HMT proposes that share buybacks on PISCES platforms will not be permitted, due to the ability of PISCES operators to set price parameters. PISCES operators may also establish their own admission criteria, which could include minimum corporate governance requirements, for example.

Requirements on platform operators: The regulatory provisions that are expected to apply to PISCES operators will draw on the existing obligations that apply to trading venues. As a PISCES platform will not be a trading venue, however, a bespoke regime for transaction reporting will be needed, and PISCES operators will be responsible for reporting. PISCES operators will be able to set their own rules for operating their platforms, including the frequency and duration of trading windows. Operators will also be able to determine to what extent pre- and post-trade information is made available beyond the private perimeter.

Regulated intermediaries that become members of a PISCES platform and trade on behalf of clients will also be subject to the requirements established by the PISCES Sandbox.

 ¹ _{HMT proposes to allow self-certified sophisticated investors and high-net worth investors to participate in PISCES platforms, as well as employees of a company participating in PISCES who would be eligible to buy shares in their company only.}

What do firms need to do?

The PISCES Sandbox environment will enable the detailed regulatory requirements on PISCES operators, participant companies, and eligible investors to be developed over time. The final regime may therefore differ from the proposals put forward in this consultation.

Firms that are considering applying to the FCA to enter the Sandbox should review the proposals against their commercial and operating models. They should also review their current policies, procedures and controls to assess their ability to comply with the specific PISCES regulatory requirements.

Participant companies, and firms wishing to provide intermediated access to PISCES platforms, should assess their ability to meet the expected regulatory requirements. This is likely to include reviewing a range of policies, processes and technologies.

Investors who may be eligible to participate in PISCES trading events should consider whether the balance of protections likely to be afforded by the regime compared with public markets is in line with their risk appetite and wider business strategy. Firms may also wish to consider the optimal access model (intermediated vs direct) when assessing the potential benefits of participating in a PISCES platform.

Next steps

The consultation period is open until 17 April 2024.

The Government intends for the PISCES Sandbox to be established by the end of 2024. Prior to that, HMT will lay a Statutory Instrument before Parliament, providing the legal framework for the Sandbox. The FCA will also consult on the rules that will apply to Sandbox participants and the process for applying.