In brief
- With a second operator approved, momentum is growing around the Treasury's PISCES initiative.
- In this article, we focus on the pools of investors who will be able to invest in PISCES companies and how.
- For scaling companies such as FinTechs, joining a PISCES platform offers the potential to tap into a wider pool of investors and create fresh liquidity.
Background
The Private Intermittent Securities and Capital Exchange System (PISCES) is the regulatory framework for a type of regulated trading platform that allows for secondary trading of private company shares. A PISCES platform is a multilateral trading system for the trading of shares in intermittent trading windows and gives the trading company control over, amongst other things, the categories of person who may buy or sell shares and minimum and maximum sale prices. PISCES is not one trading platform but a framework by which multiple operators can apply to the FCA to run a secondary trading platform.
We have a series of content on PISCES: for the most recent article and links to other pieces, please see: FCA finalises PISCES rules: new private markets expected to launch in 2025.
Who can invest in PISCES?
General retail investors are not permitted to invest in PISCES shares, but certain categories of retail investors who meet specific criteria will be eligible.
Investors need to be sufficiently sophisticated, demonstrating that they have the necessary knowledge to understand the inherent risks of investing in private companies. This typically includes: professional clients, high net worth individuals, high net worth companies, unincorporated associations, investors certified as sophisticated by an authorised person, self-certified sophisticated investors (within the Financial Promotions Order), qualifying individuals (employees or officers of the PISCES company or people providing consultancy/managerial services) and trustees of employee share plans and share incentive plans.
PISCES platforms aim to provide access to a pool of established investors who have already been vetted and certified as meeting such sophistication requirements. This creates curated investor bases that combine retail participation with appropriate investor protection safeguards.
The PISCES framework aims to give trading companies significant control over the categories of persons who may buy or sell shares. This means that it seems possible in, theory, to restrict categories of investors further beyond the baseline sophistication requirements. For example, FinTech companies using PISCES could choose to restrict competitors from investing in their shares through the platforms. This flexibility would allow companies to maintain strategic control over their shareholder base whilst still accessing liquidity through secondary trading.
Note, however, that PISCES may involve extra risks compared to trading in public companies, and investors should familiarise themselves with risk warnings from PISCES operators and trading intermediaries. The Financial Conduct Authority (FCA) rules seek to help investors understand the risks of investing in a PISCES share and make an informed decision to invest.
Who will be an operator?
So far, the London Stock Exchange (LSE) and JP Jenkins have obtained authority from the FCA to operate a PISCES platform. It is worth keeping an eye out for upcoming potential operators, such as Asset Match, as the PISCES landscape continues to develop.
How can investors invest?
Investors can access PISCES shares through authorised PISCES platforms. Each PISCES platform will be able to set its own admission requirements for companies that want to have their shares traded. The FCA's framework envisages that PISCES operators will operate their PISCES on an intermediated basis (i.e. a member firm trading directly, acting as an intermediary for the ultimate investor), although a PISCES could also, potentially, operate on a non-intermediated model.
Operators and intermediaries will need to ensure that potential investors fall within the eligibility criteria discussed above before allowing them to participate in PISCES trades, including where access to trading is restricted to protect legitimate commercial interests of the company.
The LSE has recently been partnering with operating platforms such as Crowdcube to provide access to their established investor bases for later-stage, high-growth private companies on the same terms as institutional investors. This partnership model benefits trading companies on the LSE's private market by connecting them with a pre-vetted pool of sophisticated investors ready to purchase shares during trading windows.
What does that mean for FinTech companies?
For companies, this also creates a new way to provide employee shareholders with share liquidity and facilitate the ability for loyal customers, who meet the investor eligibility criteria, to become shareholders, whilst the business continues to scale. The move gives businesses the chance to tap into a wider pool of investors, to create fresh liquidity but it must be noted that this is in the context of secondary share sales only; this route is not a method for investment fundraising. FinTech companies, widely represented within operating platforms such as Crowdcube, for example, can now access both institutional investors and retail investors, therefore, significantly expanding their potential investor base. If sufficient volume of equity is offered for sale, it might enable a company to rationalise a messy cap table, swapping out crowd-funding investors for more institutional stakeholders but if smaller volume trades take place the list of registered members might increase…
Whilst it may be possible to amend articles of association prior to a company joining a PISCES platform, this is a new element which should be kept in mind during early investor rounds to avoid, as far as possible, friction later on in the company's life cycle. The requirement to lift share transfer restrictions means, when the articles of association are so amended, there is latent tax risk, as the holders of employment-related shares (e.g. founders and other employees acquiring shares via an employee share option plan) might suffer a 'dry' tax charge at that time if certain conditions have not been met when their shares were initially acquired. An unexpected employer national insurance contribution liability may also arise. Additionally, each PISCES operator will set out certain disclosure requirements and other regulations within their rules.
As FinTech companies are generally fast-growing, it may be beneficial to seek early advice to understand when PISCES may be a feasible choice as a liquidity event further down the line and to, crucially, ensure that the full range of obligations are understood when considering any form of share capital action meanwhile. Failing to bake-in certain actions now (particularly in the context of employee share awards) may mean companies are hampered when later trying to pursue a PISCES share auction in future.