Is Pisces a solution looking for a problem?
There’s a good reason no other jurisdiction has created a regulated private stock market… argues Delphine Currie
Imitation, it is often said, is the sincerest form of flattery, so it’s perhaps for that reason that, in November of last year, the Chancellor resuscitated the previous government’s plans for the world’s first regulated private stock market.
Unveiled at the Chancellor’s first Mansion House speech, the Private Intermittent Securities and Capital Exchange System (Pisces) will allow shares in private companies to be traded at intervals, not entirely dissimilar to public markets. Heralded as a significant step forward for UK capital markets, Pisces is not only intended to revive the UK’s diminishing IPO pipeline, but to provide a fillip to the UK economy more generally.
The exact shape of the proposed market will become clearer now the FCA’s consultation has closed, but as the world’s first regulated private stock market, Pisces certainly qualifies as an innovation. But there is also a reason that no other jurisdiction has created such a market. Indeed, when the proposed structure and operation of Pisces are considered, both of which could blunt its appeal and efficacy, it seems that both Governments have answered a question that few in the UK’s capital markets were asking.
After all, it is generally accepted that the primary purpose of a stock market is to enable companies to raise money. But Pisces will be exclusively for secondary trading, and therefore quite possibly of limited interest to a majority of businesses. Particularly as businesses that do want their shares to be traded through Pisces will need to go through a FCA approved platform, which will inevitably be costly as platform operators seek to pass on their establishment costs.
With the FCA currently also consulting on proposals to introduce public offer platforms for private companies, we may also end up in a situation where there are separate regimes for secondary trading and primary issues. It is hard to foresee a world in which this does not lead to inefficiencies and higher costs for participants.
Sharing in the spoils?
Pisces will not be accessible to retail investors, with access instead being limited to employees of the company, institutional investors and qualifying high net worth individuals HNWIs and sophisticated investors under the Financial Promotion Order. These restrictions raise concerns about which investors will actually use Pisces.
Many businesses use employee share-ownership schemes as an incentive for senior recruitment or a reward for loyal and long-serving employees. But these schemes could be seriously undermined by Pisces if any and all employees are able to purchase shares in a company. The obvious response to this would be for companies to place dealing restrictions on employees, but this in turn would raise further questions about the effectiveness and utility of the proposed new market.
Employee share-ownership incentives could be seriously undermined by Pisces if any and all employees are able to purchase shares in a company
Although the proposals include no general duty of disclosure, institutional investors are unlikely to waive their usual due diligence requirements. Companies seeking investment through Pisces may accordingly need to reckon with investors requesting full disclosure of information about the company and its future prospects. It will not have escaped notice that not having such disclosure requirements is one of the significant advantages of being a private company.
Those concerns have been recognised in the proposals which make reference to a ‘private perimeter’ to protect sensitive data, but this has not yet been elaborated on. Until more clarity on that point is provided, it would be a surprise if many companies were willing to disclose confidential information for the benefit of secondary trading.
The UK needs to boost economic growth and this will require the flow of capital through our equity markets to increase substantially. If Pisces is the key that unlocks that growth, then I will be one of many heralding its success. So far, however, it seems rather more likely that Pisces will create cost, confidentiality and compliance headaches for its proposed beneficiaries. In short, it looks like the government has come up with the answer to a question that nobody has actually asked.
Delphine Currie is a partner at Reed Smith