The publication by the Financial Conduct Authority of the final rules for Pisces — the Private Intermittent Securities and Capital Exchange System (in fact, systems plural) — has so far been the subject of bemused and only hesitant interest among potential users.
However, in the right conditions, tiddlers can grow into big fish.
Pisces is a new category of regulated, multilateral, electronic trading platform, designed solely for secondary market transactions in the shares of private companies.
Those shares will be tradeable during specific windows determined by the company — quarterly, semi-annual, or as buyer and seller demand dictates — but these platforms cannot be used to raise new capital or support buybacks.
This approach is intended to provide liquidity to shareholders while avoiding the full scale and complexity of a conventional public offering.
What has inspired the rules? Geopolitical uncertainty, volatility and a lack of confidence in the UK: the market for a proper IPO is currently in the doldrums; several London-listed companies have become takeover targets; and there has been an unfortunate run of issuers announcing they will move their listing to the US.
The Chancellor, the FCA and the London Stock Exchange must be seen to be doing something (or some more) about this, and the lever they can pull most easily is to make new rules.
The idea of the new rule book is, in part, to replicate the success of Nasdaq Private Market and Forge Global, two prominent US platforms which facilitate secondary liquidity in shares (and, in their case, a range of other otherwise private instrument types).
Of course, these are only one hallmark of a much deeper and broader US capital market. Similar venues already exist in the UK, albeit with a different regulatory label and on a smaller scale: JP Jenkins and Asset Match, for example.
The LSE has announced its intention to launch a Pisces platform and the hope is the first shares might trade on it in the autumn.
There can be no doubt the Pisces regulation is pragmatic, pro-market and pro-growth.
But there is room for other fish in the sea: other venues could obtain a licence, or repurpose an existing trading operator licence, in order to compete, which they would be able to do in a sandbox, experimental, environment until 2030.
Such competition could focus, for example, on the detail of disclosure companies have to make in order for their shares to trade: competing venues could be more-or-less friendly to the company versus shareholders.
The fact more prescriptive rules have not been imposed has led to some criticism Pisces will support only bottom-feeders and sharks.
Is there demand for these new venues? Certainly, private equity and venture capital sponsors are looking for ways to achieve even partial liquidity in their private company portfolios in order to return some money to their cash-strapped limited partner investors.
So-called private equity continuation vehicles are popular but, over the past couple of years, some sponsors have negotiated entirely private secondary transactions with scores of parties, which have been labelled Private IPOs. Perhaps they would like another option.
At the same time, some company founders may welcome ways to remain private for longer without ceding control, while having an opportunity to crystallise some gains for themselves or to allow their staff to realise cash from stock incentives.
On the capital supply side, there are many dedicated pools ready to invest in minority equity in private businesses, ranging from sovereign wealth investors, through funds sponsored by multi-strategy managers, to a few listed vehicles such as Chrysalis Investments and Seraphim Space.
UCITS managers will probably remember Woodford too well to be tempted to fish, but perhaps we will see acronym innovation-on-innovation: people are already considering the possibility of catching Pisces traded-shares in non-Ucits retail schemes or long-term asset fund-shaped nets.
However, as we have noted, there are already many tried and tested ways to put together transactions to achieve liquidity, as well as those existing US and UK venues. Do we need a new type?
Pisces will have two clear advantages over the alternatives. First, transactions executed on Pisces are to be exempt from stamp duty and stamp duty reserve tax.
Second, it is intended the process will avoid triggering tax liabilities for employees with share options. We might also speculate costs could eventually come in lower to trade shares on a Pisces, compared to structuring a bespoke deal off-venue (depending on what the competing venues charge in commission).
And maybe some non-UK European companies might prefer to offer their shares for intermittent trading in the UK’s relatively stable jurisdiction, compared to subjecting themselves to US securities offering laws, Trump 2.0 policy uncertainty, and the scary US active market in securities litigation.
One or two companies will need to blaze a trail, of course, but other than finding those candidates, what could limit Pisces’ success?
Although the rules have been criticised for being too flimsy, Pisces is not without its burdens for the issuer. There will be costs and administrative burden associated with the need to reorganise the share capital, to manage the shareholder register, and to prepare disclosures (which will give rise to potential liabilities).
The sandbox also presents a moving target for the company: there is a possibility controls and rules get tightened as they are refined.
Investors may not welcome thin or sporadic liquidity windows, potentially leading to discounted prices and reluctant buyers or sellers.
Financial sponsors may not relish the prospect that a random trade between two employees provides a new valuation mark for their flagship fund.
Yet you have to cast a line to catch a fish. A continuing pragmatic approach by the FCA could involve expanding access as the platforms mature, strengthening admission and trading rules, and ensuring clear, reliable information flows for market participants.
Over time, standardised disclosures, proven trading processes, and the steady involvement of known institutional players could build the trusted price formation that draws more mainstream capital.
There can be no doubt the Pisces regulation is pragmatic, pro-market and pro-growth. Pisces could perhaps provide a stepping stone for some companies to a proper IPO in London. Healthy private equity markets ultimately depend on a healthy IPO market.
The Pisces experiment might also point the Treasury in another direction: the abolition altogether of anomalous UK equity stamp taxes. That would get the proper market firing.
Phil Bartram and Aaron Stocks are partners at Travers Smith.
