PISCES: What Early-Stage Companies and Founders Need to Know

PISCES: What Early-Stage Companies and Founders Need to Know

As UK companies stay private for longer, liquidity has become a real challenge for founders, investors, and employees. The Private Intermittent Securities and Capital Exchange System (PISCES) is the UK government’s initiative designed to make trading shares in private companies more accessible, giving shareholders a new avenue to unlock value from their investments without waiting for a full exit.

With trading expected to start later this year, this article provides an overview for companies and their shareholders, explaining what PISCES is, why it matters, and the key strategic and legal points founders should consider when considering access to PISCES.

What is PISCES and How Does it Work?

PISCES enables approved operators to provide a platform for trading shares in private companies. These platforms will operate as a regulated secondary market, where existing shares in private companies can be traded during prescribed time periods. The Financial Conduct Authority (FCA) has approved the London Stock Exchange (LSE) to operate the first PISCES platform, known as the Private Securities Market (PSM), which is set to launch later this year.

PISCES companies will not be able to issue new shares through these operators. These secondary share markets will allow shareholders in a PISCES company to auction their shares to certain categories of investors. Trading windows will be intermittent – held annually, quarterly, monthly, or on an ad hoc basis. The current rules set out by the PSM allow companies to participate in two auction windows annually.

Companies retain control over important details, including when shares can be traded, who can buy them, price limits, and what information new shareholders can access. For founders, this means you can plan the timing of trades and restrict proposed buyers of shares to certain categories. Companies wishing to make their shares available in a PISCES auction must apply to an operator for acceptance and each PISCES operator will have its own application process. The PSM has established its own set of application requirements and criteria, giving companies a clear framework to prepare for participation.

PISCES operators will be regulated by the FCA, which has set out a framework for the types of investors that may participate in a PISCES auction as well as minimum disclosure requirements for PISCES companies. These disclosure requirements are much more limited than the standards for public markets and are more akin to a disclosure process in a private company investment. Operators may establish their own additional rules for disclosure and onboarding.

Relevance to Early-Stage Companies

Even though PISCES is designed with late-stage liquidity in mind, early-stage companies should be aware of its implications to help future proof their business. By offering shareholders a potential liquidity event, PISCES could make early investments more appealing and allow investors to access value sooner, provided there is sufficient buy-side demand in the market. Founders thinking about participating in PISCES might use it to attract investors, and it may be used as a negotiation point during fundraising discussions.

PISCES also gives employee shareholders an avenue to sell their shares without waiting for a full exit, enhancing the value of employee share schemes. Employees who own shares may be able to sell them through PISCES, provided the company approves this. For option holders, this could mean exercising options during a PISCES trading event in order to attempt to sell the underlying shares.

Founders who understand how PISCES works early can plan their cap tables and option schemes with potential future liquidity in mind, instead of thinking only about an IPO or exit.

Legal and Strategic Considerations for Companies

If your company plans to make use of PISCES, it is important to consider both the regulatory requirements and the strategic impact on your business. Compliance with the requirements of the PISCES operator is essential, particularly around disclosure obligations. Companies will need to maintain internal processes to keep compliance with the PISCES framework on track, such as ensuring all company information provided to the market is current and accurate, and reviewing governance requirements of the PISCES operator regularly.

Another key consideration is the potential need to update your company’s constitutional and other relevant documents. For shares to be traded through PISCES, they must be freely transferable for the PISCES trading window. Employee option schemes should also be reviewed and amended, for example, to allow share options to be exercised upon a PISCES trading event.

Founders should think carefully about who is being brought in as new shareholders. While a benefit of PISCES is the ability to offer shares in the company to a broader market, there are certain categories of shareholders that a company may wish to restrict the offering to. The PISCES framework allows companies to restrict offers where this is necessary to protect their legitimate commercial interests. For example, founders will be opposed to competitors buying into their business, so it makes sense to restrict them from acquiring shares.

Trading on PISCES is riskier than public markets, so both founders and investors need to weigh the potential benefits alongside the risks. In comparison to public markets, the framework has fewer safeguards, and the disclosure requirements are much lighter. This may influence both the type of investors who take part and the prices they are willing to pay. Most of the financial risk falls on a buyer, but the company can still be liable if information in a PISCES statement is false, misleading, or omits necessary details. Founders should also consider how new shareholders could influence governance, decision-making, and the company’s long-term strategy.

Takeaways

PISCES will not suit every company, and its success will depend on whether operators can build sufficient buyer-side demand to create a functioning market. It is a development with the potential to change how private companies approach liquidity and shareholder management. Founders who consider PISCES early can build flexibility into their constitutional documents, option schemes, and share structure with the intention to participate in PISCES at a future stage. Preparation is key, and this will allow companies and founders to make use of PISCES, and to take advantage of trading opportunities while maintaining control over their shareholder base.