More fish in the sea: the opportunities and risks in creating a new stock market for privately-owned companies

In response to a much-publicised decline in listings, the UK recently conducted the most significant overhaul of its listing regime in decades.  While negative coverage of London as an equity listing venue has continued, it is premature to write off the reform of the listing regime completely. Even its strongest supporters accept that listing reform will not equip London to compete on an equal footing with the main U.S. exchanges for major international listings. Another way of looking at the UK's reforms is to view them as being more about stemming the outflow of homegrown companies while also remaining open to international companies for which a U.S. listing is not viable for whatever reason. Strengthening the pipeline of UK companies and keeping them in the UK aligns with the UK government's growth agenda.

PISCES is a new regulatory initiative to boost the pipeline. PISCES stands for Private Intermittent Securities and Capital Exchange System. The aim is to develop, via a regulatory sandbox, a bespoke framework for new platforms for the trading of securities in privately-owned UK or oversea companies in a controlled environment and on an intermittent basis.  The Financial Conduct Authority is currently consulting on the regulatory design of PISCES and the system is expected to go live during 2025. The London Stock Exchange is working on adding PISCES to its roster of securities trading options.

PISCES offers a new solution to the problem of designing a more proportionate disclosure and transparency regime for privately-owned companies that require some liquidity but do not favour a conventional IPO. It is ‘private plus’ rather than ‘public minus’. This orientation makes sense insofar as the travails of growth markets such as AIM have shown the limitations of the ‘public minus’ strategy of trying to cater for the needs of companies that are not ready for main market listing by starting with main market standards and subtracting some of the more burdensome elements. PISCES may be a better fit for today's realities of large private markets that have the capacity to meet much of the funding need of the corporate sector, allowing companies to stay private for longer. Viewed alongside changes to listing rules that lower eligibility requirements, thereby making it easier for growth companies to seek an early full listing if they want to, the need for junior, growth-oriented public markets becomes increasingly doubtful. 

The Financial Conduct Authority (FCA) has described PISCES as a new type of regulated stock exchange. The FCA’s proposals for its design indicate that the differences between PISCES and a public market stock exchange will go beyond the fact that it offers intermittent rather than continuous liquidity. PISCES market operators will be permitted to allow corporate insiders to constrain market forces by setting pricing parameters and imposing restrictions on buyer eligibility. Mandatory company disclosures and pre and post-trade transparency information will circulate only within the 'private perimeter' of eligible investors and will not be available for general public scrutiny. There will be no obligation of continuous disclosure of all material information within the perimeter, and corporate insider dealing will not be prohibited.

All well and good given that participants in existing secondary private markets already contend with major information asymmetries and accept the downsides that come with the permitted customisation of auction processes by corporate insiders? Or a trade-off too far that removes public interest-oriented safeguards that would be expected to play an increasingly important role as a market moves from a side channel for specialised professionals into the mainstream?

PISCES will incorporate some helpful public market disciplines - in particular, mandatory corporate disclosure and trading transparency requirements within the private perimeter, clear obligations on market operators to oversee market integrity, and a bespoke civil liability regime for company disclosures. These features may boost the growth of secondary markets in privately-owned securities, providing a relatively low-cost liquidity option for more companies and making investment in growth opportunities accessible to a wider range of investors.  But at what cost given the regulatory cherry-picking?

It is well-known that dangers to society lurk in private markets and that we cannot necessarily rely on market disciplines to protect against societal harm.  Fraud risk is an obvious vulnerability for PISCES.  PISCES will struggle even to get out of the sandbox in which it is being developed if it fails to build adequate trust and confidence regarding the dangers of investors' being cheated out of their money. But the fact that it has its own dedicated regulatory framework and that this features prominently in the presentation of PISCES as an innovation could lead to misplaced over-confidence.  In public markets, a mix of mechanisms, including public oversight and enforcement by regulators and other public agencies, provide assurances of market integrity and fairness. In PISCES, market operators will have to do a lot of the heavy lifting in these respects but at the same time, they are expected to act proportionately and take a risk-based approach so as not to displace the ethos of PISCES as a buyer beware trading environment. These may be choppy waters for PISCES operators to navigate.

Taking an optimistic view and projecting forward to a world in which PISCES has tacked a successful course into calm seas and has become a robust trusted marketplace, other issues will arise.  Reflecting the risks inherent in its regulatory design, at the outset PISCES will not be open to retail investors other than participant company employees. However, this exclusion is inconsistent with efforts to increase direct retail participation in capital markets and anomalous in that seeking to encourage retail investors to invest in very early-stage companies via public offer platforms but not giving them access to liquidity options enjoyed by more sophisticated investors puts retail investors into an invidious position.  Making a 'buyer beware' market safe for retail investors is a difficult challenge but tackling it cannot be put off indefinitely. If PISCES flourishes, maintaining the disparity will become increasingly untenable.

Finally, a successful PISCES would also raise questions that go beyond the evolution of its internal design to expand investor participation or broaden its capabilities, for instance regarding capital raising and share buybacks. A successful PISCES would further amplify the shift towards private markets as an alternative to public markets. This growing trend   has implications for company law and regulation, which is to a significant extent built around an assumption that companies of significant size and scale will be publicly quoted. There are already instances of public-interest regulation being extended to large private companies to ensure appropriate coverage. If PISCES works well, case-by-case adaptations may need to give way to a more fundamental reappraisal of the appropriate hooks on which to hang more demanding requirements.

Eilís Ferran, FBA, is Professor of Company and Securities Law, University of Cambridge and ECGI Fellow.