In its December Consultation Paper CP24/29, the FCA has set out its draft regulatory framework for the Private Intermittent Securities and Capital Exchange System (PISCES).
PISCES will be a new type of trading platform that enables intermittent trading of private company shares. The FCA's publication of its draft regulatory framework follows HM Treasury's response to its consultation on the PISCES sandbox: see our separate November briefing: PISCES: new Government takes forward plans for trading venue for private companies.
"Private-plus" framework
The FCA has proposed PISCES with a '"private-plus" mindset', with the intention of building on and enhancing private market practices and risk tolerances, rather than using public market standards as the starting point for the PISCES regulatory framework.
The rules for PISCES will take the form of a standalone sourcebook for the PISCES sandbox that contains some new rules and guidance, but also applies and modifies some existing provisions in the FCA's Handbook. The framework will be temporary: the FCA intends to update it as it learns from the operation of PISCES and for this to shape the possible permanent regime.
Disclosure requirements for PISCES companies
The FCA does not intend to apply public market disclosure standards to PISCES, like those required for example by the Prospectus Regulation, to the information PISCES companies provide; the market will be more "buyer-beware", where investors are institutional, professional, and a subset of retail investors, and can take responsibility for their investment. The FCA's proposal is therefore for PISCES operators to include in their rules a requirement that companies must disclose a set of "core information", which aims to provide a standardised set of information for private companies to disclose which investors would typically expect to receive in an M&A transaction. Operators will also be subject to an obligation to tailor additional disclosure arrangements according to the type and sophistication of the companies and investors their PISCES platforms will serve.
Core information disclosures would include, for example, a business overview, a management overview, financial information, capital structure, share information, litigation, material contracts, risks and major shareholders. They would also include forecasts of financial information of the PISCES company for at least the next 12 months.
Operators would be given a choice as to how to meet their obligation to require additional disclosures, in cases where the core information is not sufficient for efficient and effective functioning of their PISCES platform. These additional arrangements could include, for example, operator rules requiring disclosure of other categories of information, a "sweeper" model under which the operator rules require disclosure of any other information the board considers relevant or an "ask" model under which arrangements facilitate the provision of information by a PISCES company in response to specific requests by investors.
Disclosure liability and oversight
The PISCES sandbox regulations published by HM Treasury apply a negligence standard to core information disclosures, except in respect of some forward-looking statements. A recklessness or dishonesty standard will apply for some forward-looking statements in core disclosures and for certain other disclosures.
PISCES operators will be responsible for the integrity of their PISCES: they will not be required to approve disclosures, but the FCA would expect them to monitor compliance with the disclosure rules. Operators would also be expected to have procedures for handling complaints and for taking disciplinary action, taking a proportionate and risk-based approach. In the case of significant breach of the rules, appropriate action could include postponing, suspending or terminating a trading event.
Organising and running PISCES trading events
PISCES operators will be given the ability to enable companies on their platform to determine: when shares may be trade; who is allowed to buy shares; restrictions on trading (including requiring a minimum or maximum price); and the persons or categories or persons who may receive information about the company or transactions in its shares.
Given the similarities between PISCES and multi-lateral trading facilities (MTFs), the FCA proposes that PISCES operators will be subject to certain requirements of Chapter 5 of the FCA's Market Conduct Sourcebook (MAR 5). Recognised Investment Exchanges (RIEs) that operate a PISCES platform will also be subject to the Recognition Requirement Regulations (RRRs), which are set by HM Treasury, as well as any accompanying rules and guidance in the Recognised Investment Exchanges sourcebook (REC) of the FCA's Handbook. The FCA expects that the modified application of the MAR 5 and REC sourcebooks will account for a very significant proportion of the PISCES Sourcebook that applies to PISCES operators, although there will also be standalone rules and guidance specifically for PISCES.
PISCES operators will need to monitor disclosure, including those relating to price parameters, but they will not be required to verify the methodologies used to derive any price parameters are fair or reasonable.
Permissioned trading events
The FCA expects that PISCES companies will want to retain a significantly higher degree of control over who can hold their shares than is currently possible on the public markets. At the same time, however, the FCA wants to ensure that trading events do not unnecessarily prevent existing private company shareholders from benefitting from the liquidity available during PISCES trading events.
The FCA's proposal is therefore that PISCES operators may only permit a PISCES company to restrict access to a trading event if it serves the purpose of "promoting or protecting the legitimate commercial interests of the company". The broad intention is that a company cannot specify unreasonable or arbitrary criteria to restrict investors from participating.
Market manipulation and oversight
As confirmed in HM Treasury's response to its consultation on the sandbox regulations, the PISCES regime will not include a public market-style market abuse regime. Instead, the FCA will require PISCES operators to put in place rules and arrangements to mitigate the risk of manipulative trading practices occurring on their PISCES to "complement and reinforce" existing requirements. These existing requirements include the criminal market manipulation regime under the Financial Services Act 2012. PISCES operators will need to put in place rules and measures that detect and prevent manipulative trading practices on their PISCES.
Trading intermediary requirements
There will be a legal obligation on those taking orders on a PISCES to place trades to "believe on reasonable grounds" (in line with the existing Financial Promotions Order approach) that an individual meets the investor eligibility criteria set out in the sandbox regulations.
Intermediaries will also need to include a risk warning when promoting PISCES shares to or approving promotions for PISCES investors.
Next steps
The FCA is seeking comments on its Consultation Paper by 17 February 2024; it will then publish its final set of rules after HM Treasury has laid its final statutory instrument creating the PISCES sandbox before Parliament, which is expected to be by May 2025.