What is Pisces? What you need to know about new UK stock market for buying shares in private companies

A new type of stock market will open in the UK later this year, allowing investors to trade shares in privately-owned companies — as opposed to those that are publicly owned and listed, for example on the London Stock Exchange (LSE).

Referred to as Pisces — which stands for a Private Intermittent Securities and Capital Exchange System — the first trading could begin on the new stock market in the next few months after the Financial Conduct Authority (FCA) approved the rules around it.

The FCA hopes the move will support the UK economy by giving more choices to the investment community and attracting new funds for growing businesses.

Although Pisces has already officially launched, trading cannot begin until companies who will act as operators start their platforms, which are subject to licences.

With more companies choosing to stay private for longer, the new trading system was created to give investors access to businesses they otherwise could not fund, and to allow those holding shares in private businesses the chance to cash out.

That can be as a result of shares being given as part of an employment package, for example, or by being an investor in an earlier round of private fundraising — which isn’t always accessible to private investors.

Operation

Pisces is set up in the FCA’s sandbox environment to allow for experimentation on what works, what is required and what best practice will turn out to be.

The plan is for around a five-year developmental phase, during which time testing and adjusting will take place with the framework, ahead of permanent rules being established in 2030.

While Pisces is the framework for the stock exchange itself, individual operators will operate the ability to trade — comparative to now, for example, in how people with an investing Isa on an app or with their bank go through them to buy or sell companies or funds listed on the LSE.

Those operators will have flexibility on the type of private companies they list; the FCA expect some may operate by size or industry, or perhaps on timing of share sales.

Shares may be available to buy quarterly or annually in different private companies, for example, or during set windows according to their need.

Caution

While the new private stock market is largely welcomed, investors will need to be aware of the additional risks which may be involved, compared to putting money into listed companies.

Legislation exists to demand retail investors have a certain amount of knowledge before parting with their money, but this includes being “self-certified” according to investing experience.

Additionally, while public stock markets are heavily regulated — one of the reasons companies stay private instead of floating — the idea for this sandbox platform is to stay similar to private market processes and laws.

As a result, for example, the process known as insider trading will not apply in the same way, potentially leading to an imbalance of information between those privately investing and institutional, professional investors.

Emma Reynolds, economic secretary to the Treasury, said: “Pisces is a great example of industry, regulators and the government working together to go further and faster on innovative reforms to strengthen UK capital markets, supporting economic growth and putting more money in people’s pocket as part of our Plan for Change.

“I welcome the FCA’s announcement, which follows our legislation and opens Pisces to industry. This also builds on our announcements on a Stamp Taxes on Shares exemption for Pisces transactions, and on employees retaining the tax advantages on eligible shares traded.”

Simon Walls, executive director of markets at the FCA, added: “This bold design rebalances risk, but it is bold risk taking that made the UK the leading financial centre it is today. The new platforms will give investors greater access and confidence to invest in exciting new companies, while early backers and employees can sell up and invest again.

“Pisces is the latest step in the FCA’s wide-ranging reforms to the UK’s markets to boost growth and competitiveness.”

Stepping stone

Dan Coatsworth, investment analyst at AJ Bell, noted that in an ideal world, Pisces would operate as a first step toward broader aims for both businesses and stakeholders.

“Pisces could help private companies get used to the idea of slices of their business being owned by different people. It might act as a stepping stone towards a public stock listing, getting them used to regular financial reporting, transparency as a business, and understanding that a company is run for the best interests of shareholders, not the board of directors,” he said.

“It could also encourage their staff to develop a saving and investing habit. One of the biggest stumbling blocks for private company share ownership is that staff are often put off by the general inability to sell those shares at regular intervals. A lot of private companies won’t offer the ability for staff to trade shares, meaning some people are stuck owning the equity until the business either lists on a public market or there is an internal event where they can sell down.

“In theory, Pisces could improve liquidity by allowing private company shares to be traded at more regular, albeit intermittent, intervals.”

While there have been comments from some quarters that Pisces could effectively replace some markets such as the UK’s AIM, Mr Coatsworth does not expect that will be the case – and will also not play an “immediate role” in the government’s plan to develop an investing culture in the country.