Explainer-What is PISCES and can it herald a UK capital markets revolution?

By Sinead Cruise

LONDON (Reuters) - Britain's Financial Conduct Authority (FCA) has set out proposals for a new platform - The Private Intermittent Securities and Capital Exchange System (PISCES) - to enable trading of shares in private companies.

A cornerstone of the regulator's aim to bolster Britain's capital markets, the FCA hopes PISCES will connect owners of fledgling unlisted companies who want to sell their equity with new investors keen to help those firms to grow and scale up.

The UK Treasury intends to put legislation on the legal framework for PISCES before Parliament by May.

The platform will be further developed using a "financial markets infrastructure sandbox", which will allow the FCA to road-test the design and trouble-shoot any problems identified by users before finalising its permanent rules. 

HOW WILL IT WORK?

Private company equity owners who wish to sell some or all of their stock can set up an auction on PISCES, which will effectively act as a shop window for the firm and a marketplace for investors keen to put money into promising start-ups.

Companies wishing to run a PISCES platform will have to apply to the FCA, and once approved will be able to run intermittent trading events, at which company owners can offer stock for sale at regular intervals, at prices they set, to new shareholders.

Under current proposals, company owners will have a degree of power to screen or vet the investors who might seek to buy their shares, to keep competitors off their shareholder registers or prevent any single party from gaining outsized influence on the company.

The platform cannot be used to issue new shares, only to trade existing stock.

WHAT ARE THE KEY BENEFITS FOR PARTICIPANTS?

PISCES could help small companies who have limited experience of capital markets get on the radar of cash-rich and supportive investors, without undertaking a full-scale public offering (IPO).

Under the current PISCES proposals, owners will need to disclose only a small fraction of company information to prospective investors compared with an IPO process, when much more sophisticated and heavily-regulated prospectuses are required.

Firms can hold auctions at regular intervals, which can boost their ongoing investability by supporting liquidity in their stock.

Using a semi-pubic platform like PISCES is expected to be cheaper and faster than mandating a bank to lead a private placement.

As an extra incentive, Britain's finance ministry has pledged to make trading on PISCES exempt from a trading tax called stamp duty. Share trades struck on other UK public stock exchanges are subject to this levy, a fact some critics say has hurt market liquidity and reduced the appeal of UK equities.

WHAT ARE THE KEY DISADVANTAGES FOR PARTICIPANTS?

Once firms opt to hold an auction on PISCES, there is no guarantee investors will place orders at the prices they set and company owners can offload smaller volumes than they hoped to.

It is not yet clear whether firms will be required to publicly disclose the prices they achieved in an auction after the event.

In contrast, bankers running private stock sales have extensive networks of investors they can tap and greater marketing muscle to help company owners achieve best execution.

They can also strive to keep the outcome of any sales out of the public eye, meaning firms can keep sensitive details pertaining to their valuations under wraps.

Investors who buy stakes in firms on PISCES will also have fewer protections against possible market abuse.

Company owners will likely be subject to much lighter disclosure rules than those governing publicly-quoted firms and some shareholders will have far quicker, deeper access to information about the firm's performance than others. This could make the market a no-go zone for risk-averse investors.

WHAT IMPACT WILL PISCES HAVE ON BRITAIN'S CAPITAL MARKETS?

With the final rules to be decided, the first trades will be heavily scrutinised. Many investors with deep pockets say they will likely continue to use advisers to find the best start-ups to support, while some company owners see too much risk in poorly received semi-public auctions.

Some owners are wary about exposing their fledgling firms to any kind of capital market volatility that could have long-lasting impact on their value.

One senior investment industry source said most UK institutional fund managers had to meet strict criteria on liquidity when taking a new position, and the risks of being unable to exit an asset acquired on PISCES were unclear.

Some advisers are concerned they won't be sufficiently rewarded for the risk in recommending a PISCES auction to a client, with exchange operators expected to claim a hefty chunk of the fees.

Several platforms offering trading in private company shares are already in operation, but PISCES has the backing of the government, the FCA and the London Stock Exchange Group, which is likely to boost its profile domestically and internationally.

(Reporting By Sinead Cruise; Editing by Susan Fenton)