UK private company investment is on the cusp of a potential significant evolution with the proposed introduction of the Private Intermittent Securities and Capital Exchange System ("PISCES"). This initiative by the UK government aims to create a regulated marketplace for the trading of shares in private companies, offering a potential avenue for liquidity before a company undertakes an initial public offering (IPO) ¹.

Please watch this introductory video, highlighting some key considerations for both investors and entrepreneurs.

The objective is to enhance the connection between private and public markets, to foster company growth and provide investors with more opportunities to crystallise gains . This development has garnered considerable attention, particularly concerning its potential impact on companies currently benefiting from the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).

"Intermittent trading" is a key feature of PISCES, and distinguishes it from traditional stock exchanges, suggesting a controlled mechanism for liquidity rather than continuous trading, which could influence price discovery and investor sentiment ¹.

The aim to nurture a pipeline of companies eventually going public indicates that PISCES is to be a potential stepping stone, facilitating a smoother transition from private to public markets, aligning with the broader government agenda to bolster UK capital markets .

The involvement of operators approved by the Financial Conduct Authority (FCA) to manage these trading events signifies a level of regulatory oversight, even within the proposed "sandbox" environment, aiming to provide a degree of investor protection compared to purely private transactions .

Decoding PISCES: How Will it Work?

PISCES is designed with several core features that will shape its operation. Primarily, it will function as a secondary market, exclusively facilitating the trading of existing shares and not enabling companies to raise new capital through the issuance of new shares . This limitation implies that EIS/SEIS companies seeking further funding rounds will still need to rely on traditional private investment avenues or consider a full IPO. The primary benefit of PISCES, in this context, appears to be for existing shareholders looking for opportunities to achieve liquidity.

Trading will occur during defined "trading windows," which are expected to be intermittent, such as monthly or quarterly. Companies will have the flexibility to choose the frequency and duration of these trading windows, granting them significant control over liquidity events and potential price volatility . Investor eligibility will be restricted, primarily to institutional investors, high net worth individuals, and sophisticated investors, and potentially employees of the participating companies . Access for general retail investors is unlikely, indicating a focus on more experienced investors better equipped to navigate the risks associated with private company shares.

The disclosure regime under PISCES is envisaged to be bespoke but less demanding than that for publicly listed companies. Information will primarily be shared within a "private perimeter" accessible to eligible investors . This "private perimeter" concept allows companies to provide the necessary information for trading without the full public scrutiny that comes with being a listed entity, thereby preserving some of the advantages of remaining private. Transactions conducted on PISCES are expected to be exempt from stamp duty and Stamp Duty Reserve Tax (SDRT), aligning with similar exemptions for growth markets like AIM, making trading on PISCES more cost-effective for investors and potentially increasing its appeal . Initially, companies will not have the ability to conduct share buybacks . This restriction limits a potential tool for managing share price and providing further liquidity, which might be a disadvantage for some companies and investors, although this may be reviewed at a later stage. This entire framework is proposed to operate within a regulatory sandbox environment for an initial period of five years . This sandbox approach allows for flexibility and adjustments to the regulatory framework based on practical experience before it is potentially made permanent, aiming to create a robust and effective system.

EIS and SEIS: The Cornerstones of Early-Stage Investment

EIS and SEIS are government-backed schemes in the UK that offer significant tax incentives to investors who put capital into early-stage, high-risk businesses ³¹. These schemes are crucial for the UK startup ecosystem, providing essential funding and encouraging private investment. A key eligibility criterion for companies under both EIS and SEIS is that they must not be trading on a "recognised stock exchange" at the time of the share issue and should not have plans to do so ³¹. Notably, for the purposes of EIS and SEIS, companies listed on AIM and the Aquis Stock Exchange are not considered quoted ³³.  Given the explicit statement that participation in PISCES does not equate to being listed on a stock exchange. The fundamental purpose of PISCES is to provide a mechanism for liquidity before a potential IPO or listing on a recognised stock exchange. However, to ensure complete clarity and avoid any unforeseen interpretations, companies considering using PISCES should seek explicit confirmation from HMRC or legal counsel regarding the continued validity of their EIS/SEIS status ³¹.

Potential Upsides: Advantages of PISCES for EIS and SEIS Companies

One of the most significant potential benefits of PISCES for EIS and SEIS companies is the increased liquidity it could offer to existing shareholders, including employees who often hold shares or options . Providing a structured mechanism for employees to realise the value of their equity can be a substantial advantage for attracting and retaining talent within early-stage companies. Additionally, PISCES could enable companies to rationalise their shareholder base by offering an exit route for early investors . This could potentially simplify cap tables and streamline future fundraising rounds or acquisition processes. Furthermore, it might serve as a stepping stone for companies with future public market aspirations without immediately jeopardising their EIS/SEIS status ². By exposing companies and investors to a more regulated trading environment and some aspects of public market scrutiny, albeit within a private setting, PISCES could potentially ease the transition to a full IPO at a later stage.

Navigating the Challenges: Potential Disadvantages for EIS and SEIS Companies

Despite the potential benefits, there are also potential drawbacks for EIS and SEIS companies. The intermittent nature of trading windows might not provide continuous liquidity when investors need it . The infrequency of these trading periods could lead to price volatility and might not fully satisfy investors with urgent liquidity requirements. The primary focus on institutional and sophisticated investors as participants might also not fully align with the investor base of typical EIS/SEIS companies, which often includes angel investors with smaller holdings . This restricted investor pool could potentially limit demand for shares on PISCES, particularly for very early-stage SEIS companies that often rely on individual angel investors. While it appears that participation should not inherently jeopardise EIS/SEIS eligibility due to the "not listed" condition, companies will need to ensure that any necessary amendments to their articles of association required for participation do not inadvertently breach other EIS/SEIS rules regarding share structure or investor rights . Furthermore, there will likely be costs associated with participating, such as operator fees and the administrative burden of complying with the bespoke disclosure regime ⁶¹. These costs could be a potential barrier for very early-stage or smaller EIS/SEIS companies with limited financial resources. Finally, concerns have been raised regarding valuation verification in the absence of full public market transparency ⁶². The intermittent nature of trading and the limited public disclosure might make accurate valuation challenging, potentially leading to uncertainty for both buyers and sellers.

Expert Insights: Long-Term Effects on the UK Private Investment Landscape

The introduction of PISCES has the potential to bring about significant long-term effects on the UK's private investment landscape. It could foster a more dynamic secondary market for private company shares, potentially attracting greater overall investment into the private space by offering earlier opportunities for liquidity . However, there is ongoing debate about whether it will genuinely serve as a stepping stone towards public markets or if it might become an alternative endpoint for some companies, potentially delaying or reducing the number of IPOs ¹². The availability of liquidity via such exchange platform might alter the calculus for companies considering a traditional IPO, potentially leading them to remain private for a longer duration. Over time, the introduction of a more structured secondary market could lead to more transparent and potentially more accurate valuations for private companies, although the intermittent trading nature might still present some challenges ¹². Moreover, PISCES could encourage increased institutional investment into later-stage private companies, potentially benefiting those that have outgrown SEIS and are approaching the limits of EIS funding ¹². The regulated platform for secondary trading might make private equity investments more appealing to institutional investors who often prioritise liquidity.

Conclusion: Weighing the Opportunities and Implications of PISCES for EIS and SEIS Companies

For EIS and SEIS companies, the advent of PISCES presents a nuanced landscape of opportunities and considerations. While it offers the potential for increased liquidity for shareholders without likely jeopardising their eligibility for valuable tax schemes, it also comes with limitations such as intermittent trading and a restricted investor pool. Companies will need to carefully assess their specific needs, the preferences of their investor base, and the potential costs associated with participating in such a framework. The realisation of PISCES on the UK private investment landscape remains to be seen, but the idea undoubtedly is an innovative way to address the liquidity challenges often faced by private companies. As the regulatory sandbox progresses and the system evolves, its role in the ecosystem and its interaction with established schemes like EIS and SEIS will become clearer, shaping the future trajectory of private company growth and investment in the UK.

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