How should Pisces be regulated?
The regulator is swinging its eyes at private markets, should investors be worried? Asks Edwin Richards
The Private Intermittent Securities and Capital Exchange System (Pisces) is the FCA’s answer to private companies working with privately run platforms to exchange shares. The FCA’s aim is to create a regulated market for trading shares in private companies. The FCA’s consultation ends on Monday.
We can all agree that a platform that helps create liquidity in private company shares is a good thing for companies and investors and there are already platforms such as JP Jenkins and Asset Match that facilitate this. The question is does it need regulating? Most will be aware that investing in a private company involves higher risk than with public ones. These platforms will become increasingly important as the market for private company shares grows exponentially, driven, not least, by private equity liquidity issues.
The FCA’s proposed regulation in this nascent market contains many sensible proposals, but perhaps it should concentrate on those areas of running a market that only government can regulate and not produce a 72-page sourcebook of regulations.
The FCA proposes that companies should disclose certain “core information” including forecasts and that platforms can require further disclosure if they see it as desirable. Whilst standardising disclosure may make investors decision making easier, can the trading platforms not determine for themselves what is required? With platforms competing for investors and companies to “list”, it would soon become apparent what was required.
Will this regime survive the first mis-selling scandal?
Having said that, a useful area of focus of the FCA is determining liability for information disclosures. The FCA proposes that directors of traded companies must not be negligent in presenting factual information and must not be “reckless or dishonest” in making forward looking statements – this should enable companies, acting in good faith, to manage information flow to investors without incurring too much cost. The platform itself will have no responsibility for the content of disclosures. But will this regime survive the first mis-selling scandal? In any event a lighter touch than for public companies is sensible.
Trading events will be planned periodically with companies able to specify who can participate. So, for instance, a company can exclude competitors from buying its shares or just operate an employee share exchange.
Market manipulation will still be prohibited, but to a lower standard than in the public markets – the UK Market Abuse Regulation will not in general apply. Clearly, asymmetry of information in markets creates risks for the outsider and whilst some of the proposed regulations aim to increase transparency, with trades by directors and the largest shareholders needing to be revealed, trading in private company shares does not fall within the criminal sanctions of insider trading, so caveat emptor.
Pisces platforms will not be classed as Multilateral Trading Facilities like, say, AIM or the Aquis Growth Market, but the FCA seems to suggest that these platforms cannot be used by companies to raise money. Is the risk of buying a share from another shareholder all that different from the risk of buying a share from the company? The lack of a primary market function for Pisces seems to be a major flaw.
The fundamental problem is the regulatory ratchet. No one ever lifts the pawl to allow regulation to be unwound. Conventional opinion is that more regulation makes markets more attractive for investors. To date this is belied by the growth in unregulated private markets and the decline in London of the public markets. Perhaps now the regulator’s Eye of Sauron has swung its gaze on the private markets as well we should all be worried. Probably the only regulation needed is that this kind of investing is not for retail investors.
Edwin Richards is a corporate partner at full-service law firm JMW Solicitors in London