Non-Marketable Security

A non-marketable security is a type of investment that cannot be easily sold or exchanged for cash on the open market. These securities are often issued through private placements rather than public offerings. Non-marketable securities are typically utilized by governments, corporations, and some other financial institutions for specific purposes or to comply with regulatory requirements.

Characteristics of Non-Marketable Securities

Lack of Liquidity

Non-marketable securities are characterized by their lack of liquidity. Unlike marketable securities, which can be quickly sold or traded in secondary markets, non-marketable securities do not have a readily available marketplace. This makes them difficult to convert into cash when needed.

Restricted Transferability

These securities often come with restrictions on their transfer. The holder may not be able to sell or transfer the security without meeting certain conditions or obtaining approval from the issuer. This restricted transferability adds to their illiquid nature.

Issuance and Purpose

Non-marketable securities are usually issued for specific purposes. For instance, governments may issue non-marketable treasury securities to finance specific projects without causing fluctuations in the public debt market. Corporations might issue these securities as part of employee stock ownership plans (ESOPs) or to raise capital from a select group of investors in a private placement.

Types of Non-Marketable Securities

Government Non-Marketable Securities

Governments often issue non-marketable securities to finance public projects or manage their debt profile more efficiently. These include:

U.S. Savings Bonds

These are non-marketable securities issued by the U.S. Department of the Treasury. They are designed to be held to maturity and cannot be easily sold on secondary markets. Examples include Series EE and Series I savings bonds, which are popular among investors seeking a low-risk, long-term investment.

Government Account Series (GAS)

These are special non-marketable securities issued to federal government trust funds and accounts, such as the Social Security Trust Fund. These securities carry special terms and conditions tailored to the needs of government inter-agency transactions.

Corporate Non-Marketable Securities

Corporations may issue non-marketable securities for various strategic reasons. These can include:

Private Placements

In a private placement, a company issues securities directly to a selected group of investors rather than through a public offering. These securities are often illiquid due to restrictions on resale and transfer. Investors typically agree to hold the securities for a prescribed period.

Employee Stock Ownership Plans (ESOPs)

Companies may issue non-marketable stock to employees as part of ESOPs. These shares are not traded on public markets and often come with restrictions on resale and transfer. The purpose is to align the interests of employees with the company’s performance.

Financial Institution Non-Marketable Securities

Financial institutions, such as banks and insurance companies, may also issue non-marketable securities. These can include:

Certificates of Deposit (CDs)

Certain types of CDs, particularly those with long maturities or specific conditions, can be considered non-marketable. While many CDs are freely tradable, some are designed to be held until maturity and cannot be easily transferred.

Insurance Policies

Some life insurance policies and annuities are structured as non-marketable securities. These contracts are individual agreements between the policyholder and the insurer and cannot be sold or transferred without significant restrictions.

Advantages and Disadvantages

Advantages

Stability

Due to their illiquid nature and restricted transferability, non-marketable securities can offer greater stability and predictability than marketable securities. For instance, U.S. savings bonds provide stable, long-term returns unaffected by market fluctuations.

Targeted Funding

Issuers can use non-marketable securities for targeted funding purposes. For example, private placements allow companies to raise funds from specific investors without the regulatory burdens of a public offering.

Employee Incentives

Non-marketable securities issued as part of ESOPs can help align employee interests with the company’s success, potentially leading to improved performance and loyalty.

Disadvantages

Illiquidity

The primary disadvantage is the lack of liquidity. Investors cannot quickly sell these securities in secondary markets, which can pose issues if immediate cash is needed.

Limited Market

The restricted transferability means there is often no competitive market price, which can impede accurate valuation and make it difficult to determine the true worth of the security.

Higher Risk

Investors may face higher risks due to the potential difficulty in reselling the securities or if the issuer encounters financial troubles. The lack of marketability can compound these risks.

Regulatory Considerations

Securities and Exchange Commission (SEC) Regulations

Non-marketable securities issued in the United States are subject to various regulatory requirements. The SEC mandates conditions for issuing and reporting private placements and other types of non-marketable securities. Companies must comply with these regulations to ensure transparency and protect investor interests.

Financial Industry Regulatory Authority (FINRA)

FINRA also plays a role in setting rules and standards for the issuance and handling of non-marketable securities in the U.S. They ensure that brokers and financial advisors comply with ethical standards when advising clients on such investments.

Internal Revenue Service (IRS)

The IRS provides specific guidelines on the tax treatment of non-marketable securities. For instance, interest earned on U.S. savings bonds may be tax-deferred until the bond is redeemed or matures, providing potential tax benefits to investors.

Examples of Non-Marketable Securities

Thrift Savings Plan (TSP) “G” Fund

The Thrift Savings Plan (TSP) offered to Federal employees includes a Government Securities Investment Fund (G Fund). This fund consists of unique, non-marketable U.S. Treasury securities specifically issued to the TSP, providing a stable, although generally lower return.

Corporate Bonds Issued in Private Placements

Corporate bonds issued through private placements offer examples of non-marketable securities. These bonds can provide tailored investment opportunities for sophisticated investors but remain illiquid due to transfer restrictions.

Conclusion

Non-marketable securities hold a significant, but specific, place in the broader financial landscape. While they offer advantages such as stability and targeted investment opportunities, their lack of liquidity and restricted transferability can pose challenges and higher risks. Understanding the nature and characteristics of these securities is crucial for both issuers and investors to make informed financial decisions.

For more information about government-issued non-marketable securities like U.S. savings bonds, you can visit U.S. Department of the Treasury.