Common Examples of Non-Marketable Securities and Why They Lack Liquidity

Financial instruments exist on a wide spectrum of liquidity. While most individual investors are familiar with the seamless experience of buying or selling a stock on a public exchange like the NYSE or Nasdaq within milliseconds, a significant portion of the global financial system relies on assets that cannot be traded so easily. These are known as non-marketable securities.

Non-marketable securities are financial assets that lack an active secondary market for trading. Unlike a share of Apple or a standard Treasury Bond, which can be liquidated almost instantly at market price, non-marketable securities are typically held by the original purchaser until maturity or until specific contractual conditions are met. They represent a direct agreement between the issuer and the holder, often carrying legal or regulatory restrictions that prohibit their transfer to third parties.

The Defining Characteristics of Non-Marketable Assets

To understand the examples, one must first grasp why certain securities are categorized this way. In professional asset management, we categorize non-marketable securities based on three primary barriers to liquidity:

Regulatory and Legal Restrictions

Many securities are non-marketable because the law says they must be. For instance, the Securities and Exchange Commission (SEC) in the United States imposes strict rules (like Rule 144) on "restricted" securities acquired in private placements. These cannot be sold in the public marketplace for a specific period, making them non-marketable by law during that time.

Lack of a Centralized Exchange

Some assets simply do not have a venue where buyers and sellers meet. If you own a 5% stake in a local family-owned manufacturing company, there is no "Stock Exchange for Small Factories" where you can list your shares and find a buyer by noon. Selling such an asset requires private negotiation, due diligence, and legal paperwork, which removes it from the realm of "marketable" securities.

Contractual Illiquidity

Certain government-backed instruments are designed to be non-marketable to ensure stability for the issuer. The government does not want its debt being traded and speculated upon in every instance; therefore, it issues specific series of bonds that can only be redeemed back to the government itself, never sold to another individual.

1. United States Savings Bonds (Series I and EE)

Perhaps the most common example of a non-marketable security for the retail investor is the U.S. Savings Bond. While standard Treasury Bills and Notes are the bedrock of the global marketable debt market, Savings Bonds are a different animal entirely.

Series I Savings Bonds

The Series I bond is a non-marketable interest-bearing U.S. government savings bond. Its primary appeal is inflation protection, as it offers a composite rate comprising a fixed base rate and a variable inflation rate. However, you cannot go to a brokerage like Schwab or Fidelity and sell your Series I bond to another investor.

The non-marketable nature here is absolute. If you need cash, you must redeem the bond directly through the U.S. Treasury (via TreasuryDirect). Furthermore, there are holding period requirements—you generally cannot redeem them at all within the first 12 months, and redeeming them before five years results in a penalty of the last three months of interest.

Series EE Bonds

Similar to Series I, Series EE bonds are sold at face value and are guaranteed to double in value if held for 20 years. They are non-transferable. You cannot use them as collateral for a loan in the traditional sense, and you certainly cannot trade them on a secondary market. They represent a private contract between the citizen and the federal government.

2. Private Company Equity and Shares

When a company is "private," it means its shares are not listed on a public exchange. This is a massive category of non-marketable securities ranging from a small "mom-and-pop" shop to multi-billion dollar unicorns like SpaceX (before any secondary market programs are established).

The Friction of Private Transfers

Owning shares in a private corporation is a classic example of non-marketability. In our experience working with private equity, the process of selling these shares is arduous. It often requires:

• Board Approval: The company’s board of directors must often approve the new buyer.
• Right of First Refusal (ROFR): Existing shareholders or the company itself usually have the right to buy the shares at the offered price before an outsider can.
• Valuation Challenges: Without a public ticker, determining the "price" requires a formal 409A valuation or a complex negotiation.

Because these shares cannot be sold "at market," they are valued with a "Discount for Lack of Marketability" (DLOM) in professional accounting. This discount can range from 20% to 40% compared to what the shares might be worth if they were public.

3. Restricted Stock Units (RSUs) and Employee Stock Options

For many professionals in the technology and finance sectors, a large portion of their net worth is tied up in non-marketable securities issued by their employers.

Restricted Stock Units (RSUs)

RSUs are a promise by an employer to grant shares of company stock at a future date, provided certain conditions (vesting) are met. During the vesting period, these units are non-marketable. The employee cannot sell the "promise" of the share to anyone else. Even after vesting, if the company is still private, the resulting shares remain non-marketable until an IPO or a secondary sale event.

Employee Stock Options (ESOs)

Options give employees the right to buy stock at a set price. These are almost universally non-transferable. You cannot sell your employee stock options to a hedge fund; you can only exercise them yourself according to the terms of the plan. This lack of marketability is a strategic tool used by companies to ensure employee retention—if you leave, you often lose the unvested portion of these non-marketable assets.

4. Limited Partnership (LP) Interests

Investors in hedge funds, private equity funds, and real estate syndications typically hold Limited Partnership interests. These are legally structured to be non-marketable.

When an institutional investor commits $10 million to a private equity fund, they receive an LP interest. This interest represents a claim on the fund's future profits. However, the LP agreement usually forbids the investor from selling their stake without the express written consent of the General Partner (GP).

While a "secondary market" for LP interests has emerged in recent decades, it is not a public market. It involves "secondaries firms" that buy these stakes at a discount, a process that takes months of legal due diligence. For the average holder, an LP interest is a long-term, illiquid commitment.

5. State and Local Government Series (SLGS)

Moving into the more institutional side of finance, the U.S. Treasury issues a special type of non-marketable security known as SLGS (pronounced "slugs"). These are not available to the general public.

SLGS are offered to state and local governments to help them comply with federal tax laws and arbitrage restrictions when they have proceeds from issuing tax-exempt bonds. For example, if a city issues bonds to build a stadium and has excess cash that it needs to invest safely until the construction bills come due, it buys SLGS.

These securities are non-marketable because they are tailored specifically to the maturity dates and cash flow needs of a specific municipal project. They cannot be traded between cities; they are issued by the Treasury for one specific entity and are held until they expire.

6. Non-Traded REITs and BDCs

Real Estate Investment Trusts (REITs) and Business Development Companies (BDCs) come in two flavors: publicly traded and non-traded.

Non-Traded REITs

A non-traded REIT owns and manages real estate just like a public one (e.g., Prologis or American Tower), but it does not list its shares on an exchange. Investors buy shares directly from the REIT or through a financial advisor.

These are frequently marketed to retirees for their high dividends, but the "non-marketable" aspect is a significant risk. If you need your money back, the REIT may have a "share redemption program," but these are often limited to 5% of the total shares outstanding per year and can be suspended at any time by the board. During the 2008 financial crisis and the 2023 commercial real estate downturn, many non-traded REITs "gated" their funds, meaning investors were stuck with their non-marketable shares despite a desperate need for liquidity.

7. Certificates of Deposit (CDs) - The Non-Negotiable Variety

While some "brokered CDs" can be traded on a secondary market, the vast majority of CDs held by consumers at local banks are non-negotiable and therefore non-marketable.

When you open a 2-year CD at your local bank, you are entering into a contract. If you decide six months later that you want to sell that CD to your neighbor because interest rates have risen, you can't. The bank's contract is with you. The only way to "liquidate" the asset is to break the contract with the bank, which usually involves paying an early withdrawal penalty. This distinguishes them from "Marketable CDs" (Negotiable Certificates of Deposit) used by large corporations, which can be traded in the money markets.

Why Do Non-Marketable Securities Exist?

It seems counterintuitive to want an asset you can't sell. However, non-marketable securities serve vital functions in a balanced economy.

1. Stability for the Issuer

If all U.S. government debt was marketable, a massive panic could lead to every single holder trying to sell at once, causing interest rates to spike uncontrollably. By having a portion of the debt in non-marketable Savings Bonds and SLGS, the Treasury ensures that a segment of its debt is "locked in" and not subject to market volatility.

2. Control for Private Companies

For a private company, the non-marketability of its shares is a feature, not a bug. It allows the founders to control who their partners are. It prevents a competitor from hostilely taking over the company by buying up shares from disgruntled employees on a public exchange.

3. Higher Yield Potential (The Illiquidity Premium)

In finance, there is a concept called the "illiquidity premium." Because non-marketable securities are harder to sell, they often offer higher interest rates or higher potential returns to compensate the investor for the risk of being "stuck." A private equity fund aims for 15-20% returns specifically because the investors are willing to lock their money away for 10 years.

4. Behavioral Guardrails

For many individual investors, the non-marketability of assets like Series I bonds or 401(k) provident funds (which have strict withdrawal rules) acts as a behavioral guardrail. It prevents "panic selling" during market downturns. You can't sell your non-marketable savings bond just because the S&P 500 dropped 10% today, which often leads to better long-term financial outcomes.

Accounting for Non-Marketable Securities

From an accounting perspective, non-marketable securities present a unique challenge: How do you value something that hasn't been sold in years?

Under GAAP (Generally Accepted Accounting Principles), these are often classified as "Level 3" assets in the fair value hierarchy.

• Level 1: Quoted prices in active markets (Marketable stocks).
• Level 2: Observable inputs other than quoted prices (Standard bonds).
• Level 3: Unobservable inputs (Non-marketable private equity).

Valuing these requires complex models, such as the Discounted Cash Flow (DCF) method or the Guideline Public Company method, followed by the application of the aforementioned Discount for Lack of Marketability (DLOM).

Comparison: Marketable vs. Non-Marketable Securities

Strategic Considerations for Investors

In professional portfolio construction, the goal is never to avoid non-marketable securities entirely, but to ensure they are appropriately sized.

A common mistake we see is "liquidity mismatch." This happens when an investor puts money they might need for an emergency into a non-marketable asset like a non-traded REIT or a long-term private equity commitment. When the emergency hits, they find themselves "asset rich but cash poor," unable to tap into their wealth without taking massive losses in a forced secondary sale.

However, for money with a 20-year horizon—such as retirement savings or a child's education fund—non-marketable securities like private equity or Series I bonds can provide a powerful combination of higher returns and a "volatility dampener" because their value isn't jumping around on a screen every day.

Summary

Non-marketable securities are the "quiet" part of the financial world. They include everything from the humble U.S. Savings Bond and bank CD to the complex world of private equity and municipal SLGS. While they lack the excitement and instant gratification of the stock market, they provide the necessary structure for long-term capital appreciation, corporate control, and government fiscal stability. Understanding the examples and the inherent restrictions of these assets is crucial for anyone looking to move beyond basic retail investing into a more sophisticated understanding of wealth management.

FAQ

Can non-marketable securities ever become marketable?

Yes. The most common way this happens is through an Initial Public Offering (IPO). When a private company goes public, its non-marketable private shares are converted into marketable public shares (usually after a 180-day lock-up period). Additionally, restricted stock can become marketable once the SEC-mandated holding period (Rule 144) expires.

Are non-marketable securities safer than marketable ones?

Not necessarily. They have lower price volatility because they aren't traded daily, but they have much higher liquidity risk. You might see the value of your Series I bond stay stable while the stock market crashes, but if you need the money tomorrow and you’ve only held the bond for six months, you literally cannot get it.

How do I sell a non-marketable security in an emergency?

It is difficult. For private company shares, you may need to find a private buyer and get board approval. For limited partnerships, you might have to sell to a "secondary fund" at a steep discount (often 10-30% below the actual value). For government savings bonds, you simply have to wait until the minimum holding period (1 year) has passed.

Why does the government issue non-marketable debt?

The U.S. Treasury issues non-marketable debt like SLGS and Savings Bonds to manage its cash flows more predictably and to offer specific groups (like individual citizens or municipal governments) a way to save that is insulated from the volatility of the professional bond market.

Is a house a non-marketable security?

Technically, a house is a "real asset," not a "security." However, it shares many characteristics with non-marketable securities, such as high transaction costs, long closing times, and the lack of a centralized exchange. In a broader portfolio analysis, real estate is treated as an illiquid, non-marketable asset.