Unlisted Securities In Mutual Funds: Assessing Liquidity Prospects

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Mutual funds have long been an investment vehicle for individuals seeking diversification in investments and professional management. Their objectives often revolve around capital appreciation, income, or a combination of both.
Nigeria Corporate/Commercial Law
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Mutual funds have long been an investment vehicle for individuals seeking diversification in investments and professional management. Their objectives often revolve around capital appreciation, income, or a combination of both.1

In the world of capital markets, choices abound. Typically, securities in Nigeria are traded after being listed on formal exchanges such as Nigerian Exchange Ltd (NGX) or FMDQ securities trading platform. However, there is an option in the form of unlisted security and this option is gaining traction among mutual fund managers.2 This article explores the implications of integrating unlisted securities in mutual fund portfolios, with a specific focus on their liquidity and the trading dynamics in the NASD3 OTC Market. It also addresses the legal and regulatory landscape on the trading of unlisted securities in Nigeria.

Understanding Unlisted Securities: Legal and Regulatory Aspects

The meaning of 'Unlisted Securities' lies in its name. According to NASDAQ, unlisted security is any security traded in the over-the-counter "OTC" market that is not listed on an organized exchange.4 In simple terms, unlisted securities are securities such as shares, bonds, stocks, etc. that are sold in places which are not the official market or formal exchanges and away from the immediate regulation of the market regulators. Their appeal lies in reduced bureaucracy, attracting preference over formal stock markets.

Well, it may seem like unlisted securities are freelancers dancing on the edge of regulation, like the Wild West! Unlisted securities, unlike their listed counterparts on prominent exchanges like the Nigerian Exchange Ltd (NGX) or FMDQ securities trading platform, reside in a realm of lesser-known investments. Typically issued by smaller or newer companies that may not meet the stringent listing requirements of major exchanges, these securities offer a unique investment opportunity. Despite their lack of formal listing, unlisted securities can be traded through over-the-counter (OTC) markets, such as the NASD OTC Market in Nigeria, providing investors with access to this alternative asset class.

The National Association of Securities Dealers (NASD) Plc operates as the only licensed OTC operator in Nigeria. Registered by the Securities and Exchange Commission ("SEC"), NASD Plc provides a trading platform where securities instruments not listed on traditional exchanges can be traded through licensed stockbroking houses on the NASD platform.

Liquidity Concern: A balancing Act

Liquidity, the ease with which an asset can be converted into cash, is a crucial factor for investors. Unlisted securities are often perceived as less liquid than their listed counterparts due to the absence of a centralized exchange and regulatory oversight. This lack of liquidity can make it challenging for investors to quickly buy or sell these securities, potentially impacting their ability to access their funds in times of need.

However, the NASD OTC Market has emerged as a key player in enhancing the liquidity of unlisted securities. This platform provides a regulated marketplace for OTC transactions, facilitating the buying and selling of unlisted securities through licensed stockbroking houses. While the liquidity of unlisted securities may not match that of listed securities, the NASD OTC Market has significantly improved accessibility and ease of conversion compared to direct negotiations between buyers and sellers. 5

Why Unlisted Securities?

As previously mentioned, unlisted securities are issued by smaller or new firms and big companies that may not or do not wish to comply with the requirements of an official exchange, such as market capitalization thresholds or listing fees. Other reasons why companies opt for unlisted securities are;

  1. Privacy and Control: Staying unlisted allows companies to maintain privacy regarding their financial information and operational strategies. They have more control over their operations without the scrutiny that comes with being publicly traded.
  2. Avoiding Regulatory Requirements: Listing on formal exchanges often involves adhering to stringent regulatory standards, which can be costly and time-consuming. Remaining unlisted saves companies from some of these regulatory burdens.
  3. Flexibility: Unlisted companies have more flexibility in decision-making. They can focus on long-term strategies without the pressure of meeting quarterly expectations or satisfying shareholder demands.
  4. Avoiding Short-Term Market Pressures: Publicly traded companies in the listed securities market such as NGX and FDMQ are subject to market fluctuations and short-term investor pressure such as selling and buying of securities based on the slightest indication of non-performance of a particular security's performance on the daily market as shown by the trading radar. Unlisted companies can avoid these fluctuations and focus on their long-term vision without being swayed by market sentiment.6
  5. Less Stringent Disclosure Requirements: Listed companies are required to disclose a significant amount of information regularly. Unlisted companies have fewer obligations in this regard, allowing them to keep certain sensitive information confidential.7

Key Risks of Investing in Unlisted Securities

While unlisted securities offer the potential for higher returns and exposure to smaller less established companies, they also carry unique risks that investors should carefully consider.

  1. Limited Liquidity: Unlisted securities are typically less liquid than listed securities, making it more difficult for investors to quickly buy or sell their holdings. This lack of liquidity can hinder investors' ability to access their funds when needed.
  2. Valuation Challenges: Accurately valuing unlisted securities can be challenging due to the absence of readily available market prices. This can lead to potential overvaluation or undervaluation of these securities.
  3. Increased Risk of Fraud: Unlisted securities are often subject to less stringent regulatory oversight, which can increase the risk of fraud and manipulation. Investors should carefully evaluate the company's management and financials before investing.
  4. Information Asymmetry: Investors in unlisted securities may have limited access to information about the company's operations and financial performance. This lack of transparency can increase the risk of making uninformed investment decisions.
  5. Potential for Manipulation: Unlisted securities may be more susceptible to manipulation due to their smaller trading volumes and less stringent regulatory oversight. Investors should be cautious of any investment opportunities that seem too good to be true.

The Role of Mutual Funds in Unlisted Securities Investments

Mutual funds, with their professional expertise and risk management capabilities, can play a crucial role in navigating the complexities of unlisted securities investments. By conducting thorough due diligence, assessing risks, and employing rigorous portfolio diversification strategies, mutual funds can help investors mitigate the risks associated with unlisted securities while potentially unlocking their value.


Liquidating unlisted securities—it is like having the backstage pass to the exclusive club of investments. Although they are not easy to liquidate, unlisted securities offer the potential for higher returns and exposure to smaller, less established companies, as they operate outside the stringent regulatory oversight of formal exchanges. While there may be a delay in realizing profits compared to listed securities, the potential for higher returns can make this wait worthwhile. Ultimately, the decision of whether to invest in unlisted securities lies with the fund manager, who must carefully weigh the potential risks and rewards.


1. Lynch, P., & Rothchild, J. (2000, April 3). One Up On Wall Street. Simon and Schuster.

2. In the weekly edition of Economic Update by Securities and Exchange Commission "SEC," SEC reported the planned switch of a large mutual fund from listed to unlisted securities. SEC Nigeria. (2020) Economic Update. https://sec.gov.ng/wp-content/uploads/2020/11/WEU-FOR-11092020.pdf.

3. National Association of Securities Dealer.

4. Harvey, C. R. (2018). Unlisted Security. Nasdaq Glossary. https://www.nasdaq.com/glossary/u/unlisted-security.

5. NASD PLC. (2023). Secondary (OTC) Market. https://nasdng.com/join-nasd/join-the-otc-market/

6. When a company is listed on any formal exchange, it becomes subject to the dynamics of the stock market. The company's stock price is influenced by various factors, including market sentiment, economic conditions, news, and quarterly financial performance. This often leads to short-term fluctuations and volatility in stock prices based on daily trading activities and investor reactions. Unlisted companies, on the other hand, are not subject to the same market pressures. Since their shares are not traded on major exchanges, they are not influenced by daily market fluctuations or short-term investor behavior. This allows unlisted companies to focus more on their long-term goals, strategies, and business vision without being swayed by immediate market reactions. However, this advantage is subject to the change in price/volatility by the market makers in the unlisted.

7. True Tamplin, Unlisted Security (2023) retrieved from https://www.financestrategists.com/wealth-management/investments/unlisted-security/#:~:text=Volatility%20and%20Liquidity%20in%20the,prices%20and%20higher%20price%20volatility.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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