ADR stands for American Depositary Receipt and is a stock that trades in U.S. markets but represents a certain number of shares in a foreign corporation. ADRs are bought and sold on U.S. markets like regular stocks, and are issued in the U.S. by a bank or brokerage that purchases a bulk of shares from the company and reissues them on either the New York Stock Exchange (NYSE), American Stock Exchange (AMEX) or the Nasdaq.
ADRs were created for financial markets in 1927 because of the difficulty of buying shares in foreign countries using different currency values.
There are four types of ADR issues:
Unsponsored – An unsponsored ADR program is initiated by a depositary bank without the contractual involvement from the company. The establishment of an unsponsored ADR program is driven by broker/investor demand. The ADRs are traded on the over-the-counter (OTC) market in the U.S. and have less Securities and Exchange Commission (SEC) reporting requirements.
Level I – Level I ADRs are found on the over-the-counter market (OTC) and also have few SEC reporting requirements. The ADR program is initiated by the company and involves the filing of a F-6 registration statement, but allows for exemption under Rule 12g3-2(b) from full SEC reporting requirements.
Level II – This type of ADR is listed on a major exchange. Level II ADRs have more reporting and disclosure requirements from the SEC making them safer than Unsponsored and Level I ADRs.
Level III – Level III sponsored ADRs are similar to Level II ADRs in that the issuer initiates the program, deals with one depositary bank, lists on a major U.S. exchange, and fully complies with SEC reporting requirements. The major difference is that a Level III program allows the foreign company to raise capital through a public offering of ADRs in the U.S. and this requires greater financial reporting requirements and disclosures from the SEC.<< Back to Glossary Index