Sponsored ADRs allow US citizens to own shares in foreign companies listed on US markets. A US bank is involved, giving holders voting rights equivalent to owning shares. ADRs trade and pay dividends in US currency, simplifying foreign stock investment. Sponsored ADRs have three levels, with Tier III allowing foreign companies to issue new shares as ADRs.
A sponsored ADR is a way for US citizens to own shares in a foreign company listed on a US financial market. The ADR, or American Depository Receipt, is the document and asset that is legally owned by the US citizen. A sponsored ADR means that a US bank is involved in the process and will give the holder the same voting rights that come with ownership of equivalent shares.
Many foreign companies want to have shares available for trading on the US market, as this can be a valuable source of investment. It can be difficult for US citizens to simply buy foreign stocks due to currency exchange issues. With a standard stock issue, an investor would have to pay for the shares and receive dividends in a foreign currency. This brings transaction costs and uncertainty about the effects of variable exchange rates.
The solution is ADR. This is a security that trades and pays dividends in US currency. An individual ADR will be considered equivalent to a share in the foreign company in a set proportion. While an ADR may simply be equal to one share, it is possible for an ADR to be equivalent to several shares, or even a fraction of a share.
In its simplest form, the unsponsored ADR, a US bank’s only connection is to issue the ADR. This type of ADR may be traded, but it effectively exists as an asset in its own right. The connection to the shares of the foreign company is loose, and the holder often does not have the equivalent rights as if he owned the share.
A sponsored ADR works in a more formal way. The ADR holder will normally have the same voting rights as if she held shares. In some cases, the holder may even have the right to exchange the ADR for the relevant shares, although US investors generally do not need to exercise this right.
There are three levels of sponsored ADR. Level I is an over-the-counter ADR, which means it can only be traded through direct investor-to-investor deals, rather than through a stock exchange. Tier II means that the ADR can be listed on a stock exchange and traded in the same way as shares of US companies. Tier III means that the foreign company can create new shares and issue them in the form of an equivalent ADR. The company will need to comply with US rules on new share issues, and may even be more open and transparent about the details it discloses to the public in an attempt to win over potentially skeptical investors.
Smart Asset.
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