What Are American Depositary Receipts (“ADRs”)?

Many foreign companies use American Depositary Receipts (“ADRs”) as a means of going public to raise capital or establish a trading presence in the United States. ADRs are traded on exchanges like NASDAQ or NYSE as well as the OTC Markets.

An ADR is a negotiable certificate that evidences ownership of American Depositary Shares (“ADSs”), which, in turn, represent an interest in a specified number (or fraction) of a foreign company’s shares. The use of a ratio allows ADSs to be priced at an amount more typical for the U.S. public markets. While an ADR is a physical certificate evidencing an ADS, market participants often use the terms ADR and ADS interchangeably. ADRs trade in U.S. dollars and clear through U.S. settlement systems, allowing ADR holders to avoid effecting transactions in a foreign currency.

ADRs are issued by a depositary bank in the United States and represent the deposit of the foreign company’s shares in a custodian bank, usually in the foreign company’s home jurisdiction. Pursuant to the terms of the underlying deposit agreement, ADR holders may exchange ADRs for the representative number of shares in the foreign company. Conversely, those holding shares in the underlying foreign company may deposit such shares in exchange for ADRs.

ADRs may be “sponsored” or “unsponsored.” Sponsored ADRs are those in which the foreign private issuer enters into an agreement directly with the U.S. depositary bank to arrange for record-keeping, the forwarding of shareholder communications, the payment of dividends, and other services as described above. An unsponsored facility is set up without the cooperation of the foreign private issuer and may be initiated by a broker-dealer wishing to establish a trading market.

An ADR facility may not be established unless the issuer is either subject to the reporting requirements under the Securities Exchange Act of 1934 (the “Exchange Act”) or is exempt from SEC reporting requirements pursuant to Rule 12g3-2(b). Because an ADR essentially represents two separate securities, ADSs and the underlying shares of the foreign company, a registration analysis must be made for each security.

ADSs are always registered on Form F-6. Disclosure under Form F-6 relates only to the contractual terms of deposit under the deposit agreement and includes copies of the agreement, a form of ADR certificate, and legal opinions. A Form F-6 registration statement contains no information about the foreign private issuer. If a foreign private issuer with ADRs wishes to raise capital in the United States, it must separately file a Form F-1, F-3 or F-4 registration statement.

Market participants have generally categorized ADRs into three “levels,” depending on the extent to which the foreign company has accessed the U.S. markets:

• Level 1 ADR programs establish a securities market presence in the United States but may not be used to raise capital. It is the only type of facility that may be unsponsored and, as a result, may be quoted only on the OTC Markets. Form F-6 would be the only form required to be filed because exemption from registration pursuant to Rule 12g3-2(b) is sufficient to establish eligibility for an ADR facility. 
• Level 2 ADR programs establish a securities market presence in the United States (on a national securities exchange) but may not be used to raise capital. Again, Form F-6 would be used to register the ADRs. Filing a Form 20-F would also be necessary in order to register the underlying class of securities the ADR represents. 
• Level 3 ADR programs may be used not only to establish a securities market presence in the United States but also to raise capital for the foreign company. As such, in addition to the Form F-6 used to register the ADSs, a Form F-1, F-3 or F-4 registration statement must be filed with the Commission.

To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Attorneys
Brenda Hamilton, Securities Attorney
200 E Palmetto Rd, Suite 103
Boca Raton, Florida 33432
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