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Encyclopedia > American Depository Receipt

An American depository receipt (ADR) is how the stock of most foreign companies trades in United States stock markets. See stock (disambiguation) for other meanings of the term stock A stock, also referred to as a share, is commonly a share of ownership in a corporation. ... The stock market is the market for the trading of company stock, both those securities listed on a stock exchange as well as those only traded privately. ...


Each ADR is issued by U.S. depository banks and represents one or more shares of a foreign stock or a fraction of a share. If investors own an ADR they have the right to obtain the foreign stock it represents, but U.S. investors usually find it more convenient to own the ADR. The price of an ADR is often close to the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares. The word investor may refer to: A person who makes investments Investor AB, a Swedish investment company institutional investor corporate investor This is a disambiguation page, a list of pages that otherwise might share the same title. ...


Individual shares of a foreign corporation represented by an ADR are called American depository shares (ADS).

Contents


Types of ADR programs

When a company establishes an American depositary receipt program, it must decide what exactly it wants out of the program and how much they are willing to commit. For this reason, there are different types of programs that a company can choose.


Unsponsored shares

Unsponsored shares are ADRs that trade on the over-the-counter (OTC) market. These shares have no regulatory reporting requirements and are issued in accordance with market demand. The foreign company has no formal agreement with a custodian bank and shares are often issued by more than one depository. Each depository handles only the shares it has issued.
Due to the hassle of unsponsored shares and hidden fees, they are rarely issued today. However, there are still some companies with outstanding unsponsored programs. In addition, there are companies that set up a sponsored program and require unsponsored shareholders to turn in their shares for the new sponsored. Often, unsponsored will be exchanged for Level I depository receipts.

Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, or derivatives directly between two parties. ...

Level I

Level 1 depository receipts are the lowest sponsored shares that can be issued. When a company issues sponsored shares, it has one designated depository acting as its transfer agent.
A majority of American depository receipt programs currently trading are issued through a Level 1 program. This is the most convenient way for a foreign company to have its shares trade in the United States.
Level 1 shares can only be traded on the OTC market and the company has minimal reporting requirements with the U.S. Securities and Exchange Commission (SEC). The company is not required to issue quarterly or annual reports. It may still do so, but at its own discretion. If a company chooses to issue reports, it is not required to follow US generally accepted accounting principles (GAAP) standards and the report may show money denominations in foreign currency.
Companies with shares trading under a Level 1 program may decide to upgrade their share to a Level 2 or Level 3 program for better exposure in the U.S. markets.

For other uses of SEC, see SEC (disambiguation) The Securities and Exchange Commission, commonly referred to as the SEC, is the United States governing body which has primary responsibility for overseeing the regulation of the securities industry. ... The Securities and Exchange Commission (SEC) requires public companies to file reports regularly so that they can be made available to the public. ... Generally accepted accounting principles (GAAP) are the accounting rules used to prepare financial statements for publicly traded companies and many private companies in the United States. ...

Level II (listed)

Level 2 depository receipt programs are more complicated for a foreign company. When a foreign company wants to set up a Level 2 program, it must file a registration statement with the SEC and is under SEC regulation. In addition, the company is required to file a Form 20-F annually. Form 20-F is the basic equivalent of an annual report ( Form 10-K) for a U.S. company. In their filings, the company is required to follow GAAP standards.
The advantage that the company has by upgrading their program to Level 2 is that the shares can be listed on a U.S. stock exchange. These exchanges include the New York Stock Exchange (NYSE), NASDAQ, and the American Stock Exchange (AMEX).
While listed on these exchanges, the company must meet the exchange’s listing requirements. If it fails to do so, it will be delisted and forced to downgrade its ADR program.

The Securities and Exchange Commission (SEC) requires public companies to file reports regularly so that they can be made available to the public. ... The Securities and Exchange Commission (SEC) requires public companies to file reports regularly so that they can be made available to the public. ... New York Stock Exchange (June 2003) The New York Stock Exchange (NYSE) is the largest stock exchange in the world, although its trading volume was exceeded by that of NASDAQ (historic comparison graph {pdf}) during the 1990s. ... NASDAQ MarketSite (Times Square, New York City) at night NASDAQ (originally an acronym for National Association of Securities Dealers Automated Quotations) is a U.S. electronic stock exchange. ... The American Stock Exchange (AMEX) is a stock exchange operated by American Stock Exchange LLC, a subsidiary of the National Association of Securities Dealers, in the United States of America. ...

Level III (offering)

A Level 3 depository receipt program is the highest level a foreign company can have. Because of this distinction, the company is required to adhere to stricter rules that are similar to those followed by U.S. companies.
Setting up a Level 3 program means that the foreign company is not only taking some of its shares from its home market and depositing them to be traded in the U.S.; it is actually issuing shares to raise capital. In accordance with this offering, the company is required to file a Form F-1, which is the format for an Offering Prospectus for the shares. They also must file a Form 20-F annually and must adhere to GAAP standards. In addition, any material information given to shareholders in the home market, must be filed with the SEC through Form 8K.
Foreign companies with Level 3 programs will often issue materials that are more informative and are more accommodating to their U.S. shareholders because they rely on them for capital. Overall, foreign companies with a Level 3 program set up are the easiest on which to find information.

The Securities and Exchange Commission (SEC) requires public companies to file reports regularly so that they can be made available to the public. ... A prospectus is a legal document that institutions and businesses use to describe what they have to offer for participants and buyers. ... The Securities and Exchange Commission (SEC) requires public companies to file reports regularly so that they can be made available to the public. ...

Restricted programs

Foreign companies that want their stock to be limited to being traded by only certain individuals may set up a restricted program. There are two SEC rules that allow this type of issuance of shares in the U.S.: Rule 144-A and Regulation S. ADR programs operating under one of these 2 rules make up approximately 30% of all issued ADRs.

144-A

Some foreign companies will set up an ADR program under SEC Rule 144(a). This provision makes the issuance of shares a private placement. Shares of companies registered under Rule 144-A are restricted stock and may only be issued to or traded by Qualified Institutional Buyers (QIBs).
No regular shareholders will have anything to do with these shares and most are held exclusively through the Depository Trust & Clearing Corporation, so the public often has very little information on these companies.
144-A shares may be issued along side of a Level 1 program.

Raising of capital via private rather than public placement. ...

Regulation S

The other way to restrict the trading of depository shares is to issue them under the terms of SEC Regulation S. This regulation means that the shares are not and will not be registered with any United States securities regulation authority.
Regulation S shares cannot be held or traded by any “U.S. Person” as defined by SEC Regulation S rules. The shares are registered and issued to offshore, non-US residents.
Regulation S shares can be merged into a Level 1 program after the restriction period has expired.

External link

SEC guide to foreign investing for U.S. citizens(PDF)
Foreignmarketwatch.com A website covering ADRs from foreign markets


  Results from FactBites:
 
* ADR - (Stock Market): Definition (592 words)
American Depositary Receipt (ADR) A receipt that is issued by a U.S. which represents shares of a foreign corporation held by the bank.
American Depositary Receipt (ADR): A security that physically remains in a foreign country, usually in the custody of a bank, but is traded in the U.S...
Receipt for the shares of a foreign-based corporation held in the vault of a U.S. bank and entitling the shareholder to all dividends and capital gains...
ADR - ADdRess, Advanced Digital Recording (544 words)
Americans are funny about directly holding foreign shares and prefer instead to trade a receipt from a US bank that holds the underlying shares.
American Depositary Receipt - a security issued by a U.S. bank in place of the foreign shares held in trust by that bank, thereby facilitating the trading of foreign shares in U.S. markets.
American Depository Receipt, which is a mechanism through which foreign shares are traded in the USA.
  More results at FactBites »

 
 

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