A
sponsored ADR is a way for US citizens to own shares in a foreign company that
trades on a US financial
market. The ADR, or American Depositary
Receipt, is the document and asset that the US citizen legally owns. A
sponsored ADR means that a US bank is involved in the process and will grant
the holder the same voting rights that come with the equivalent stock
ownership.
Many
foreign companies wish to have stock available for trade on the US market, as
this can be a valuable source of investment. It can be difficult to have US
citizens simply buy foreign stocks because of the problems of currency
exchange. With a standard share issue, an investor would have to pay for
the stock and receive dividends in a foreign currency. This brings both transaction costs
and uncertainty about the effects of varying exchange rates.
The
solution is the ADR. This is a security that is traded and pays dividends in US
currency. An individual ADR will be considered equivalent to a share in the
foreign company in a stated ratio. While one ADR can simply equal one share,
it's possible for an ADR to be equivalent to multiple 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 can be traded, but effectively exists as an asset in
its own right. The connection with the foreign company's shares is loose, and
the holder does not usually have the equivalent rights as if she owned the
share.
A sponsored ADR works on a more formal basis. The
holder of the ADR 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, though usually US investors don't need to exercise
this right.
There are three levels of sponsored
ADR. Level I is an over-the-counter ADR, meaning it can only be traded by
direct investor-to-investor deals, rather than through a stock exchange. Level
II means the ADR can be listed on a stock exchange and traded in the same way
as US company shares. Level III means the foreign company can create new stock
and issue it in the form of the equivalent ADR. The company will need to comply
with the US rules on new stock issues, and may even be more open and
transparent about the details it releases to the public in an attempt to win
over potentially skeptical investors.