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 14. What is American Depository Receipt (ADR) and Unsponsored s ADR, Sponsored Level 1 to 3 ADR program?

An American Depositary Receipt (ADR) is a negotiable U.S. certificate issued by a depositary bank that represents a specific number of shares in a foreign company. ADRs trade on U.S. stock markets in U.S. dollars, allowing American investors to easily buy and sell foreign stocks without the complications of cross-border transactions. [1, 2]


Unsponsored ADRs


An Unsponsored ADR is created by a U.S. depositary bank to meet investor demand, completely without the involvement, cooperation, or permission of the foreign company. Multiple banks can issue unsponsored ADRs for the same foreign company, but they only trade Over-The-Counter (OTC). They never include shareholder voting rights. [3, 4, 5]


Sponsored ADR Levels 1 to 3


Sponsored ADR programs involve a direct, contractual agreement between the foreign company and a single depositary bank. They are classified into three levels based on SEC compliance and the ability to raise capital:
  • Level 1: The simplest, cheapest, and most common type of sponsored program. These ADRs can only trade Over-The-Counter (OTC) and cannot be used to raise new capital. The foreign company is exempt from full SEC registration but must maintain certain English-language financial disclosures.
  • Level 2: Requires the foreign company to formally register with the SEC and comply with partial U.S. accounting standards (U.S. GAAP). These ADRs can be listed on major U.S. exchanges (NYSE, Nasdaq), providing better visibility, but still cannot be used to raise fresh capital.
  • Level 3: The highest and most strictly regulated level. It allows a foreign company to list on major U.S. exchanges and actively raise new capital from U.S. investors. It requires full SEC registration and extensive compliance with U.S. reporting standards. [2, 7, 10, 11, 12]
To learn more about how the SEC regulates these programs, review the full SEC Investor Bulletin on ADRs. For a detailed breakdown of the risks and tax structures involved, check out the Fidelity Guide to Understanding ADRs. [7, 13]





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