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American Depository Receipts
An American Depository Receipt, or “ADR,” is a form of equity ownership of a non-U.S. company. It is denominated in U.S. dollars and represents the foreign shares of the company held on deposit by a custodian bank in the company’s home country. ADRs allow Americans to invest in foreign companies because of the widespread availability of dollar-denominated price information, lower transaction costs, and timely dividend distributions. [1] Subject to the terms and conditions specified by the ADR certificate, the ADR carries the corporate and economic rights of the foreign shares. This four page white paper explains the basics of ADRs and Rule 144A, the advantages of ADRs, and the different types of ADRs. ADRs allow investors to conveniently invest in foreign securities without the worries that come along with cross-border transactions. Holders of ADRs enjoy the same economic benefits as domestic shareholders of foreign companies, and a U.S. bank acts as a depositary. The ADR ratio is the relationship between the number of ADRs and the number of foreign shares, and each ADR is backed by a specific number or fraction of shares in the foreign company. ADRs may be listed on any of the U.S. Exchanges, including the New York Stock Exchange (“NYSE”) and the American Stock Exchange (“AMEX”). They may also be quoted for trading on the National Association of Securities Dealers Automated Quotation System (“Nasdaq”), the Over-the-Counter Bulletin Board (“OTCBB”), or the Pink Sheets. It is also possible for ADRs to be privately placed and traded as Rule 144A securities. Rule 144A of Section 5 of the 1933 Securities Act provides an alternative to a public offering and listing of securities. Specifically, it governs the buying and reselling of restricted securities. A restricted security is not allowed to be traded on public markets. The main purpose of Rule 144A is to increase the efficiency and liquidity of private placements of equity and debt by allowing institutional investors greater freedom in trading these securities. The restricted securities are exempt from SEC registration with much less stringent disclosure requirements. This rule provides safe harbor relief from the registration requirements involved in a resale of unregistered securities to “qualified institutional buyers” in certain cases. This exemption makes it easier for foreign companies to issue securities in US capital markets. In the past, US registration and disclosure standards have been much more involved than the foreign company’s home rules. This increased time, effort, and cost induced many foreign companies to avoid raising capital in the US. With Rule 144A’s exemption, foreign companies will be more willing to sell securities in the US, which will also present US investors the opportunity to invest more easily in foreign companies. [continued...] Want to know more? Download the White Paper "American Depository Receipts" for just $9.95. People who ordered this paper also ordered: |
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