Unsponsored ADR

What Is an Unsponsored ADR?

An unsponsored ADR is a American depositary receipt (ADR) issued by a depositary bank without the contribution, participation, or consent of the foreign company it addresses ownership in.

Figuring out Unsponsored ADRs

ADRs are negotiable certificates that address a certain number of shares in a foreign company. ADRs are issued by banks outside the U.S. furthermore, trade just like shares on American stock exchanges in U.S. dollars. These securities permit foreign corporations to enter the American financial markets and attract American capital. They likewise give American investors a method for investing in foreign companies they may otherwise not have the option to access.

ADRs can be sponsored or unsponsored. A sponsored one is issued in a joint effort with the foreign company, while an unsponsored ADR is laid out without the company's cooperation.

How does an ADR get laid out in the U.S. without a company's consent? The response is basic — demand. A depository entity can issue certificates when there's heavy demand from investors for ownership in a specific company from abroad. The responsible entity is typically a broker-dealer that possesses common stock in the company.

Unsponsored ADRs are ordinarily issued by broker-dealers that own common stock in a foreign company.

Since they're issued without the consent or cooperation of the foreign company, unsponsored ADRs generally trade over-the-counter (OTC) — rather than on a stock exchange. Furthermore, there's another catch. Shareholder benefits and voting rights may not be extended to the holders of these specific securities.

Special Considerations

Since depository banks were not required to tell the underlying issuers or get permission before enrolling unsponsored ADRs with the Securities and Exchange Commission (SEC), there was a race to carry them to market, coming about in different unsponsored ADRs in some cases being made for a similar issuer.

The number of unsponsored ADR issues flooded after Oct. 10, 2008, when the SEC amended an exemption applicable to foreign issuers. This exemption permitted them to have their securities traded through the U.S. OTC market without the registration required under Section 12(g) of the SEC Act of 1934 (SEA).

This amendment disposed of the written application and paper submission requirements by giving an automatic exemption from Section 12(g) to foreign issuers that met certain conditions. These conditions required the issuer to keep a listing of its shares in its primary market outside the U.S. furthermore, distribute electronically determined non-U.S. disclosure reports in English.

Unsponsored ADRs versus Sponsored ADRs

As referenced above, sponsored ADRs have the full cooperation of the foreign company, empowering them to tap into international capital markets straightforwardly. Albeit a sponsored ADR would be listed in the United States, the responsible company actually has its revenue and profit named in its home currency.

There are three levels of sponsored ADRs:

• Level I sponsored ADRs: These must be traded OTC and not on an official U.S. exchange. A Level I sponsored ADR is more straightforward to set up for foreign companies since it doesn't need similar disclosures or the need to submit to generally accepted accounting principles (GAAP). There is some degree of risk with Level I sponsored ADRs given their relative lack of transparency.
• Level II sponsored ADRs: These ADRs can be listed on an exchange, significance they're noticeable to a more extensive market and require the company to consent to the SEC.
• Level III sponsored ADRs: The last level of sponsored ADRs permit companies to issue shares to raise capital, however require the highest level of compliance and disclosure.

In excess of 2,000 ADRs — both sponsored and unsponsored — traded in the United States in 2012, as per the SEC.

Illustration of an Unsponsored ADR

Numerous large global corporations use unsponsored ADRs to attract American capital. For instance, American investors can invest in Royal Mail PLC, a postal and delivery service company from the United Kingdom that was established by Henry VIII. The company's unsponsored ADR trades OTC under the ticker symbol ROYMY.

Features

• These securities trade on the over-the-counter market rather than on American stock exchanges.
• Not at all like ordinary ADRs and stock, shareholder benefits and voting rights may not be extended to investors who hold unsponsored ADRs.
• An unsponsored ADR is an American depositary receipt issued by a depositary bank without the contribution, participation, or consent of the foreign company.