What Is an Unsponsored ADR?
Let me explain what an unsponsored ADR really is. It's an American depositary receipt issued by a depositary bank without any involvement, participation, or even consent from the foreign company whose ownership it represents.
Key Takeaways
You should know that an unsponsored ADR comes from a depositary bank acting alone, without the foreign company's input. These trade on the over-the-counter market, not on major American stock exchanges. Also, if you hold one, you might not get the usual shareholder benefits or voting rights that come with regular ADRs or stocks.
Understanding Unsponsored ADRs
ADRs are basically negotiable certificates that stand for a set number of shares in a foreign company. They're issued by banks outside the U.S., and you can trade them like shares on American exchanges, all in U.S. dollars. This setup lets foreign companies tap into American markets and pull in capital, while giving you, as an American investor, access to companies you might not otherwise reach.
Now, ADRs split into sponsored and unsponsored types. Sponsored ones involve collaboration with the foreign company, but unsponsored ADRs happen without that cooperation.
How can an ADR get set up in the U.S. without the company's okay? It's all about demand. If investors are clamoring for ownership in a particular foreign company, a depository entity—usually a broker-dealer that already owns common stock in that company—can issue the certificates.
Keep in mind, unsponsored ADRs are typically issued by broker-dealers holding common stock in the foreign company. Since there's no consent from the company, these trade over-the-counter, not on exchanges. And here's the downside: you, as a holder, might not get shareholder benefits or voting rights.
Special Considerations
Before 2008, depository banks didn't have to notify issuers or get permission to register unsponsored ADRs with the SEC, which led to a rush of them hitting the market—sometimes multiple for the same company.
Things changed after October 10, 2008, when the SEC amended an exemption for foreign issuers. This allowed their securities to trade on the U.S. OTC market without the usual registration under Section 12(g) of the Securities Exchange Act of 1934.
The amendment ditched the need for written applications and paper submissions, offering an automatic exemption if the issuer kept a listing in its primary market outside the U.S. and published required non-U.S. disclosure documents electronically in English.
Unsponsored ADRs vs. Sponsored ADRs
Sponsored ADRs have the full backing of the foreign company, letting them directly access international capital markets. Even so, the company's revenue and profits stay in its home currency, despite the U.S. listing.
Levels of Sponsored ADRs
- Level I sponsored ADRs: These trade only OTC, not on official U.S. exchanges. They're simpler for foreign companies to set up, skipping heavy disclosures and GAAP compliance, but they carry risks due to lower transparency.
- Level II sponsored ADRs: These can list on exchanges, reaching a broader market, but the company must comply with SEC rules.
- Level III sponsored ADRs: These allow companies to issue shares for raising capital, demanding the highest compliance and disclosure levels.
Fast Fact
According to the SEC, more than 2,000 ADRs—both sponsored and unsponsored—were trading in the United States back in 2012.
Example of an Unsponsored ADR
Plenty of big global corporations use unsponsored ADRs to draw in American investors. Take Royal Mail PLC, the UK-based postal and delivery service founded by Henry VIII. You can invest in it through its unsponsored ADR, which trades OTC under the ticker ROYMY.
Other articles for you
A duopoly is a market structure where two companies dominate, impacting competition and consumer choices similar to a monopoly if they collude.
The Jordanian Dinar (JOD) is Jordan's national currency, pegged to the USD for stability since 1995.
A Memorandum of Understanding (MOU) is a non-binding document that outlines agreements between parties to signal intent for future contracts.
Inorganic growth involves expanding a company through mergers, acquisitions, or new locations rather than internal operations.
The GRE is a standardized test for graduate school admissions that evaluates verbal, quantitative, and analytical skills.
The Dividends Received Deduction (DRD) allows U.S
ERISA is a federal law that sets standards to protect workers' retirement and health benefits in employer-sponsored plans.
Wedge patterns in technical analysis help traders identify potential reversals or continuations in market trends through converging trend lines.
Escrowed shares are stocks held by a third party in an escrow account until specific conditions are met in transactions like mergers, employee plans, or bankruptcies.
Credit unions are member-owned financial cooperatives offering banking services with benefits like better rates but some drawbacks compared to traditional banks.