Unsponsored ADR

An unsponsored ADR is an American depositary receipt (ADR) that a depositary bank issues without the involvement, participation – or even the consent – of the foreign issuer whose stock underlies the ADR. The issuer therefore has no control over an unsponsored ADR, in contrast to a sponsored ADR where it retains control.

Depository banks usually establish unsponsored ADRs in response to investor demand. Shareholder benefits and voting rights may not be extended to the holders of these particular securities. Unsponsored ADRs generally trade over-the-counter (OTC) rather than on United States exchanges.

The number of unsponsored ADR issues surged after Oct. 10, 2008, when the Securities and Exchange Commission (SEC) amended an exemption applicable to foreign issuers, which allowed them to have their securities traded in the U.S. OTC market without the registration required under Section 12(g) of the SEC Act of 1934.

This amendment eliminated the written application and paper submission requirements by providing automatic exemption from Section 12(g) to foreign issuers that met certain conditions. These conditions required the issuer to maintain a listing of its shares in its primary market outside the U.S., and publish electronically in English specified non-U.S. disclosure documents.

Since depositary banks were not required to notify the underlying issuers or obtain permission before registering unsponsored ADRs with the SEC, there was a rush to bring these to market, resulting in multiple unsponsored ADRs sometimes being created for the same issuer.

In contrast with unsponsored ADRs, sponsored ADRs allow foreign companies to directly tap into international capital markets. Although a sponsored ADR would be listed in the United States, the issuing company still has its revenue and profit denominated in its home currency. Three levels of sponsored depository receipts exist:

1. Level I sponsored ADRs can only be traded over-the-counter (OTC) and not on an official U.S. exchange; however, a Level I sponsored ADR is easier to set up for foreign companies, since it does not require the same disclosures, nor does the company have to abide by the generally accepted accounting principles GAAP. Level I sponsored ADRs pose certain risks to investors given their relative lack of transparency.
   

2. Level II sponsored ADRs can be listed on an exchange and are thus visible to a wider market; however, they do require the company to comply with the SEC.
   

3. Level III sponsored ADRs permit companies to issue shares to raise capital, but require the highest level of compliance and disclosure.