This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

Duration: 4:21

Instructor:

Contributor: Interactive Brokers

Level: Beginner

Lesson 2 covers the different types of ADRs and explains what Sponsored and Unsponsored ADRs are. In this lesson, we also explain the differences between Level 1, 2 and 3 ADRs and why companies might choose one type of ADR over another.

Read More

Study Notes:

There are two types of ADRs:

  • Sponsored ADRs
  • Unsponsored ADRs

A Sponsored ADR, as the name implies, is one that’s “sponsored” by the company, whereby the non-US company works with a US depository bank, which:

  • Creates the ADR
  • Handles record-keeping
  • Forwards communications to shareholders
  • Pays dividends
  • Provides other services

An Unsponsored ADR is created by a US depository bank without the cooperation or participation of the non-US company. Unsponsored ADRs can even be created without the consent of the non-US company whose stock underlies the American Depositary Receipt.

Unsponsored ADRs are:

  • Often not liquid
  • Financial information or news releases in English may not be available
  • Only trade Over the Counter (not traded through an exchange)

Regardless of whether an ADR is Sponsored or Unsponsored, all ADRs must be registered with the Securities and Exchange Commission. However, the SEC requires different types of registration depending on the “level” of the ADR. Next, we will explore ADR levels.

ADR levels

In addition to being classified as either Sponsored or Unsponsored, ADRs are categorized into three levels.

Level 1 ADRs

A Level 1 American Depositary Receipt is a very basic type of ADR. It is only traded over the counter. You may also hear the term “pink sheets” in relation to Level 1 ADRs. Pink sheet listings are used for stocks that trade over the counter and are not listed on a major exchange, such as the New York Stock Exchange or Nasdaq.

Level 1 ADRs are generally created when a foreign company either doesn’t meet the necessary requirements to be listed on an exchange or does not wish to have their ADR listed on an exchange.

Being classified as a Level 1 ADR does NOT mean that the companies are small or fly-by-night operations. For example, some international giants such as:

  • Daimler
  • Heineken
  • Nestle

can be found in the pink sheets. You can search for companies in the Pink Sheets at https://www.otcmarkets.com/.

A foreign company may wish to have a Level 1 ADR to see if investors in the US are interested in buying shares in the company. While they can be useful for creating a trading presence in the US, they can’t be used to raise capital.

Level 1 ADRs:

  • Are traded Over the Counter
  • Are listed in the Pink Sheets
  • Can be used to create a trading presence in the US
  • Can be highly speculative
  • May not be appropriate for risk-averse investors
  • Do not have to undergo full registration by the Securities and Exchange Commission
  • Are regulated by the Financial Industry Regulatory Authority (FINRA)

 Level 2 ADRs

Level 2 ADRs:

  • Are listed and traded on a US exchange
  • Can be used to create a trading presence in the US
  • Can’t be used for capital-raising
  • Must conform to more SEC requirements than Level 1 ADRs
  • Tend to have more trading volume than Level 1 ADRs
  • Generally, have more visibility among investor

Level 3 ADRs

Level 3 ADRs are considered the top level.

Level 3 ADRs are:

  • Listed and traded on an exchange
  • Must meet stricter reporting rules similar to the rules governing publicly traded US companies
  • Can be used to raise capital
Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Supporting documentation for any claims and statistical information will be provided upon request.

Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: Forex

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

trading top