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Definition: Sponsored ADR
It is an American depository receipt (ADR) issued by a bank with a contractual relationship with the company whose stock backs it. ADR is a certificate representing a lot of shares of a foreign stock issued by a US bank and it can be traded on a US exchange. ADRs are denominated in US Dollars and enable an American investor to invest in stocks of companies outside USA. There are two types of ADRs
• Unsponsored ADR- There is no contractual relationship between the bank and the company. They can be traded only in the Over The Counter (OTC) market.
• Sponsored ADR- Company forms a contractual relationship with the depository bank. They are traded on exchanges.
In sponsored ADRs the cost of issuing the security is borne by the foreign company. There are 3 types of sponsored ADRs
• Level I – It is the simplest and most basic type of ADR which can be traded only OTC and cannot be listed in a US exchange. It is easier for companies to sponsor Level I ADRs as they have loose requirements from Securities and Exchange council (SEC).
• Level II – Requires the companies to comply with the SEC’s reporting and registration requirements and it can be listed on an exchange. Also the companies need to follow the US Generally Accepted Accounting Principles (US GAAP) or International Financial Reporting Standards (IFRS) while preparing their annual report.
• Level III- It is similar to Level II ADRs but the major difference is that Level III ADR allows the issuing company to raise capital through public offering. It requires the issuer to submit F-1 registration form to the SEC.