Sponsored ADR

A sponsored ADR is an ADR program created and maintained by the foreign company itself, as opposed to an unsponsored ADR created by a bank without the company’s involvement. In a sponsored ADR, the company appoints a depositary bank, sets the terms of the ADR, controls the exchange listing (Level I, II, or III), handles regulatory filings, and manages investor relations. Sponsored ADRs provide better governance and transparency and are preferred by institutional investors.

How sponsored ADRs work

A German automotive company decides to broaden its US investor base. Rather than let a US bank create an unsponsored ADR, the company directly:

1. Appoints a depositary: Selects J.P. Morgan, BNY Mellon, or Citibank as the official depositary.

2. Negotiates terms: Company and depositary agree on:

   • ADR level (I, II, or III).
   • Conversion ratio (e.g., 1 ADR = 2 German shares).
   • Dividend handling and currency conversion.
   • Fees (depositary typically charges holders a per-share fee).

3. Files with SEC: For Level II or III, company files required documents (Form F-6 registration statement, financial statements in US GAAP, etc.).

4. Lists on exchange: ADRs trade on NYSE or NASDAQ (Level II) or OTC (Level I).

5. Investor relations: Company manages investor communication, earnings calls, and Q&A specific to ADR holders.

6. Regulatory compliance: Company is responsible for ongoing SEC compliance, financial reporting, and Sarbanes-Oxley compliance (for Level II–III).

Sponsored versus unsponsored

Unsponsored ADRs are rarer and less preferred by institutions because the company has no accountability to ADR holders.

ADR levels for sponsored programs

Level I (unregistered):

• Trades OTC; minimal SEC oversight.
• No requirement for US GAAP financial statements.
• Cheapest for the company; limited US investor reach.
• Used by companies dipping their toe into US markets.

Level II (registered):

• Trades on NYSE or NASDAQ.
• Company must reconcile financial statements to US GAAP.
• Company must file annual (Form 20-F) and periodic filings with SEC.
• More expensive; larger US investor base.
• Most common for major international companies.

Level III (with capital raising):

• Trades on exchange (NYSE or NASDAQ).
• Full SEC registration; company can raise capital via new ADR offerings.
• Company subject to Sarbanes-Oxley requirements (SOX).
• Most expensive; highest regulatory burden.
• Used by companies planning significant US expansion and capital raising.

Costs of sponsoring an ADR

Companies sponsoring ADRs incur:

• Depositary fees: Bank charges per share annually (typically $0.01–$0.03 per ADR held).
• SEC compliance: Lawyer and accounting costs for financial reconciliation and SEC filings.
• Investor relations: Extra staff or consultants to manage ADR holder communication.
• Exchange listing fees: NYSE or NASDAQ listing fees.

For Level III programs, total annual costs can be $500,000–$2+ million. These costs are borne by the company or passed to ADR holders as fees.

Benefits to the company

• Broader access: Tap US institutional capital (pension funds, mutual funds, hedge funds).
• Better valuations: US investors may value the company higher if there is liquidity and transparency.
• Currency diversification: Raise capital in USD if needed.
• Prestige: Level II or III listing signals quality and commitment to global investors.
• Employee equity: Facilitate US employee options and RSUs using ADRs.

Benefits to investors

• Transparency: Company-controlled program; strong governance.
• Liquidity: Level II–III ADRs have good US market liquidity.
• Regulatory oversight: SEC oversight provides investor protection.
• Dividend management: Reliable dividend handling and currency conversion.
• Two-way conversion: Can convert ADRs to underlying shares if desired.

Regulatory requirements (Level II–III)

Companies sponsoring Level II or III ADRs must:

• Reconcile to US GAAP: Provide financial statements reconciled from home-country GAAP to US GAAP. This is sometimes complex and costly.

• File with SEC: Annual (Form 20-F), quarterly (6-K for current reports), and event-driven filings.

• Comply with SOX: Sarbanes-Oxley requirements (for Level III and sometimes Level II) including:

  • CEO/CFO certifications.
  • Internal control assessments.
  • Audit committee and independent directors.

• Investor relations: Earnings calls, investor meetings, and transparency.

For Level I, these requirements are minimal or non-existent.

Termination of sponsored programs

Companies can terminate sponsored ADR programs if:

• The US investor base shrinks or is unprofitable to maintain.
• The company goes private.
• The company is acquired.

Upon termination, ADR holders must convert their ADRs to underlying shares or sell in the market before conversion deadline.

Dual-listing advantages

Many companies maintain both a home-country listing (local exchange) and sponsored ADRs (US exchange). This provides:

• Regional liquidity: Investors in both regions can trade in local currency.
• 24-hour trading: As US markets close, home market opens, and vice versa.
• Geographic diversification: Shareholder base spread across regions.

For example, large European companies often trade on their home exchange and via Level II ADRs on NYSE/NASDAQ.

Comparison to unsponsored ADRs

An unsponsored ADR might be created by a bank for a smaller or emerging market company. The company is not involved; the bank creates the ADR and profits from the spread. Unsponsored ADRs are less liquid, less transparent, and riskier for investors because the company is not accountable.

Most institutional investors only hold sponsored ADRs.