Level I vs. Level II vs. Level III ADRs: An Ove🤪rview

Mutual funds and exchange-traded funds (ETFs) offer American investors opportunities to diversify a portfolio through foreign securities and are the most common way for 澳洲幸运5官方开奖结果体彩网:i🎉nvestors to gain global exposure; however, for people who prefer to purchase individual stocks of foreign compa🌜nies, their options can 🤪be limited.

While some foreign companies are allowed to list their stocks on U.S. stock exchanges, very few meet the strict requirements of securities regulations or want to pay dual-listing fees. One alternative for U.S. investors looking to bypass the somewhat costly obstacles of purchasing a foreign company's stock on an overseas exchange is by investing in an 澳洲幸运5官方开奖结果体彩网:American depositary receipt (ADR).

An ADR is a certificate representing shares of foreign company stock held in a bank within the United States and denominated in U.S. dollars. Most are 澳洲幸运5官方开奖结果体彩网:sponsored ADRs, meaning the foreign company is involved in creating the investment for U.S. in✤vestors.

An ADR may represent the underlying shares on a one-for-one basis, or it can also represent a fraction of a share or multiple shares. The ratio of U.S. ADRs per home-country share is set by the depository bank at a value that appeals to investors. Although 澳洲幸运5官方开奖结果体彩网:unsponsored ADRs exist, they are rare.

ADRs are offered to investors as either a level-I, level-II, or level-III🅷 issue. Each ADR category meets different regulatory standards and isꦬ offered to investors through different outlets.

Level-I ADRs

A sponsored ADR listed as a level-I issue requires the least amount of compliance and regulatory oversight, and investments are originated by the foreign company wishing to offer shares. An 澳洲幸运5官方开奖结果体彩网:F-6 registration statement must be filed to meet the requirements of a level-I ADR offering, but the company is exempt from full Securities and Exchange Commission (SEC) reporting requirements.

An ADR issued under a level-I program is controlled by the foreign company and the single depository bank it selects. Because of the minimal oversight and exemption from reporting requirements, level-I ADR issues are only traded on the 澳洲幸运5官方开奖结果体彩网:over-the-counter market. Note that a level-I ADR may also be unsponsored, meaning the foreign company does not have direct involvement in the ADR.

Level-II ADRs

Foreign companies issuing level-II ADRs are mandated to fulfill all registration and reporting requirements imposed by the SEC. This includes submitting the company's F-6 registration statement, 澳洲幸运5官方开奖结果体彩网:SEC Form 20-F, and annual financial reports prepared in line with either generally accepted accounting principles (GAAP) or international financial reporting standards.

Companies must also comply with the 澳洲幸运5官方开奖结果体彩网:Sarbanes-Oxley Act, which requires accounting and financial disclosure, as well as other reporting standards. Level-II ADRs are allowed to be listed on a major U.S. stock exchange such as the New York Stock Exchange or the Nasdaq Stock Market. Level-II ADRs provide the issuing foreign company greater exposure in the United States without needing to complete a public offering.

Level-III ADRs

Level-III ADRs are similar to level-II issues in terms of reporting requirements and listing on U.S. exchanges; however, foreign companies issuing level-III ADRs can also raise capital through a public offering of the ADR within the United States. This additional step requires the company to file a Form F-1 with the SEC to properly register the public offering.

Special Considerations

Investors should be aware that ADRs may come with fees. This could make them more costly than investing in domestic companies. These fees are custody fees, also known as Depository Service Fees, paid to the depository bank for the work it performs on the creation and maintenance of the ADR. The fees are either deducted from the dividends that the foreign company pays or if the company does not pay a dividend, the fees are charged to the broker, which then charges them to the investor.

The Bottom Line

ADR🍬s allow U.S. investors to invest in the stocks of foreign companies. The diffe🦂rences in regulatory requirements for level-I, level-II, and level-III ADRs, determine how much oversight the ADR has as well as the way in which to invest in it. It also reflects how much time and regulatory compliance the foreign company wants to put into setting up an ADR.