Goodwin Insights October 02, 2018

Tapping the US Capital Markets Through American Depositary Receipt Programs

American Depositary Receipts, or ADRs, facilitate trading of foreign securities in U.S. markets by creating instruments that represent ownership of a foreign company’s equity or debt securities. Use of ADRs can significantly broaden a foreign company’s investor base, as they provide investors in the U.S. with a means to access securities listed on foreign exchanges.

Increasingly, foreign companies are employing ADR programs to go public in the U.S., enabling them to tap into the large and sophisticated U.S. institutional investor base both to raise money to grow their businesses and to increase liquidity for their existing stockholders.

U.S. depositary banks issue ADRs to evidence ownership of underlying securities that they hold as custodian. ADRs are denominated in U.S. dollars and are traded like other domestic securities, either on an exchange or over-the-counter. Depositary banks periodically transfer any dividends or distributions from the securities to ADR holders in U.S. dollars. Foreign companies have flexibility as to the number of securities underlying each ADR, with ADRs representing anything from a fraction of an underlying security to several underlying securities. ADR holders are generally able to access the underlying securities, either through cancellation of the ADR facility or by request.

Foreign companies and U.S. investors benefit from many advantages that ADRs offer, including:

  • Expanded access to the deep institutional investor base in the U.S.;
  • Favorable pricing and valuation recognition as a result of increased analyst coverage and higher levels of liquidity in the U.S.;
  • Minimum impact to local administrative, governance and registrar procedures to which the foreign company is subject in their home country; and
  • Ability to use ADRs as a currency for M&A, as well as for employee retention.

The benefits to issuers and investors are highlighted in the table below. A FAQ on ADR programs can be viewed here.

Issuer Investor
  • Increased investor access and valuation
  • Shareholder diversification
  • Enhanced visibility and liquidity
  • Flexibility for raising capital
  • Continuity of regulatory regime, with no change to current home country administrative, governance and registrar procedures
  • Increased research coverage
  • Quotes and dividend payments in U.S. dollars
  • Familiar trade, clearance and settlement procedures
  • Ability to acquire the underlying foreign securities directly upon cancellation or request
  • Portfolio diversification
  • Investment in U.S. securities, rather than foreign securities