2. Should ADRs be added to your portfolio ?

What Are The Different Types of ADRs?

There are three main types of ADRs and as we will see, it’s important to pay attention to their distinctions.

  • Level 1 ADRs
  • Level 2 ADRs
  • Level 3 ADRs
  • “Unsponsored” ADRs

Level I ADRs

These ADRs are the most basic type with the least amount of oversight by the SEC. Most companies issuing level 1 ADRs either don’t pass the SEC’s minimum qualification or don’t want to deal with the hassle. They only trade on over-the-counter markets (OTC) and foreign companies can’t raise capital with them.

Some smaller foreign companies may issue Level 1 ADRs as a means of engaging U.S. investors’ interest in their business. Other companies have abused the lax SEC oversight, as we will discuss below.

Level II ADRs

Level II ADRs are similar to Level I, but there is more SEC scrutiny involved. Due to the increased regulatory requirements, these ADRs often have more visibility and trading volume. Companies can’t raise capital with Level II ADRs and trade on the OTC markets as well.

Level III ADRs

Level III ADRs are of the highest quality. They trade on the major exchanges and prior to listing, the foreign company must submit all of its audited documentation to the SEC for review.

Essentially, these ADRs should be as scrutinized as any regular stock. Additionally, foreign companies can tap into American markets for capital raises through Level III ADRs.

“Unsponsored” ADRs

While most ADRs are known as “sponsored ADRs,” there is a minority that falls under the category of “unsponsored.” These are ADRs issued by banks without the participation, and in some cases, the permission of the foreign company.

The banks assume the costs and handling of the original shares, then list those ADRs for their own business rather than working with the foreign company directly. Unsponsored ADRs are inherently more speculative and, by law, can only trade on the OTC markets. Additionally, companies cannot raise money through them and the ADRs do not possess any voting rights.

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