American Depositary Receipt (ADR)

There are three levels of ADR programs. Level I ADRs trade on the OTC market and have minimal SEC reporting requirements — the company only needs to file an exemption form. Level II ADRs are listed on a major U.S. exchange and must file an annual report (Form 20-F) with the SEC. Level III ADRs also list on a major exchange and can raise capital by issuing new shares to U.S. investors through a public offering.

The depositary bank that issues ADRs acts as a custodian and transfer agent. It handles dividend conversions from foreign currency to U.S. dollars, processes corporate actions like stock splits, and provides tax documentation. Major depositary banks include BNY Mellon, JPMorgan, and Citibank.

ADR investors are exposed to currency risk because the underlying shares are denominated in a foreign currency. If the foreign currency weakens against the U.S. dollar, the ADR's value may decline even if the underlying stock price is unchanged. Additionally, many countries withhold taxes on dividends paid to foreign investors, though U.S. tax treaties may reduce these withholding rates.

ADRs are a crucial tool for international diversification. They make it easy for U.S. investors to invest in foreign companies without opening overseas brokerage accounts or dealing with foreign exchanges and settlement systems. This accessibility has helped millions of investors build globally diversified portfolios.

Understanding ADRs is especially important as global markets become increasingly interconnected. Some of the world's most innovative and profitable companies are headquartered outside the United States, and ADRs provide the most convenient way for American investors to participate in their growth.