DEFINITION of 'Sponsored ADR'

An American depositary receipt (ADR) issued by a bank on behalf of the foreign company whose equity serves as the underlying asset. A sponsored ADR creates a legal relationship between the ADR and the foreign company, which absorbs the cost of issuing the security. Unsponsored ADRs can only trade on the over-the-counter market, while sponsored ADRs can be listed on major exchanges.

BREAKING DOWN 'Sponsored ADR'

Foreign companies use ADRs in order to tap into capital markets abroad. Investors who may typically focus on domestically listed companies are given the opportunity to obtain returns from higher growth emerging markets, such as those in China or India. Despite being listed in America, a company using a sponsored ADR will still have its revenue and profit denominated in its home currency.

There are three levels of sponsored depository receipts. A Level I sponsored ADR can only be traded over-the-counter (OTC) and cannot be listed on a U.S. exchange, but is easier to set up for foreign companies, does not require the same disclosures and does not require the company to abide by GAAP. Level II sponsored ADRs can be listed on an exchange and are thus visible to a wider market, but require the company to comply with the SEC. Level III sponsored ADRs permit the company to issue shares to raise capital, but require the highest level of compliance and disclosure.

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RELATED FAQS
  1. What factors must a company consider before establishing an American Depository Receipt ...

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    Understand the difference between sponsored American depositary receipts categorized within Level I, II or III. Read Answer >>
  3. How are American Depository Receipts (ADRs) exchanged?

    Learn specifics about American depositary receipts, including how they are exchanged and some of their advantages and disadvantages. Read Answer >>
  4. Why are big foreign companies considering delisting their American depositary receipts?

    American depositary receipts (ADRs) were developed to give investors an easier way to invest in foreign companies. An ADR ... Read Answer >>
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  6. What parties are involved in the creation of an American depositary receipt?

    An American depositary receipt (ADR) is a legal certificate issued by a recognized U.S. bank that represents a specific number ... Read Answer >>
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