The flexibility of the depositary receipt structure is one of its most attractive characteristics, and a variety of alternatives have evolved to satisfy the needs of issuers.
ADRs: In the United States, issuers have several types of programs from which to choose: listed on a national stock exchange or traded over-the-counter; available to retail or institutional investors; and designed to expand the issuer's shareholder base or raise capital.
One of the requirements for issuing ADR is that the issuing firm has to follow the US Securities and Exchange Commission's (SEC) guidelines on disclosure. Depending on the level of disclosure and whether the firm is using the ADR to raise new equity, these ADRs are classified into three levels. Level I ADR is the least expensive to issue and has relatively less stringent disclosure requirements, but can only be traded in the over-the-counter (OTC) market in the United States and cannot be used to raise new capital. Level II ADRs are allowed to trade in organized exchanges in the United States, but the issuing foreign firm has to undergo full disclosure requirements as stipulated by SEC and cannot be used to raise new capital. With a Level III ADR, the issuing firm can raise new capital and list the ADR in an organized exchange in United States, but has to provide to the SEC financial statements prepared according to the US Generally Accepted Accounting Principles (GAPP) or submit a detailed summary of the differences in financial reporting between home and the United States.
Rule 144 A market: A foreign firm that would like to raise capital without meeting the full disclosure requirements can do so by using private placements under Rule 144A of SEC. These private placements have a limited secondary market; only Qualified Institutional Investors5 (QIBs) are allowed to trade these private placements. One of the other developments in the 144A market is the creation of Global Depositary Receipts (GDRs). Some of the US private placements are issued for global investors and then traded in markets outside the United States, predominantly
5 A QIB is defined as a firm that has at least US$100 million available for investments. Currently there are 4,000 QIBs and they trade on the 144A placements using the closed electronic system called PORTAL (Private Offerings, Resales and Trading through Automated Linkages).
Exhibit 13.2 Salient features of different types of DR offerings
Listed on NYSE, AMEX or NASDAQ
Broaden shareholder base
Level 1 unlisted OTC
Level 2 listed Level 3 listed Rule 144 A
Yes Yes in London and several German exchanges. These DRs for sale outside the United States are issued under Registration S provision, and can be complementary to a 144A issue in the United States. One of the major differences between ADRs and GDRs is that these GDRs are usually listed in a foreign exchange, but cannot be bought and sold by US citizens.
GDRs: Issuers who look beyond the US equity markets to raise capital typically do so using a GDR, which commonly combines two complementary structures: the Regulation S (Reg S) depositary receipt and the American Depositary Receipt (ADR). The most frequently utilized structure is a RegS/Rule 144A DR, which raises capital in the European markets (typically London or Luxembourg) and through private placement with qualified institutional buyers in the United States. The inherent flexibility of GDRs is one of its most attractive characteristics, however, and Reg S DRs can be combined with either Level 1 (unlisted) or Level II/II (listed/listed with IPO), depending upon the issuer's needs.
• Issuers should carefully assess their business goals in order to select the right depositary receipt structure. Consider whether the objective is to
• Expand the investor base or raise capital.
• Increase liquidity and recognition in the United States or in other markets.
• Attract retail or institutional investors.
• The salient features of different types of DR offerings are presented in Exhibit 13.2.
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