Sponsored Level I. This is the lowest level of ADR, and they're only traded over the counter. Level I ADRs have the fewest reporting requirements and are typically used for securities where the foreign company doesn't want its stocks listed on U.S. exchanges. The company must be listed on an exchange in its company of origin, however.
Sponsored Level II. With a Level II ADR, the company that's underlying the security has to file a registration statement with the U.S. Securities and Exchange Commission (SEC), as well as comply with GAAP or IFRS standards. They can't be used to raise capital, but they can be traded on normal U.S. stock exchanges.
Sponsored Level III. This is the most prestigious level of ADR possible, but it also comes with the most reporting requirements. At Level III, the foreign companies underlying the ADR can issue a public offering of their ADR as a way to raise capital through U.S. exchanges but are subject to significantly more scrutiny.
Benefits and risks of American depositary receipts
There are several benefits and risks associated with ADRs, depending on the level of the ADR. For example, ADRs that are traded on public exchanges have much the same reporting requirements as any other publicly traded company, which can give an investor a really clear idea of what they're buying. Not all ADRs are listed, however, and many are only available on the over-the-counter market, making them much riskier.
Although there can be tax advantages for dividends, these can be offset by quarterly or annual pass-through fees charged by the institutions that issue them. These often consist of both custody fees and processing fees.
ADR investors should also be aware that ADR programs can be terminated by the issuing bank, requiring an investor's position to be liquidated or converted into ordinary foreign shares.