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Foreign private issuers<br />
9.1 American depositary receipts<br />
J.P. Morgan (Depositary Receipts Group)<br />
The tranche of shares that foreign issuers<br />
sell to U.S. investors when going public<br />
typically takes the form of American<br />
depositary shares, commonly known as<br />
ADRs. These instruments subsequently<br />
trade just like ordinary shares on the<br />
NYSE, another U.S. stock exchange or in<br />
the over-the-counter market.<br />
(a) Advantages for issuers<br />
For foreign issuers, going public in the<br />
United States has numerous advantages<br />
beyond an initial capital raising.<br />
Ready access to world’s largest equity<br />
market: A U.S. listing affords ready access<br />
to the world’s largest equity market,<br />
facilitating future capital raising through<br />
follow-on, secondary and rights offerings.<br />
Diversification of shareholder base and<br />
valuation support: By going public in<br />
the United States and maintaining a<br />
listing there, U.S. investors can more<br />
easily invest in a foreign issuer. For<br />
some foreign issuers, a U.S. listing<br />
results in higher corporate governance<br />
standards, further increasing its<br />
appeal. Attracting U.S. investors helps<br />
broaden and diversify a foreign issuer’s<br />
shareholder base, reducing the issuer’s<br />
dependence on investors in its home<br />
market for its capital needs. Moreover,<br />
the incremental demand that U.S.<br />
investors can bring to bear on a<br />
foreign issuer’s shares helps drive<br />
its market valuation—and hence<br />
lowers its cost of capital—over the<br />
long term.<br />
U.S. acquisition currency: Because the<br />
ADRs used to raise capital in the United<br />
States are dollar denominated, they can<br />
eventually be used to make stock-based<br />
acquisitions of U.S. companies. Generally,<br />
U.S. shareholders are more likely to accept<br />
ADRs than foreign shares.<br />
Stock-based compensation for U.S.<br />
employees: Being dollar denominated,<br />
ADRs allow foreign issuers to establish<br />
stock purchase and option plans for<br />
U.S.-based employees. Absent these plans,<br />
foreign issuers can be at a significant<br />
disadvantage when competing for talent<br />
in the U.S. labor market. ADRs also allow<br />
for the creation of direct purchase and<br />
dividend reinvestment plans, which can<br />
enhance the investment appeal of a foreign<br />
issuer.<br />
Enhanced corporate visibility in the<br />
United States: Finally, by going public<br />
in the United States, a foreign issuer<br />
can increase its visibility not just in the<br />
U.S. investment community, but in the<br />
commercial and consumer markets that<br />
make up the world’s largest economy.<br />
Many U.S. citizens own equities and<br />
tend to follow publicly traded companies.<br />
Consequently, a U.S. listing can raise a<br />
foreign issuer’s corporate profile as well as<br />
capital.<br />
The effectiveness of ADRs is why 162<br />
foreign issuers have used this instrument<br />
to raise over $44 billion in capital (IPOs<br />
only) in the United States during the past<br />
decade alone. 1 As of December 31, 2012,<br />
262 foreign issuers had ADRs listed on<br />
the NYSE. 1<br />
Capital raised using ADRs, by<br />
region—2002 to 2012 ($MM)<br />
$11,552<br />
$3,874 $29,082<br />
65% – APAC<br />
9% – EMEA<br />
26% – LATAM<br />
Source: J.P. Morgan, Bloomberg, other depositary<br />
banks, stock exchanges, January 2013<br />
1<br />
Source: J.P. Morgan, Bloomberg, other<br />
depositary banks, stock exchanges, January 2013.<br />
Capital raised using ADRs, by<br />
sector—2002 to 2012<br />
13% – Communications<br />
28% – Technology<br />
22% – Financial<br />
13% – Industrial<br />
6% – Energy<br />
8% – Consumer, noncyclical<br />
7% – Consumer, cyclical<br />
3% – Basic materials<br />
Source: J.P. Morgan, Bloomberg, other depositary<br />
banks, stock exchanges, January 2013<br />
(b) Advantages for investors<br />
The effectiveness of ADRs for raising<br />
capital in the United States is due to their<br />
appeal to investors—these instruments<br />
are a convenient way to directly invest in<br />
international companies while avoiding<br />
many of the risks typically associated with<br />
securities held in other countries. For U.S.<br />
investors, ADRs:<br />
• are easier to purchase and hold than<br />
a foreign issuer’s underlying ordinary<br />
shares;<br />
• trade easily and conveniently in U.S.<br />
dollars and settle through established<br />
clearinghouses;<br />
• pay dividends in U.S. dollars;<br />
• eliminate local custody arrangements;<br />
and<br />
• provide notifications of corporate<br />
actions in English.<br />
(c) Establishing an ADR program<br />
ADR structures: A Level III ADR program<br />
listed on the NYSE (or on another U.S.<br />
stock exchange) allows a foreign issuer to<br />
realize all of the aforementioned benefits<br />
of ADRs, including raising capital from<br />
98 NYSE IPO Guide