american depository receipts

[I wrote this in 1999-2000 as my law school thesis]

American Depository Receipts
by Travis A. Wise
Introduction
The 1990's have presented historical growth opportunities in the United States equity markets.  Since January 1, 1989 the Dow Jones Industrial Average has risen 6,568 points from 2,432 to near the 9,000 mark.[1]  This record growth of 370% in one decade has encouraged both private and industrial investors to place more of their assets into equity markets, in an effort to maximize their growth potential.  While increasing their equity holdings, many investors desire to diversify their portfolio with international equities.  This demand for a medium for international investment, as well as the attractiveness of the United States equity market to foreign private companies, was the impetus for the development of the American Depository Receipt (ADR).
Foreign private companies are able to issue shares of stock on the U.S. equity markets using ADRs.  This allows U.S. investors to easily purchase stock of foreign companies, while allowing foreign companies to benefit from the vast shareholder base and liquidity of U.S. markets.  ADRs are regulated by the United States Securities and Exchange Commission (SEC).  These regulations assure investors that the securities which they are buying are regulated according to a standard with which they are familiar, regardless of the country from which the security originated.  These regulations imposed by an inherently non-international body, such as the SEC, have a broad and significant impact on the economy and stability of foreign countries' economies and their business transactions.
This paper examines the expanding role of ADRs as a tool for investment, and how the SEC regulation of ADRs affects international business transactions, to the point of being a de facto international regulatory body.  In Part I, we examine the nature and characteristics of ADRs, as well as their history as an investment device. In Part II, we examine the internal structure of the ADR programs.  In Part III, we examine the specific regulatory requirements imposed on ADR programs by the SEC.  Finally, we analyze how the SEC regulations affect the world's economies and businesses, and suggest methods for improving the efficiency of ADR regulation.
I.          What is an American Depository Receipt
An ADR is a negotiable security, quoted in U.S. dollars and traded freely on domestic exchanges, including the New York Stock Exchange (NYSE).  To the investor, there is no difference between purchasing an ADR and shares of a domestic corporation's stock, except for the country of origin of the shares underlying an ADR.[2]  Unlike a share of stock, however, an ADR is issued by a U.S. depository bank, such as Citibank or the Bank of New York.  The ADR represents a specified number of underlying shares of a foreign corporation's equity, which is in the bank's possession.[3]
Foreign companies use ADRs to sell shares of equity in the U.S. market, thereby leveraging access to U.S. investors with the liquidity and marketability of the domestic equity markets.[4]  Foreign private issuers are able to broaden their shareholder base, particularly among institutional investors, and tap into capital outside of their home markets.[5]  Additionally, the markets provide ADR issuers with the advantages of:  (1) improved efficiency; (2) reduced transaction costs, e.g.; (3) reduced disclosure requirements; (4) standardized reporting and pricing; (5) public trading without SEC registration; and (6) protection and services of a depository bank.[6]
Simultaneously, domestic investors are able to benefit from ADRs as a tool for diversification.  Investors are able to purchase international securities at a low transaction cost, with the protection and standardization of the regulations imposed on the issuance of the shares by the SEC and the individual exchanges.  Institutional investors who may otherwise not be permitted to invest in foreign securities can diversity their holdings using ADRs, without unnecessarily risking clients' money with unregulated securities.[7]
The demand for ADRs has grown at a rate of 30% to 40% annually. Between 1990 and 1996, the volume of ADR trading increased exponentially from $75 billion to $375 billion per year.[8]  The present volume of ADR trading represents over 10% of the total volume on the NYSE.[9]  Most of this growth is generated by institutional investors, purchasing ADRs as a means of global diversification.[10]  There are presently more than 900 ADRs, issued by companies in over 40 countries. The majority of the ADR listings continue to come from British issuing companies.  As of 1996, these companies represented 20% of total the number of ADRs, followed by Australia with 15% and Japan with 14%. In the same year, Britain had 25% of the trading volume, Mexico had 20%, and the Netherlands had 14%.[11]  Nearly one-third of the ADR programs are traded on the major U.S. equity markets, with the remaining traded over-the-counter.[12]
A.            Characteristics of ADRs
While ADRs operate and trade in the same manner as any other security on domestic equity markets, there are important differences.  The value of an ADR fluctuates based on the value of the underlying shares, as listed on the foreign market, as well as the exchange rate between the U.S. dollar and the currency of the issuing country.[13]  ADRs are listed and pay dividends in U.S. dollars, and benefit from a competitive currency exchange rate for the U.S. investor.  These characteristics make ADRs more attractive than purchasing foreign shares of the same company directly from the company's home equity market.  Finally, since trades are settled domestically, there is a high rate of successful settlements .  ADR purchasers benefit from low or no custody fees. [14]
It is the depository bank that provides these benefits.  Located in the U.S., the depository bank acts as custodian and issuer of the ADRs, as well as administrator of the currency exchange and dividend distribution.[15]  The bank also handles the proxies, tax reporting and regulatory filings for the issuance of the shares.[16] It receives a management fee for these services, either from the shareholders or the issuing company.[17]  In addition to providing services to the investors, the depository bank also helps the issuing companies market their shares to the domestic investors, and provides the issuing company with feedback on the ADR program.[18]
Investors wishing to purchase ADR shares will contact their broker and request a certain number of shares.  The broker then may either purchase outstanding ADRs on the domestic markets, or on the foreign markets if no shares are available locally.  The broker then deposits the foreign shares with a depository bank, which in turn issues the ADRs to the broker.  ADRs can then be freely traded just like any other security.[19]   The sale of ADRs work in the reverse:  The shares can be sold either on a domestic market, or if no buyer can be found, the broker will cancel the ADRs.  Cancellation causes the depository bank to release the shares back into the foreign market, where they can be purchased by a foreign broker.[20]
B.             History and Development of ADRs
ADRs were created in 1927 when U.S. investors wanted to purchase foreign equities, especially those from Britain.  The British government overseas registration of British shares without the involvement of a British transfer agent.  As a way around this restriction, U.S. banks established agencies in foreign countries, such as Britain, who would take ownership of the British shares and then issue a receipt to the U.S. investor.  The legal relationship between the U.S. investor and the depository bank is that of a trust, which evolved into the modern ADR program.[21]  Thereafter, U.S. investors were either prohibited from foreign share ownership or they were deterred from making foreign investments by the complexities and expenses involved in direct foreign share ownership.  Investors were also often apprehensive about investing in a market whose regulatory system was unknown to them, and often not as progressively developed.  ADRs presented a medium which facilitated the trading, clearing, settlement and regulation of owning foreign securities in the U.S.[22]
As an investment and capital-raising vehicle, ADRs have experienced phenominal growth and success. For example, in 1993, Glaxo, a British company, saw over 275 billion shares traded on the NYSE, making it the most actively traded ADR on the exchange.  Over 350,000 domestic investors own shares of Glaxo, providing the company with market capitalization of approximately $20 billion dollars.  Because of the liquidity and capitalization of the domestic markets, it is not unusual for a foreign company to be more actively traded on the domestic markets than on the markets in their home country.[23]
In order to accommodate and regulate the increase in demand for ADRs, the SEC established a tri-level structure.  Most foreign company issuers begin with a Level I program, and after establishing recognition and marketability, convert their programs to Level II or Level III. This conversion allows companies to further enlarge their shareholder base and raise capital through an Initial Public Offering, or IPO, and increases the visibility and growth of the program. [24]  More recently, companies have begun to bypass the first two levels and directly implement a Level III program, which permits the raising of capital, to more rapidly benefit from the favorable market conditions of the 1990's.[25]
II.        The ADR Program Structure
There are two main categories of ADR programs:  Unsponsored and sponsored. Both categories require that the ADR program be registered with the SEC.  However, the degree of disclosure required for registration is relative to the categorization and level of the program.[26]
A.            Unsponsored
An unsponsored ADR program is one which is created by the depository bank in response to demand by domestic investors.[27]  This is an inexpensive and uncomplicated way for a foreign company to issue shares in the U.S., with minimal SEC compliance and reporting.  However, trading is limited to the OTC market.[28]  In order to create an unsponsored ADR, the depository bank and the foreign company together apply under Rule 12g3-2(b) to the SEC seeking an exemption from the reporting requirements of the Securities Exchange Act of 1934.  When this exemption is granted, the depository bank files a Form F-6 report in accordance with the Securities Act of 1933.  This report is a limited (but still lengthy) disclosure statement, which registers the depositary shares.  Once this report is properly filed, the depository bank can place ADRs for sale to investors on the OTC market.[29] 
The registration of an unsponsored ADR program places the burden of ongoing reporting and disclosure on the depository bank, not the issuing company. [30]  Holders of unsponsored ADRs generally bear the costs of the depository bank's expenses, in the form of fees transaction fees, or as a deduction from dividend payments.[31]
The unsponsored ADR program has become unpopular and is now generally obsolete because the program is subject entirely to decisions made by the depository bank with no control by the foreign company.  Further, investors tend to disfavor unsponsored ADR programs because the trading is limited to the OTC market, and not permitted on the more popular NYSE and NASDAQ markets.[32]
B.            Sponsored
The sponsored ADR program is more popular.  This program is initiated by the foreign company, and then maintained and administered by a depository bank, according to a deposit agreement between the bank and the company.  Foreign companies prefer sponsored programs because they retain a greater degree of control over the program, compared to an unsponsored program.[33]  Investors prefer sponsored programs because of the enhanced reporting and disclosure requirements on the company, and opportunity for greater liquidity.[34]  Additionally, unlike with an unsponsored program, a sponsored program does not generally charge the end purchaser a fee for its services, which is normally paid for by the issuing company.  Therefore the end purchaser receives a higher return on their investment.[35]
The sponsored ADR programs consists of three levels. The higher the level of the program, the more attractive and more visible the shares will be to domestic investors.  Accordingly, the registration and disclosure requirements also increase with each level.[36]
        1.            Level I
A foreign company wishing to establish an ADR program typically starts with a Level I program.  This is the most rapidly growing segment of the ADR system, mainly because it is the easiest and most cost efficient means for issuing shares. [37] A Level I program allows the issuer to establish a core group of domestic investors, without overly burdensome SEC regulatory and reporting requirements.  This results in relatively low setup costs.  Because the foreign company initiates the ADR program, the company retains control over the issuance of shares through the depository bank.  The depository bank, in turn, administers the program for the company. 
Despite these advantages, there are two major disadvantages:  First, the shares can only be listed on the OTC market, as listings on the more popular NYSE and NASDAQ domestic markets are not permitted at this level.[38]  Second, companies are not permitted to raise capital through this program.[39]  However, once the Level I program is established, the company can convert its program to a Level II or Level III program, which offers increased marketability and liquidity, as well as opportunities for raising capital.[40]
To register a Level I program, the foreign private issuer must file a Form F-6 report to register the foreign shares held by the depository bank.[41]  The program can gain exemption from the registration and reporting requirements of the SEC Exchange Act by complying with Rule 12g3-2(b), which basically requires the disclosure of that which has already been disclosed in the issuer's home country.[42]
         2.            Level II
A Level II program provides foreign issuers with increased visibility and enhanced liquidity on the U.S. markets, without the cost or burden of a public offering, which is not permitted at this level.[43]  Level II programs are more attractive to U.S. investors than Level I because Level II programs are fully registered with the SEC, and therefore may be listed on one of the three major U.S. exchanges: NYSE, AMEX, or NASDAQ.[44]
The SEC requires that a Level II program comply with a greater degree of registration and reporting requirements.  Specifically, the foreign private issuer must file an F-6 report and annual 20-F Form reports.[45]   The 20-F Form requires the submission of the company's annual report, [46] which must be prepared in accordance with the United States Generally Accepted Accounting Principals (U.S. GAAP) to the extent that there are differences in major line items between the balance sheet and the income statement.[47] These additional reporting requirements make a Level II program more expensive for the company than a Level I program, but the value of the increased marketability, liquidity and respect of analysists and investors often outweighs the expense.  The added registration requirements benefit the domestic investors by allowing them to monitor the foreign company, it's program and the shares in the U.S.[48]
         3.            Level III
Level III programs are similar to those at Level II, with the exception that a Level III program permits the issuing company to raise capital through a public offering of the shares on the U.S. markets, either the NYSE, AMEX, NASDAQ, or the OTC exchanges.[49] While there are substantial set-up costs and requirements, the benefit of access to capital from a broad investor base on the most liquid U.S. securities market will likely provide a foreign company with more capital than it could raise on its home equity market.  Once the initial public offering has been completed, the program is maintained as a listed Level II program.[50]
The listed shares must be registered under the 1933 Securities Act and the foreign company must comply with the reporting requirements under the 1934 Exchange Act.  The reports must be in accordance with the U.S. GAAP.  Additionally, the company must maintain ongoing reporting and disclosure requirements by filing F-1, F-6 and 20-F form reports.[51]
            4.         Rule 144a Restricted
The final level of sponsored programs is the Rule 144a Restricted ADR program. Enacted by the SEC in 1990, Rule 144a governs the trading of shares under this program, where foreign companies are permitted to raise capital in the U.S. by selling ADR shares to a restricted class of purchasers.[52]  The program is not significantly different from a Level III program, however the 144a program can be implemented in less than half the time required for a Level III program.  The administrative costs of a 144a program are lower, and there are substantially fewer SEC registration requirements than with a Level III program.[53]  This savings of time and money makes capital raising in the U.S. cost competitive to raising capital in the European markets, which are less regulated and therefore also require less cost and start-up time.[54]
However, these advantages are not without restrictions.  Rule 144a shares can only be sold to and traded between Qualified Institutional Buyers (QIBs).[55] QIBs are institutional investors who own or invest at least $100 million in securities, or brokers with $10 million in security investments[56] of an unaffiliated entity.[57]  QIBs can include insurance companies, investment companies, business development companies, employee benefit plans, investment advisors, banks, savings and loan associations, and a few other types of institutional investors.[58]  There are more than 4,000 QIBs, which results in the market for 144a shares being less liquid than the unrestricted domestic equity market.[59]  The prohibition of resale of shares to non-QIBs expires after three years, and the shares can then be traded on the broader Level I OTC market.[60] 
In addition to these requirements, the program offering can be made only so long as the shares are not simultaneously listed on a domestic exchange, i.e. on the NYSE or NASDAQ through a Level II or Level III program, or issued by an investment company.[61]  A private listing service known as Portal[62] trades 144a shares.  The NASD administers Portal.[63]  The seller of the shares must take reasonable steps to ensure that purchaser is aware of seller's reliance on the exemption from the registration requirements of the Securities Act.[64]  Rule 144a also requires that the security holder and holder's prospective purchaser must have the right to obtain from foreign private issuer, at the request of the holder, a reasonably current brief statement of the issuer's business, products and services; and the issuer's most recent balance sheet, profit and loss statements, retained earnings statements, and similar financial statements for the prior two years.  This information need not be prepared in accordance with U.S. GAAP.  This regulation does not apply if the program is exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, or a foreign government.[65]
Many of the registration and reporting requirements which are waived in the 144a program, such as requirements for periodic disclosure of prospectuses and financial reporting, were designed to protect individual investors.[66]  This results in a lower degree of information and support to investors from the issuing company, although companies supply an offering memorandum that describes the company and other relevant factors in order to gain respect of domestic investors.[67]  However, the restriction on trading to and between QIBs[68] ensures that the market participants have the internal resources to perform their own research of the issuing companies.[69]
Issuing companies use 144a programs to issue shares either as a stepping stone into the U.S. market, or because they are unable to comply with the SEC regulations for Level I, II or III offering programs.[70]  Another option available for issuing companies is to simultaneously list shares with a Level-I program and a 144a program.  This allows QIBs to obtain increased information about the companies, while making the listing more efficient by issuing under the 144a program's relaxed rules for issuing to QIBs. 
In 1992, the 144a market was worth about $3.8 billion.  In 1993, the market collapsed, as a result of investors' preference for investing in companies who disclose more information than is required for a 144a offering.  By 1994, the market was worth only $500 million ' a fraction of its peak, and has not been resuscitated since.[71]
III.            Detailed Registration Requirements of ADRs
The SEC was created as an agency of the U.S. government, charged with creating and enforcing federal securities laws in order to protect investors.  These laws govern securities offerings, trading, and persons dealing in the securities markets by requiring certain disclosures by  issuers making public offerings.[72]
The philosophy of the SEC towards the issuance of ADRs is twofold:  First, domestic investors should have the benefit of receiving the same information about their investments, regardless of the origin of the shares.  Second, the interests of the investing public, such as diversification, would be best served by providing the opportunity for investment in foreign securities.  In order to accomplish these goals, the SEC maintains similar requirements of disclosure for both foreign and domestic issuers.[73] 
The issuance and trading of ADRs is regulated by two principal bodies of law.  The first, the Securities Act of 1933, 15 U.S.C. 77(a)-77(aa), governs public distributions of shares by a foreign private issuer and its domestic affiliates.  The second regulatory law, the Exchange Act of 1934, 15 U.S.C. 78(a)-78(ll), governs secondary trading of ADRs in U.S. capital markets.[74]  Under these laws, ADR programs must be registered with the SEC before they may be publicly distributed within the U.S.  Without this registration, it is unlawful for any person to sell or deliver shares of an ADR. [75]
In addition to these federal laws, state regulations may govern the issuance of securities.  Issuers can often comply with most if not all of the state regulations by publishing certain standard financial data, thus providing adequate disclosure, and eliminating the need for registration in individual states.[76]  Further, listing securities on a domestic stock exchange exempts issuers from the need to comply with state regulations.[77] 
A.            Form F-6
Form F-6 is used to register the depository shares of the issuing company's stock, which will be held by the depository bank.  In order to register the shares, the following conditions must be met:  (1) The holder of the ADR must be able to withdraw the deposited shares at any time; (2)  The deposited shares must be registered with or exempt from the Securities Act; and (3) as of the date of the filing of the Form F-6, the foreign private issuer must be a reporting company under the Exchange Act, or exempt from those reporting requirements.[78]
The registration statement contains two parts.  The first part lists the information that is required to be disclosed in the prospectus, and requires disclosure of certain information regarding the depository and its obligations; the depository mechanism; the rights of the ADR holders; and the terms of the deposit of shares.[79]  The second part of Form F-6 describes the filings and undertakings made by the depository in pursuance of registration.[80]
The form requires ongoing obligations of disclosure on the part of the depository bank.  Specifically, the depository must supply the SEC, on a semi-annual basis, with information concerning the number and registration of shares issued, and the name of each dealer known to the depositary to have deposited shares against the issuance of ADRs during the period covered by the report.  The depository bank must supply fee information, and make available at its domestic office any reports that are generally made available to the holders of the underlying securities by the foreign private issuer and that are received from the foreign private issuer of the deposited shares by the depositary in its capacity as the holder of the deposited shares.  Interestingly, these disclosures do not necessarily have to be in English.[81]
B.            Forms F-1, F-2, F-3, F-4
Once the depository shares have been registered with a Form F-6, the foreign private issuer must then register the securities under the Securities Act of 1933.  There are several different forms used for this purpose, depending on the characteristics of the offering, and of the issuing company.  All of the financial statements must be prepared in accordance with the GAAP of the issuing country.  Additionally, the statements must be reconciled with U.S. GAAP requirements to the extent that there are any major contradictions between the balance sheet and income statement.  Revenue information must to be categorized by activity and geographic markets, unless the total operating profit from each market materially differs from their respective contributions to total sales and revenue, in which case a narrative disclosure is required.  Compensation of directors and officers must be disclosed to whatever specific degree that information has been made public, but a minimum requirement is that the aggregate compensation be disclosed.  Information regarding transactions with management must be disclosed to the extent that that information has already been made public.[82]
Form F-1 is the default form used to register the deposited shares for an initial public offering of ADRs, when the F-2, F-3 and F-4 Forms do not apply.  The Form requires voluminous disclosure of information from the issuing company and the depository bank in the form of a separate report.[83]
Form F-2 is used to register deposited shares when the registrant already has shares registered pursuant to the Act, and is in good standing with the SEC.  Those shares must either have been continuously registered for at least the preceding three years, or have an aggregate market value of $75 million or more.  The form requires all of the specific information required by Form F-1, as well as voluminous financial disclosures and filings related to the shares already registered.[84] 
Form F-3 is used to register deposited shares when the registrant already has shares registered pursuant to the act, and in good standing, for at least the previous 12 months, and the securities to be offered are either valued at over $75 million; investment grade securities; or securities being resold by a third party.  The disclosure requirements are substantially similar to those of the Form F-2.[85]
Form F-4 is used to register deposited shares resulting from a merger, exchange offer, consolidations, or other combinations of securities.  The disclosure requirements are similar to those of the Form F-2, with additional information to be disclosed about both companies and the merger.[86]
C.            Ongoing Disclosure Requirements
The SEC requires that certain classes of issuers maintain ongoing detailed disclosure of specific information.  This class includes those programs registered under the Securities Exchange Act of 1934, i.e. Level II and Level III ADR programs.[87]  This class also includes programs whose securities will be securities will be listed on a U.S. stock exchange, or whose assets exceed U.S.$1 million and 500 shareholders.[88]
Each fiscal year, a 20-F Annual Report must be filed with the SEC.   The report is extensive, with the instructions for disclosure being over fifty pages in length.[89]  The information required closely resembles that which is required to be disclosed by domestic security issuers.  The report need not strictly comply with the U.S. GAAP, but must be reconciled to the U.S. accounting and disclosure requirements.[90]
A 10-Q Quarterly Report must be filed at the close of each of the first three quarters of the fiscal year.  The report must include detailed information and analysis about the company's financial condition, legal proceedings, changes in securities, defaults on debts, and voting of shareholders.[91]
A 6-K Current Report must be filed promptly after the information required by the form has been (1) made public pursuant to a law of the home country; (2) publicly filed with a stock exchange on which its securities are traded; or (3) distributed to its shareholders.  The information required by the form is that which is regarding material changes in business, management or control; acquisitions or dispositions of assets; financial conditions of the company; legal proceedings; changes in securities; votes by shareholders; and transactions with directors, officers or principal shareholders.  Of this information required to be disclosed, only that which is in the form of press releases and all communications distributed directly to shareholders need be translated or summarized in English.[92]
D.            Rule 12g3-2
Rule 12g3-2 provides an exemption to qualified programs from the ongoing disclosure requirements of the Securities Exchange Act of 1934.  Issuers qualify if they have at least 300 shareholders who are U.S. residents; have total assets of less than U.S.$5 million and not be listed on the NASDAQ; and disclose certain information to the SEC on an ongoing and updated basis.  They must disclose that which has been disclosed to persons or agencies in the issuer's home country or securities holders, or filed with a stock exchange on which its securities are traded.  This information must be in English, and include that which is material to an investor making an investment decision, as well as the number of shareholders in the U.S., the amount of securities held by residents in the U.S., details about the most recent public offering of shares, and press releases and other communications or materials distributed to the shareholders.[93]
E.            Exchanges
Issuers must comply with the listing and reporting requirements of each individual exchange.[94] Under the Securities Exchange Act of 1934, the New York Stock Exchange requires filing of Form 20-F, a minimum of 5,000 worldwide shareholders, $100 million in aggregate market value of publicly held shares, $100 million in net tangible assets, and a $100 million total in pre-tax income for the last three years combined.[95]
IV.            Analysis
            As can be seen from the preceding review of SEC registration requirements, there is an immense level of regulation imposed upon foreign companies desiring to offer shares to domestic investors.  While there are less-regulated markets in the world where trading can take place, without the cost and start-up time required by the companies, the investors with the capital to attract foreign companies are in the United States.  Those investors demand information from the issuing companies, and empower the SEC to make sure their demands are complied with. This desire for information is one reason why programs such as the unsponsored ADRs and the Rule 144a ADRs have not been successful.  Investors have a plethora of companies to choose from when deciding where to put their money.  Those companies which do not offer their investors a high degree of information will not attract as much capital as those who comply with the most stringent disclosure and reporting requirements.  For example, executives of Grupo Televisa SA, Television Azteca SA, and Grupo Elektra SA, all of which are Mexican companies whose ADRs are listed on the NYSE, failed to share crucial information with stock analysis and investors in August of 1998.  Upon revealing this fact, the share price of their ADRs plunged, as investors reacted to the companies' failures to disclose information.[96]
Encouraging disclosure of information is not the only impetus for regulation. Recently, governments in developing countries and communist countries converting to capitalism, especially those in Latin America and Southeast Asia, have begun the privatization of state-owned assets in an effort to restructure their economies.  These privatization programs often include the use of ADRs to increase private ownership and to raise capital.[97]  Privatization is often associated with deregulation, the effects of which can cause a nationalistic backlash, which at least one theorist surmises results in a privatization-nationalization cycle.[98]  Economists encourage these countries to regulate their privatization programs (in effect, re-regulation), in order to reduce the nationalistic backlash often associated with privatization.[99]
            A requirement of a high degree of disclosure comes disadvantages, however.  Primarily, the regulations are difficult and costly to comply with.  U.S. disclosure requirements, particularly the requirement to reconcile financial statements according to the U.S. GAAP, is believed to deter many foreign companies from listing on U.S. exchanges.[100]  A study conducted in 1996 among listed and unlisted foreign companies revealed that over half of the companies cited reconciliation to U.S. GAAP as a 'major problem.'  Further, nearly two-thirds of the responding companies encountered problems with disclosure of the Management's Discussion and Analysis of Financial Condition and Results of Operations, required on the annual 20-F report.  Half of the companies also reported having difficulty complying with forward-looking information and company risk factors, required for reports on Forms F-1, F-2, F-3 and F-4.[101]
            Companies who comply with the disclosure and reporting requirements in order to list on the U.S. markets do so because the advantage of the listing outweighs the expense and burden of compliance.  Nonetheless, the burden can and does hinder growth of the U.S. market for foreign securities, even to the point of threatening its existence.[102]  If the regulations continue to exact greater costs and start-up time from the issuing companies, they may seek alternative means of raising capital.  Even the status quo may prevent worthy companies from making themselves available to investors on the domestic markets.
            Possibly there is a happy medium ' a point at which investors are satisfied with the amount of disclosure from companies, and which companies find disclosure to be efficient in terms of cost and set-up time.  One feature of such a system would be for the SEC to accept financial disclosure in compliance with an International Accounting Standard (IAS).  An international standard would permit companies to draft one set of disclosure documents, according to a universal standard with which they were familiar, and use that standardized format in disclosing regulatory information to markets worldwide.  Companies who already prepare their financial reports in accordance with IAS would simply submit those reports to the SEC, rather than have to reconcile to the U.S. GAAP for an American listing.[103]  This increase in efficiency would save both issuing companies and depository banks money and time.  An international standard would also allow investors, particularly institutional investors, to digest the information without having to concern themselves as to which standard the information applies.  It may be argued that there is a de facto international standard, in that the U.S. GAAP is widely used as a result of most of the trading activity taking place on U.S. markets.  However, if an international standard was developed, by the consent of the powerful economic nations, businesses and banks, the IAS would be legitimized by the market participants, who would then be more eager and willing to comply with the standard.  Further, countries which develop depository receipt programs would have a working standard, in place, which they can immediately utilize without concerning themselves with whether companies and banks will be able to conform to a new standard, thus possibly hindering growth of the market.
There is the possibility that adopting an IAS would open the floodgates and numerous foreign companies, presently unable or unwilling to comply with the U.S. GAAP, would enter the U.S. markets.[104]  While this influx of new investment possibilities may upset the short-term balance between supply and demand, in the long term maximization of investment choices brings an entirely positive result for the investors.   While a regulated market, regardless of how standard the market is, is never a completely free market, the increased level of standardization for disclosure and reporting, as well as the increased number of companies offering shares, will give consumers a greater choice when it comes to purchasing ADRs.  This increased competition for the investment dollar will lend to a self-regulation, whereby companies will have to strive for quality in their offerings in order to attract investors, thereby creating an economic Darwinism.
Conclusion
The domestic investment market is expected to experience a continued increase of foreign companies offering securities to domestic investors.  At the same time, domestic investors will want to continue supplementing and diversifying their portfolios with foreign investments. [105]  American Depository Receipts play a key role in this flow of investment capital.  This increase in volume, as well as changes in world economies, will further the need for standardization of disclosure and reporting requirements.  This standardization will increase companies abilities to offer investment opportunities, while still maintaining a high standard of protection for the public and facilitating the public's acquisition of useful information about their investment choices.  The standardization will take place, if at all, not by an international administrative body, but through the cooperation of the depository banks, issuing companies, and individual national regulatory bodies such as the Securities and Exchange Commission.

[1] Yahoo! Finance, Yahoo! (visited November 30, 1998), quote.yahoo.com
[2] Joseph Velli, American Depository Receipts: An Overview, 17 Fordham Int'l L.J. S38, S42 (1994).
[3] Id. at S39.
[4] Mark A. Saunders, American Depository Receipts: An Introduction to U.S. Capital Markets for Foreign Companies, 17 Fordham Int'l L.J. 48, 50 (1993).
[5] An Overview of Depository Receipts, The Bank of New York (last modified September 19, 1997), bankofny.com/adr/aovrview.htm
[6] See American Depository Receipts: An Introduction to U.S. Capital Markets for Foreign Companies, supra note 6, at 73.
[7] Depository Receipt Program Options, Citibank (visited September 29, 1998), citibank.com/corpbank/adr/overview/struct.htm
[8] The Market Position, Deutsche Morgan Grenfell (visited September 29, 1998), adr-dmg.com/marktpos.htm
[9] See A Perspective, supra note 16.
[10] See An Overview of Depository Receipts, supra note 7.
[11] See A Perspective, supra note 16.
[12] See ADRs ' American Depository Receipts, supra note 15.
[13] ADRs ' American Depository Receipts, Stock City (visited September 29, 1998), cyberhost3.com/stockcit/adr/adrexplain.html
[14] See Velli, supra note 4, at S42.
[15] Glossary of Financial Terms, New York Stock Exchange (visited September 29, 1998), nyse.com/public/glossary/glsd17.htm
[16] Deutsche Bank as Depository, Deutsche Morgan Grenfell (visited September 29, 1998), adr-dmg.com/deposit.htm
[17] Subject:  Stocks ' American Depository Receipts (ADRs),  SURETRADE.COM (visited September 29, 1998), invest-faq.com/articles/stock-adrs.html
[18] See Velli, supra note 4, at S56.
[19] Id. at S53.
[20] See An Overview of Depository Receipts, supra note 7.
[21] A Perspective, Deutsche Morgan Grenfell (visited September 29, 1998), adr-dmg.com/perspec.htm
[22] See ADRs ' American Depository Receipts, supra note 15.
[23] See Velli, supra note 4, at S38.
[24] Investor Relations, Citibank (visited September 29, 1998), citibank.com/corpbank/adr/overview/inv_rel.htm
[25] See Velli, supra note 4, at S48.
[26] Simple Description of Structure, Deutsche Morgan Grenfell (visited September 29, 1998), adr-dmg.com/simpdesc.htm
[27] See ADRs ' American Depository Receipts, supra note 15.
[28] See American Depository Receipts: An Introduction to U.S. Capital Markets for Foreign Companies, supra note 6 at 57.
[29] Unsponsored Programs, Deutsche Morgan Grenfell (visited September 29, 1998), adr-dmg.com/unspons.htm
[30] See Simple Description of Structure, supra note 30.
[31] See American Depository Receipts: An Introduction to U.S. Capital Markets for Foreign Companies, supra note 6 at 55.
[32] See An Overview of Depository Receipts, supra note 7.
[33] See American Depository Receipts: An Introduction to U.S. Capital Markets for Foreign Companies, supra note 6 at 56.
[34] See ADRs ' American Depository Receipts, supra note 15.
[35] See American Depository Receipts: An Introduction to U.S. Capital Markets for Foreign Companies, supra note 6 at 56.
[36] See An Overview of Depository Receipts, supra note 7.
[37] See id.
[38] Level-One, Citibank (visited September 29, 1998), citibank.com/corpbank/adr/overview/lvl_one.htm
[39] Sponsored Programs, Deutsche Morgan Grenfell (visited September 29, 1998), adr-dmg.com/spons1.htm
[40] See Velli, supra note 4, at S44.
[41] See Sponsored Programs, supra note 45.
[42] See Velli, supra note 4, at S44.
[43] See Simple Description of Structure, supra note 30.
[44] Sponsored Programs, Deutsche Morgan Grenfell (visited September 29, 1998), adr-dmg.com/spons2.htm
[45] See Simple Description of Structure, supra note 30.
[46] See Sponsored Programs, supra note 50.
[47] Level-Two, Citibank (visited September 29, 1998), citibank.com/corpbank/adr/overview/lvl_two.htm
[48] See Sponsored Programs, supra note 50.
[49] Depository Receipt Program Options, Citibank (visited September 29, 1998), citibank.com/corpbank/adr/overview/struct.htm
[50] Level-Three, Citibank (visited September 29, 1998), citibank.com/corpbank/adr/overview/lvl_thr.htm
[51] See Simple Description of Structure, supra note 30.
[52] Rule 144a, Deutsche Morgan Grenfell (visited September 29, 1998), adr-dmg.com/rule144a.htm
[53] See Velli, supra note 4, at S54.
[54] RADR/GDR, Citibank (visited September 29, 1998), citibank.com/corpbank/adr/overview/radr_reg.htm
[55] See American Depository Receipts: An Introduction to U.S. Capital Markets for Foreign Companies, supra note 6, at 72.
[56] Introduction, Citibank (visited September 29, 1998), citibank.com/corpbank/adr/overview/index.htm
[57] See Rule 144a, supra note 52.
[58] SEC Securities Act of 1933, 17 CFR '230.144A(d) (1998).
[59] See Rule 144a, supra note 52.
[60] See Simple Description of Structure, supra note 30.
[61] See RADR/GDR, supra note 54.
[62] See Depository Receipt Program Options, supra note 49.
[63] See RADR/GDR, supra note 54.
[64] See SEC Securities Act of 1933, supra note 58.
[65] See id.
[66] See RADR/GDR, supra note 54.
[67] See Velli, supra note 4, at S53.
[68] See SEC Securities Act of 1933, supra note 58.
[69] See RADR/GDR, supra note 54.
[70] See Velli, supra note 4, at S53.
[71] Id. at S54.
[72] U.S. Securities Regulations, Citibank (visited September 29, 1998), citibank.com/corpbank/adr/overview/sec_regs.htm
[73] See American Depository Receipts: An Introduction to U.S. Capital Markets for Foreign Companies, supra note 6, at 59.
[74] See American Depository Receipts: An Introduction to U.S. Capital Markets for Foreign Companies, supra note 6, at 58.
[75] 15 U.S.C. '77e(a) (1998).
[76] See Level-One, supra note 44.
[77] Level-Two, Citibank (visited September 29, 1998), citibank.com/corpbank/adr/overview/lvl_two.htm
[78] Form F-6, Security Lawyer's Deskbook (visited September 29, 1998), www.law.uc.edu/CCL
[79] With respect to the terms of the deposit of the shares, the following information must be described:  The amount of deposited securities represented by one unit of ADRs; the procedure for voting, if any; the collection and distribution of dividends; the transmission of notices, reports and proxies; the sale or exercise of rights; the deposit or sale of securities resulting from dividends, splits or plans of reorganization; amendment, extension or termination of the deposit; rights of holders of receipts to inspect the transfer books of the depositary and the list of holders of receipts; restrictions upon the right to deposit or withdraw the underlying securities; and limitation upon liability of depositary. See id.
[80] This includes the depository agreements, recent material contracts between the issuer and depository, and an opinion of counsel as to the legality of the ADRs being issued.  Also required is the disclosure of certain information regarding securities dealers who have deposited shares against the issuance of ADRs in the prior 6 months, propose to deposit shares against the issuance of ADRs, or have assisted in creating a plan for the issuance of the ADRs, the selection of ADRs or the selection of deposited securities.  See id.
[81] See American Depository Receipts: An Introduction to U.S. Capital Markets for Foreign Companies, supra note 6, at 64.
[82] Id. at 68.
[83] Form F-1 requires detailed disclosure of information regarding:  The filer; agent for service of process; risk factors; ratio of earnings to fixed charges; use of proceeds; determination of offering price; dilution; selling security holders; plan of distribution; description of securities to be registered; interests of named experts and counsel; the registrant; disclosure of commissions; expenses of issuance and distribution; indemnification of directors and officers; recent sales of unregistered securities; financial statements; offering price; statement concerning enforceability of civil liabilities; purpose of proceeds; name of underwriter and its obligations; shareholder rights; debts; general character of business done and intended to be done by issuer.  Form F-1, Security Lawyer's Deskbook (visited September 29, 1998), www.law.uc.edu/CCL
[84] Form F-2, Security Lawyer's Deskbook (visited September 29, 1998), www.law.uc.edu/CCL
[85] Form F-3, Security Lawyer's Deskbook (visited September 29, 1998), www.law.uc.edu/CCL
[86] The Form requires disclosure of risk factors, ratio of earnings to fixed charges, nature of the business, details related to the transaction producing the combination of securities, disclosure of material contacts between the two companies, voluminous financial disclosures about both the acquiring and the acquired company, information about voting, proxies and management, and indemnification of directors and officers. Form F-4, Security Lawyer's Deskbook (visited September 29, 1998), www.law.uc.edu/CCL
[87] Reports To Be Filed With The SEC, Citibank (visited September 29, 1998), citibank.com/corpbank/adr/overview/sec_reps.htm
[88] See American Depository Receipts: An Introduction to U.S. Capital Markets for Foreign Companies, supra note 6, at 75.
[89] Among the information that must be disclosed is a description of the business, including development and material changes; the plan of operation; registrant's opinion as to the period of time that the proceeds from the offering will satisfy the cash requirements and whether in the next six months it will be necessary to raise additional funds, and the reasons for such opinion; material product research and development; material acquisition of plants and equipment; material changes in number of employees; principal products produced and services rendered; markets and methods of distribution; total sales and revenue by categories of activity and geographical markets; description of property; legal proceedings; limitations affecting security holders; foreign taxation; management's discussion and analysis of financial condition and results of operations; liquidity; capital resources; results of operations; compensation of directors and officers; interest of management in certain transactions.  Form 20-F.
[90] See Velli, supra note 4, at S44.
[91] Form 10-Q, Security Lawyer's Deskbook (visited September 29, 1998), www.law.uc.edu/CCL
[92] Form 6-K, Security Lawyer's Deskbook (visited September 29, 1998), www.law.uc.edu/CCL
[93] Rule 12g3-2(b) Exemption, Citibank (visited September 29, 1998), citibank.com/corpbank/adr/overview/12g3_2.htm
[94] Listing Requirements, Citibank (visited September 29, 1998), citibank.com/corpbank/adr/overview/sec_reqs.htm
[95] New York Stock Exchange, Citibank (visited September 29, 1998), citibank.com/corpbank/adr/overview/nyse.html
[96] Investors Punish Tight-Lipped Media in Mexico, The Wall Street Journal, August 11, 1998, at A12.
[97] Advantages of a DR Program, Citibank (visited September 29, 1998), citibank.com/corpbank/adr/overview/advantg.htm
[98] Amy L. Chua, The Privatization-Nationalization Cycle: The Link Between Markets and Ethnicity in Developing Countries, 95 Colum. L. Rev. 223 (1995).
[99] See id. at 287.
[100] James A. Fanto & Roberta S. Karmel, A Report on the Attitudes of Foreign Companies Regarding A U.S. Listing, 3 Stan. J.L. Bus & Fin. 51 (1997).
[101] See id. at 63.
[102] See id. at 73.
[103] See id. at 74.
[104] See id.
[105] See Velli, supra note 4, at S56.

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