• RULE 144(a) ADRS



The shortage of local capital in South Africa has led to South African public companies tapping international capital markets. This has resulted in the use of Global Depositary Receipts to raise capital internationally, American Depositary Receipts to raise capital in the United States and European Depositary Receipts to raise capital in the Euromarkets. In this issue Benny Levene and Carl Stein explain what Depositary Receipts are, the different kinds and the advantages and disadvantages of using them.


A Depositary Receipt ("DR") is a means of packaging a company's shares into a "unit" which, because it is not a share, can be traded and settled in international markets without having to comply with the laws of the country of incorporation of the issuer of the underlying shares (South Africa) as to changes in ownership. In a DR programme, a block of shares is allotted or transferred to a depositary (usually a bank) or, more commonly, to a custodian on behalf of that depositary. The depositary, in turn, issues DRs which are instruments evidencing one or more of the underlying shares held by that depositary. A DR certificate is similar in appearance to a share certificate. DRs are traded as negotiable instruments.


There are seven principal types of DR programmes:

  • American Depositary Receipts ("ADR")
  • Unsponsored
  • Sponsored Level I
  • Sponsored Level II
  • Sponsored Level III
  • Rule 144(a) (RADR)
  • European Depositary Receipts ("EDR")
  • Global Depositary Receipts ("GDR")

The type of programme used depends on the requirements of the issuer company as well as on investor attitudes.


A DR programme has the following advantages to international investors -

  • it offers a convenient means of holding what are for them, foreign shares;
  • the trading in and settlement for foreign shares are simplified;
  • there are low trading and custody costs compared with shares bought directly in the foreign market.


A DR programme has the following advantages for a South African issuer company -

  • it provides a simple means of diversifying a company's shareholder base and save for unsponsored and sponsored Level I ADRs, of tapping international capital markets;
  • it helps to increase a South African company's international visibility and name recognition in the international community;
  • it may increase the liquidity of the shares of the issuer company internationally;
  • it facilitates raising capital on a scale which might be difficult in the local market.


An unsponsored ADR programme is not initiated or controlled by the issuer company but by a broker in response to US investor demand. The broker acts as market maker for the issue and works in conjunction with a US bank which, acting as the depositary, issues the ADRs. The depositary and the issuer together submit an application under Rule 12g3-2(b) to the Securities and Exchange Commission (SEC) seeking exemption from the full reporting requirements of the Securities and Exchange Act of 1934.

Unsponsored ADR programmes are exempt from full compliance with the SEC's reporting requirements. Therefore they can only be traded on the over-the-counter (OTC) market and listed in the "Pink Sheets" published daily by the National Quotation Bureau (that is, a non-automated listing of shares which trade outside an exchange) or the OTC's Electronic Bulletin Board ( an electronic quotation system run by the National Association for Securities Dealers). The SEC's only requirement is that material public information published by the issuer in its home country be supplied to the SEC and made available to US investors. The depositary will therefore mail the issuer's annual reports and certain other public information to US investors upon request.


  • They provide an inexpensive and relatively simple way of expanding the issuer's investor base in the US.
  • All costs associated with an unsponsored ADR are absorbed by the investor and not the issuer company.
  • SEC compliance and reporting requirements are minimal.


  • The issuer has little, if any, control over the activity of the unsponsored ADR programme because there is no depositary agreement between the issuer and one specific US depositary. If the issuer company is in compliance with the SEC's requirements governing exemptions from reporting under Rule 12g 3-2(b), an unsponsored programme can be duplicated by other depositaries.
  • Converting from an unsponsored to a sponsored programme can provide the issuer with greater control over its programme, but conversion requires the payment of cancellation fees for outstanding unsponsored ADRs. The conversion and cancellation costs are high.
  • An unsponsord ADR programme is not a means of raising capital on the US markets. It is rather a means of enhancing the issuer's US investor base and the marketability of the issuers shares in the US.


A Level I sponsored ADR programme is the easiest and least expensive means for a company to provide for the issue of its shares in ADR form in the US. A Level I programme is initiated by the issuer and involves the filing of an F-6 registration statement, but allows for exemption under Rule 12g 3-2(b) from full SEC reporting requirements. The issuer derives greater control over the ADRs issued under a sponsored Level I programme, since a depositary agreement is executed between the issuer and one selected depositary. However, Level I ADRs can only be traded over-the-counter and cannot be listed on a national exchange in the US.


  • It avoids full compliance with the SEC's reporting requirements.
  • By working with a single depositary, the issuer has greater control over its ADR programme than would be the case with an unsponsored programme.
  • The depositary acts as a channel of communication between the issuer and the holders of the ADRs. Dividend payments, financial statements and details of corporate actions will be passed on to US investors by the depositary.
  • The depositary maintains accurate ADR holder records for the issuer and can, if requested, monitor large stock transactions and report them to the issuer.
  • Set-up costs are lower than Level II and III programmes. All transaction costs are absorbed by the ADR holder.
  • It is easy and relatively inexpensive to upgrade the programme to Level II or III as the issuer and depositary do not have to negotiate cancellation of unsponsored ADRs with several depositaries, as would be the case if upgrading an unsponsored programme.


  • It cannot be listed on any of the national exchanges in the US. As a result, investor interest might be somewhat restricted which may limit the issuer's ability to enhance its name recognition in the US.
  • Capital raising is not permitted under a Level I programme.
  • The costs of a "road show" can be high.


A sponsored Level II ADR programme must comply with the SEC's full registration and reporting requirements. In addition to filing an F-6 registration statement, the issuer is also required to file SEC Form 20-F and to comply with the SEC's other disclosure rules. These include submission of either its annual report which must be prepared in accordance with US Generally Accepted Accounting Principles (US GAAP) which are more onerous than South African GAAP or a detailed summary of the differences in financial reporting between the home country and the US. Registration allows the issuer to list its ADRs on one of the three major national stock exchanges, namely the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) or the National Association of Securities Dealers Automated Quotation Stock Market (NASDAQ).

Level II sponsored programmes are initiated by non-US companies to give US investors access to their shares in the US. As with a Level I programme, a depositary agreement is signed between the issuer and a depositary.


It is more attractive to US investors than a Level I programme because the ADRs are fully registered with the SEC and may therefore be listed on one of the major US stock exchanges. This raises the profile of the ADR programme to investors, thus increasing the liquidity and marketability of the securities.

  • Listing and registration also enhance the issuer's name recognition in the US.
  • SEC disclosure regulations enable the issuer to monitor the ownership of its ADRs in the US.


More detailed SEC disclosure is required than for a Level I programme. For example, either the issuer's financial statements must conform to US GAAP, or a detailed summary of the differences in financial reporting between the home country and the US must be submitted.

  • SEC regulations do not permit a public offering of ADRs under a Level II programme.
  • It is more expensive and time consuming to set up and maintain a Level II programme than a Level I programme because of the more stringent reporting requirements and higher legal, accounting and listing costs.
  • The costs of a "road show" can be high.


Level III sponsored ADRs are similar to Level II ADRs in that the issuer initiates the programme, deals with one depositary, lists on one of the major US exchanges and files Form F-6 and 20-F registration statements with the SEC. The major difference is that a Level III programme allows the issuer to raise capital through a public offering of ADRs in the US and this requires the issuer to submit a Form F-1 to the SEC.


  • All of the advantages of a Level II programme.
  • It permits public offerings of ADRs in the US which can be used for a variety of purposes, for example the raising of capital to finance acquisitions or the establishment of an Employee Stock Ownership Plan for the issuer's US subsidiary.


SEC reporting is more onerous than for Level I or II programmes.

  • The costs of setting up and maintaining a Level III programme are high. Set-up costs include listing, legal, accounting, investor relations and "road show" costs.

RULE 144(a) ADRS

Rule 144(a) ADRs, or restricted ADRs (RADRs) are simply DRs which are placed and traded in accordance with Rule 144(a). This rule was introduced by the SEC in April 1990 to stimulate capital raising in the US by non-US issuers. Some of the former restrictions under Rule 144 governing resale of privately placed securities (or "restricted securities") have been lifted under Rule 144(a), provided that the sale is made to "qualified institutional buyers" (QIBs). A QIB is currently defined as an institution which owns and invests on a discretionary basis at least US$100 million (or, in the case of registered broker-dealers, US$10 million) in securities of an unaffiliated entity. At present, there are believed to be in excess of 3 000 QIBs. There is speculation that the SEC may decide to broaden the definition of a QIB to allow a larger number to participate in the Rule 144(a) market.

Non-US companies now have easy access to the US equity private placement market and may thus raise capital through the issue of RADRs without conforming to the full SEC registration and reporting requirements. Additionally, the cost of issuing RADRs is considerably less than the cost of initiating a Sponsored Level III ADR programme.

In June 1990, the National Association for Securities Dealers (NASD) established a closed electronic trading system for RADRs called PORTAL (Private Offerings, Resales and Trading through Automated Linkages). This system is designed to provide a market for privately traded securities such as RADRs and access to it is available to both investors and market makers.


  • ADRs offered under Rule 144(a) do not have to conform to full SEC reporting and registration requirements. However, QIBs may demand certain financial disclosure, unless the reporting exemption under Rule 12g 3-2(b) has been granted.
  • RADRs provide a cheaper means of raising equity capital than other DRs and they can be issued more easily and quickly.
  • RADRs can be launched on their own or as part of a global offering.
  • They can be traded through the NASD's PORTAL system and they clear through The Depositary Trust Company ("DTC").


  • RADRs cannot be created for classes of shares already listed on a US exchange.
  • RADRs can only be sold in the US to other QIBs. Although there are in excess of 3 000 QIBs, the RADR market is not as liquid as the public US equity market.


Just as ADRs allow non-US issuers to access the important US market, EDRs allow issuers to tap the Euromarkets while GDRs give access to both the US market and the Euromarkets. EDRs and GDRs are most commonly used when the issuer is raising capital in the local market as well as in international markets, either through private placement or public offerings.

Where there is a US component of a GDR, this can be structured either as a Level III ADR with full disclosure and reporting to the SEC, or it can be privately placed under Rule 144(a), in which case full compliance with the SEC's onerous reporting and registration requirements is avoided.

With global integration of the major securities markets it is now commonplace to have securities listed and cleared in more than one market. The links that exist between Euroclear and Cedel in Europe and DTC in the US allow for efficient and trouble-free settlement of securities between these two major markets.


  • EDRs/GDRs can be launched as part of a private or public offering.
  • They allow a single security to be placed in one or more international markets, thus giving access to a global investor base.
  • They may allow the issuer to overcome local selling restrictions to foreign share ownership.
  • GDRs are eligible for settlement through Cedel, Euroclear and DTC.


  • If the US tranche of a GDR is structured as a Rule 144(a) private placement, the disadvantages of a RADR programme will apply.


In a sponsored DR programme, the company will enter into a deposit agreement with the depositary, governing the creation and maintenance of the deposit facility. The deposit agreement will stipulate the manner in which the individual DRs can be transferred. Invariably the deposit agreement stipulates that transfer is only effective once the new holder of the DR has been registered as such in the books of the depositary. Once issued, DRs are freely exchangeable into shares. The holder of a DR may convert his holding of a DR into a direct holding of the issuer company's shares by presenting his DR certificate to the depositary or custodian for cancellation against the transfer of the relevant number of underlying shares in the issuer company and the registration of that former DR holder as a shareholder of the issuer. Conversely, a shareholder of the issuer company may, by transferring his shares to the depositary, arrange for a DR to be issued to him in exchange for those shares.

The deposit agreement also provides for the depositary to transmit copies of certain information received from the issuer company to the holders of the DRs. Such information includes circulars to shareholders, notices of general meetings and financial information. This communication structure by its very nature creates timing problems in relation to DR holders instructing the depositary as to how to exercise the voting rights attaching to the underlying shares at general meetings of shareholders of the issuer company.

The depositary usually takes responsibility for converting dividends paid in the local currency of the issuer into a foreign currency (usually United States Dollars) and distributes these dividends to DR holders.


It is possible, but not essential, for DRs to be listed on one or more stock exchanges. In addition, DRs are capable of being traded through the systems operated by DTC in the United States and Euroclear and Cedel in Europe. These systems are clearance and settlement systems for dealings in securities and other instruments. If the DRs are accepted into one or more of these systems, the depositary usually issues a master DR (representing all the underlying shares held by it) to the nominee of the system and the investors who have applied for DRs are then credited appropriately in the books of that system. As the DRs are traded, the relevant entries are then made through that system.


An issuer of DRs must consider whether or not to list the DRs. The criteria to be considered include, share liquidity, visibility, listing costs and funding requirements. The type of DR programme will determine the alternatives available. The major distinction in listing alternatives is between the OTC market and a listing on an exchange. OTC traders are listed on the "Pink Sheets" and the OTC electronic bulletin board. Such a listing is available for all ADR programmes. On the other hand, a listing on the NYSE, AMEX or NASDAQ is only available to Level II and Level III sponsored ADR programmes. Non-US GDRs, including the non-US elements of GDR programmes, and EDRs, are generally listed on the Luxembourg Stock Exchange.

"Nothing in this article should be construed as legal advice from any lawyer of Werksmans. The article is a general summary of developments or principles of interest, and may not apply directly to any specific circumstance. Professional advice should therefore be sought before action based on any information is taken."

For further information please contact: 

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