What is American Depositary Receipt?

Best known for its acronym (ADR), the American Depositary Receipt is the stock certificate that allows foreign companies (including Brazilian ones) to trade their securities on the United States Stock Exchanges.

They are issued by American banks, based on so-called stock receipts. This is even the reason for the name American  Depositary Receipt – which, in free translation, means American Depositary Receipt .

ADRs act as facilitators between investors and foreign companies, making it possible to sell the shares at a favorable price for both.

How do American Depositary Receipts work?

Imagine that a publicly traded company in Brazil decides to trade its shares on one of the United States Stock Exchanges.

Choosing to issue ADRs, it follows the following path.

First, its shares must be held in custody with a Brazilian depositary institution. It is mandatory that the institution has the authorization to operate from the Central Bank, as well as be properly qualified by the Securities and Exchange Commission.

Then, in the USA, a bank issues receipts related to these securities in custody and makes them available on an over-the-counter market or the Stock Exchange, in the form of ADR.

The American Depositary Receipt may consist of a single share, a fraction of a share or a set (bundle) of shares. These may have been previously negotiated (only in some cases) or may be entirely new.

The value of the shares is traded in dollars and follows the quotation in the country of origin (in this case, Brazil).

In order to act, each company receives a unique corresponding code in ADR.

For example, PBR is the Petrobras code. GGB is Gerdau’s. ABV and BBD are, respectively, Ambev and Bradesco codes.

And know that this is just a small fraction of the codes! There are currently more than 30 Brazilian companies operating in the US financial market with American Depositary Receipts.

But, regardless of the company or the type of ADR available, the IOF charge on Brazil-United States migration is always 1.5%.

What types of American Depositary Receipt are there?

American Depositary Receipts are divided into 3 levels.

At Level 1, shares are only traded on the over-the-counter market.

At Level 2, shares are traded directly on the Stock Exchanges, such as NASDAQ and NYSE.

At Level 3, a Public Offering is launched. Similar to the IPO, but only for ADRs, it is mandatory that the shares available at that level are new (this requirement does not apply to lower levels).

The availability of company information to its shareholders also varies at each level, increasingly.

This means that the requirements made by the SEC (Securities and Exchange Commission, the regulatory agency of the US securities sector, which corresponds to the CVM in Brazil) are minimal for Level 1, increase in Level 2 and reach their peak in Level 3.

What are the advantages of working with American Depositary Receipts?

From the investor’s point of view, ADRs facilitate the purchase of shares in foreign companies. With reduced costs, from tax cuts and foreign administration costs, it is possible to operate more profitably.

From the point of view of companies, having ADRs in circulation opens up the possibility of making their shares available more cheaply in the USA, and can reach an advantageous market (after all, the country is the largest in volume of variable income transactions).

In addition, Level 3 actions usually mean a significant increase in the organization’s financial contribution, as they attract attention and raise capital more easily.

 

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