Issuance of ADSs: Overview, definition, and example
What is the issuance of ADSs?
Issuance of ADSs (american depositary shares) refers to the process through which a foreign company offers its stock to U.S. investors by listing the shares on a U.S. exchange via an intermediary bank. An ADS is a negotiable security that represents a specific number of shares in a foreign company. The foreign company's stock is held by a depositary bank, and the bank issues the ADSs to investors. This allows U.S. investors to buy and sell shares of foreign companies in the same way they would domestic stocks, without needing to engage with foreign stock markets directly.
For example, a Japanese company might issue ADSs to U.S. investors, allowing them to buy shares of the company listed on a U.S. exchange without dealing with the complexities of international trading.
Why is the issuance of ADSs important?
The issuance of ADSs is important because it facilitates access to global markets for U.S. investors and helps foreign companies raise capital in the U.S. market. By issuing ADSs, a foreign company can tap into a broader pool of capital, enhance its visibility, and expand its investor base in the U.S. For U.S. investors, ADSs provide an easier and more convenient way to invest in foreign companies, as they eliminate the need for complex cross-border transactions and currency conversions.
For businesses, issuing ADSs can be a strategic move to increase global presence and investor engagement, while for U.S. investors, it allows for exposure to international markets without the logistical challenges of international investing.
Understanding the issuance of ADSs through an example
Imagine a European-based company that wants to raise capital in the U.S. To do so, the company partners with a U.S. depositary bank to issue ADSs. The depositary bank holds the company’s European shares and issues ADSs to U.S. investors. Each ADS represents one share of the European company. By doing so, the company makes its shares available to U.S. investors who can now buy and sell those shares as if they were listed on a U.S. stock exchange.
In another example, a Chinese technology company decides to raise capital by listing its shares in the U.S. via ADSs. The company works with a U.S. depositary bank to issue ADSs, enabling American investors to purchase shares in the Chinese company on a U.S. exchange.
An example of an issuance of ADSs clause
Here’s how an issuance of ADSs clause might appear in an agreement:
"The Company agrees to engage [Depositary Bank] to issue American Depositary Shares (ADSs) in connection with its listing on the U.S. exchange. Each ADS shall represent [number] shares of the Company’s common stock. The Company will ensure that all regulatory requirements are met and that the depositary bank has the necessary authority to issue the ADSs in compliance with U.S. securities laws."
Conclusion
The issuance of ADSs provides a pathway for foreign companies to access the U.S. capital markets and for U.S. investors to invest in international companies. This process simplifies the complexities of international trading and currency exchange, making global investment opportunities more accessible. For businesses, issuing ADSs is a strategic way to expand their reach, attract investors, and raise capital in a highly liquid and accessible market.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.