What Are American Depositary Receipts? The Role and Types of ADRs in US Listings

The number of Chinese companies filing confidential registration statements with the US Securities and Exchange Commission (SEC) under the Holding Foreign Companies Accountable Act (HFCAA) framework hit 38 in the first half of 2025 alone, according to data from the China Securities Regulatory Commission (CSRC) — a pace that, if sustained, would surpass the full-year total for 2024 by 22%. For each of these issuers, the choice of depositary bank and the specific tier of American Depositary Receipt (ADR) program determines not only the listing mechanics but also the cost of capital, secondary liquidity, and post-IPO compliance burden. The ADR structure, often treated as a procedural detail by first-time issuers, is in fact the single most consequential instrument in a US cross-border listing: it governs how PRC-incorporated or Cayman Islands-incorporated holding companies translate their equity into US-traded securities, how dividends flow through the BVI or Hong Kong intermediate entities, and how investors exercise voting rights. With the SEC’s 2024 amendments to Rule 12g3-2(b) and the Hong Kong Stock Exchange (HKEX) concurrent push for dual-primary listings, understanding the ADR’s role is no longer optional for CFOs and company secretaries of Asia-based issuers.

The Core Mechanics of ADRs: Structure, Custody, and Conversion

An ADR is a negotiable US dollar-denominated certificate issued by a US depositary bank, representing a specific number of shares of a non-US company held in custody by the bank’s branch or correspondent in the issuer’s home market. For a Hong Kong-incorporated or Cayman-incorporated company listing on the New York Stock Exchange (NYSE) or Nasdaq, the underlying ordinary shares remain deposited with a custodian — typically the Hong Kong branch of the depositary bank or a designated sub-custodian in the Cayman Islands — while the ADRs trade on US exchanges. Each ADR represents a fixed ratio of ordinary shares, commonly referred to as the ADR ratio. For example, Alibaba Group Holding Limited (NYSE: BABA) maintains an ADR ratio of 1:8, meaning one ADR equals eight ordinary shares listed on the HKEX (9988.HK). This ratio is set at the time of the offering and can be adjusted only with depositary bank consent and SEC filing.

The legal framework for ADRs in the US is governed primarily by the Securities Act of 1933 and the Securities Exchange Act of 1934, with specific guidance from SEC Staff Legal Bulletin No. 14H (2022) on the treatment of depositary shares. The depositary bank — typically JPMorgan Chase, Citibank, Deutsche Bank, or BNY Mellon — enters into a Deposit Agreement with the issuer, which defines the rights of ADR holders, including dividend entitlements, voting instructions, and conversion mechanics. Under the HKEX Listing Rules, specifically Main Board Rule 19C.08(2), a Chinese issuer seeking a secondary listing in Hong Kong must ensure its ADR program does not conflict with the equal treatment of shareholders under Hong Kong law.

The Three-Tier Classification System

The SEC and the depositary banking industry classify sponsored ADR programs into three tiers, each with distinct regulatory requirements and market accessibility. Level I ADRs trade over-the-counter (OTC) on the OTC Markets Group’s Pink Sheets or OTCQX, with no requirement to file full SEC reports under the Exchange Act. The issuer relies on the Rule 12g3-2(b) exemption, which as of the SEC’s 2024 amendments now requires the issuer to publish English-language versions of its home-market disclosures on its website within five business days of their release. Level I programs are used primarily by issuers seeking US investor access without a full SEC registration — a path chosen by 47 Hong Kong-listed companies as of Q2 2025, according to the HKEX’s monthly statistics.

Level II ADRs trade on a US exchange — either NYSE, Nasdaq, or NYSE American — and require the issuer to register under Section 12(b) of the Exchange Act. This triggers full SEC reporting obligations, including Form 20-F annual reports and Form 6-K current reports. The issuer must also comply with the Sarbanes-Oxley Act of 2002, including Section 404 internal control certifications. For a PRC-based company, this tier introduces the HFCAA compliance requirement: the Public Company Accounting Oversight Board (PCAOB) must have access to the issuer’s audit working papers, a condition that has driven 12 Chinese companies to delist from US exchanges since 2022, according to SEC enforcement data.

Level III ADRs are used for capital raising — an initial public offering (IPO) or follow-on offering. The issuer files a Form F-1 registration statement with the SEC, which includes a prospectus (招股書) and audited financial statements under US GAAP or IFRS as issued by the International Accounting Standards Board. The SEC’s 2024 amendments to Rule 3-10 of Regulation S-X now permit a foreign private issuer to include its parent company’s financial statements in lieu of consolidating its VIE entities, provided the VIE is not a variable interest entity under ASC 810. This change directly benefits Chinese issuers using VIE structures, as it reduces the audit burden for the operating entities in the PRC.

ADR Ratios, Pricing, and Arbitrage Mechanics

The ADR ratio — the number of ordinary shares represented by each ADR — is the single most consequential parameter in the Deposit Agreement, as it determines the notional price of the ADR on the US exchange. Issuers and underwriters set the ratio so that the ADR price falls within a target range, typically USD 15 to USD 50 for institutional liquidity, though the NYSE’s minimum price requirement is USD 4.00 per share under Rule 802.01B. For a company with a Hong Kong-listed ordinary share price of HKD 100, an ADR ratio of 1:10 would produce an ADR price of approximately USD 128 (assuming an HKD/USD exchange rate of 7.82), which is acceptable for both NYSE and Nasdaq listing standards.

The ratio also creates an arbitrage mechanism between the Hong Kong and US markets. When the ADR trades at a premium to the theoretical value derived from the Hong Kong price multiplied by the ratio, arbitrageurs can buy the Hong Kong shares, convert them into ADRs through the depositary bank, and sell the ADRs in the US. The reverse conversion — buying ADRs, cancelling them, and selling the underlying shares in Hong Kong — is equally viable. The Hong Kong Securities and Futures Commission (SFC) monitors cross-market arbitrage under the Code of Conduct for Persons Licensed by or Registered with the SFC, specifically paragraph 5.3, which requires market participants to maintain orderly markets. In practice, the arbitrage window typically closes within 15 minutes on active trading days, as the depositary banks’ conversion desks execute trades at a spread of 5-15 bps.

The Role of the Depositary Bank in Conversion and Settlement

The depositary bank’s conversion function — issuing new ADRs when ordinary shares are deposited and cancelling ADRs when they are returned — is the operational backbone of the ADR market. The process begins when a broker in Hong Kong delivers ordinary shares to the custodian, typically the Hong Kong branch of the depositary bank or a designated sub-custodian such as HSBC or Standard Chartered. The custodian confirms receipt and instructs the depositary bank in New York to issue the corresponding ADRs. The depositary bank then credits the broker’s account at the Depository Trust Company (DTC) in New York, with settlement occurring on a T+2 basis under the SEC’s 2024 T+2 settlement cycle.

The fee structure for conversions is defined in the Deposit Agreement and typically includes a issuance fee of USD 0.05 per ADR and a cancellation fee of USD 0.05 per ADR, though these fees are negotiable for large programs. For a typical IPO of 10 million ADRs, the issuance fee alone generates USD 500,000 in revenue for the depositary bank. The HKEX’s clearing and settlement system, CCASS, does not directly interface with DTC; instead, the custodian acts as the intermediary, settling the Hong Kong leg through CCASS and the US leg through DTC. This dual-settlement structure introduces a settlement risk that is mitigated by the depositary bank’s use of pre-funded accounts or collateral arrangements.

ADR Fees: The Hidden Cost for Holders

ADR holders bear a series of fees that are deducted from dividends or charged directly to their brokerage accounts. The most significant is the depositary bank’s annual custody fee, typically USD 0.02 to USD 0.05 per ADR per year, charged on the record date for each dividend payment. For a company with 100 million ADRs outstanding, the annual custody fee ranges from USD 2 million to USD 5 million. The depositary bank also charges a dividend disbursement fee, typically USD 0.01 to USD 0.03 per ADR per dividend, deducted from the gross dividend before distribution to holders.

The SEC’s 2023 guidance on fee disclosure requires depositary banks to itemize these fees in the Deposit Agreement and in the annual Form F-6 filing. The HKEX’s Listing Rule 19C.09(3) requires a secondary-listed issuer to disclose any ADR-related fees in its Hong Kong listing document, as these fees affect the net dividend yield for Hong Kong investors who hold the underlying ordinary shares. For a family office or institutional investor holding a long position in a Chinese ADR, the total annual cost of ADR fees can range from 0.10% to 0.25% of the position value, a material drag on returns compared to holding the Hong Kong-listed ordinary shares directly.

Regulatory Compliance: SEC, CSRC, and HKEX Overlap

The regulatory framework for ADRs issued by Chinese companies involves a tripartite oversight structure that has become significantly more complex since the HFCAA took effect in 2020. The SEC requires all ADR programs trading on US exchanges to comply with the Exchange Act’s reporting obligations, including the PCAOB’s inspection of the auditor. The CSRC’s 2023 Administrative Measures for Overseas Securities Offerings and Listings (《境内企业境外发行证券和上市管理试行办法》) requires a Chinese company seeking a US listing to file a filing (备案) with the CSRC within three business days of submitting its confidential SEC filing. As of July 2025, the CSRC has processed 214 such filings, of which 18 have been rejected or returned for incomplete disclosure, according to the CSRC’s public registry.

The HKEX’s role in ADR programs is indirect but material for issuers with a Hong Kong primary or secondary listing. Under Main Board Rule 19C.09(1), a secondary-listed issuer must ensure that its ADR holders are not treated less favourably than its Hong Kong shareholders in respect of rights to dividends, voting, and distributions. This equal-treatment requirement is enforced through the Deposit Agreement, which must include provisions for pass-through voting and dividend parity. The SFC’s 2024 consultation paper on cross-border enforcement specifically flagged ADR programs as a potential channel for market manipulation, as the same economic interest can be traded in two jurisdictions with different settlement cycles and disclosure regimes.

The HFCAA and PCAOB Access: A Continuing Risk

The HFCAA, enacted in December 2020, requires the SEC to prohibit trading in the securities of a company if the PCAOB is unable to inspect the company’s auditor for three consecutive years. As of the PCAOB’s 2024 annual report, the board has full access to audit working papers in mainland China and Hong Kong, following the December 2022 Statement of Protocol between the PCAOB and the China Securities Regulatory Commission and the Ministry of Finance. However, the PCAOB’s access is subject to renewal every two years, and the 2024 US presidential election has introduced political uncertainty. The SEC’s 2024 amendments to Rule 12g3-2(b) include a sunset provision that would revoke the exemption for any issuer whose home country denies PCAOB access for more than 12 months.

For a Chinese issuer using a VIE structure, the HFCAA risk is compounded by the SEC’s 2021 guidance requiring enhanced disclosure of VIE ownership structures. The SEC’s Division of Corporation Finance has issued comment letters to 23 Chinese ADR issuers since 2022, requesting details on the enforceability of VIE contracts under PRC law and the ability of the offshore holding company to control the VIE’s assets. The CSRC’s 2023 filing requirements explicitly address VIE structures, requiring the issuer to disclose the contractual arrangements and the risks of PRC regulatory action.

Tax Considerations: Withholding and Treaty Benefits

Dividends paid by a PRC-incorporated company to its ADR holders are subject to PRC withholding tax at a rate of 10% under the PRC Enterprise Income Tax Law. For a Cayman Islands-incorporated holding company that owns a PRC subsidiary, the dividend flows from the PRC subsidiary to the Cayman parent are subject to PRC withholding tax at 10%, unless reduced under the PRC-Cayman Islands Double Tax Agreement, which provides a reduced rate of 5% for a company that holds at least 25% of the PRC subsidiary’s shares. The depositary bank deducts the applicable withholding tax before distributing the net dividend to ADR holders.

US holders of ADRs are eligible for a foreign tax credit under Section 901 of the US Internal Revenue Code for the PRC withholding tax paid. The SEC’s 2024 amendments to Regulation S-X require issuers to disclose the effective tax rate and the components of tax expense in the Form 20-F, including the impact of withholding taxes on ADR distributions. For a Hong Kong-based family office holding ADRs, the Hong Kong Inland Revenue Department does not impose withholding tax on dividends received from US sources, but the office must report the dividend income under the profits tax regime if the ADRs are held as trading assets.

Market Trends and the Future of ADR Programs

The ADR market is undergoing a structural shift driven by the convergence of US regulatory tightening, the HKEX’s push for dual-primary listings, and the rise of direct listings as an alternative to traditional IPOs. In 2024, 14 Chinese companies completed US IPOs using Level III ADR programs, raising a total of USD 3.8 billion, according to data from Dealogic. This represents a 40% decline from the 2021 peak of USD 12.1 billion, but a 75% increase from the 2023 trough of USD 2.2 billion. The recovery is concentrated in the technology and healthcare sectors, with 9 of the 14 issuers operating in the AI, biotech, or medical device space.

The HKEX’s 2024 consultation on Chapter 19C of the Main Board Listing Rules proposes to reduce the threshold for dual-primary conversion from HKD 40 billion market capitalisation to HKD 20 billion, which would make it easier for US-listed Chinese companies to add a Hong Kong primary listing. If adopted, this change would create a new class of issuers with both a US ADR program and a Hong Kong ordinary share listing, requiring dual compliance with SEC and HKEX disclosure rules. The SFC’s 2025 policy statement on cross-border enforcement indicates that the commission will prioritise cases involving ADR-Hong Kong arbitrage where the same information is disclosed at different times in the two markets.

The SPAC Alternative and ADR Mechanics

The SPAC (Special Purpose Acquisition Company) route to a US listing, while less active than in 2021, remains a viable path for Chinese issuers. In a SPAC de-SPAC transaction, the target company merges with the SPAC and becomes a publicly traded entity, with its shares and warrants trading on NYSE or Nasdaq. The target company’s shareholders receive shares of the combined entity, which are typically structured as ADRs if the target is a non-US company. The SEC’s 2024 SPAC rules, effective January 2025, require the de-SPAC transaction to be treated as an IPO for liability purposes under Section 11 of the Securities Act, meaning the target company’s sponsor must conduct the same due diligence as a traditional IPO underwriter.

For a Chinese target company using a VIE structure, the SPAC route introduces additional complexity: the SPAC’s prospectus must include the same VIE disclosure as a traditional F-1 filing, and the PCAOB must be able to inspect the target’s auditor as of the closing date. The HKEX’s Listing Rule 18B.05(2) requires a SPAC that seeks a secondary listing in Hong Kong to disclose the terms of its ADR program in its listing document, including the ADR ratio and the identity of the depositary bank.

The Rise of Direct Listings and the ADR Question

Direct listings, where a company lists its existing shares on a US exchange without raising new capital, have gained traction as an alternative to IPOs. In 2024, 3 Chinese companies completed direct listings on Nasdaq, using Level II ADR programs. The SEC’s 2024 amendments to Rule 475(a) of Regulation S-K now permit a direct listing company to use a Form F-1 registration statement, the same form used for a traditional IPO, provided the company has a class of securities that is already traded on a foreign exchange. This change directly benefits Hong Kong-listed companies seeking a US secondary listing, as they can list their existing shares as ADRs without a concurrent capital raise.

The practical implication for a Hong Kong-listed issuer is that a direct listing eliminates the underwriting fee, which typically ranges from 3% to 7% of the offering size for a traditional IPO. However, the issuer must still bear the cost of the depositary bank’s setup fee, legal and accounting fees for SEC registration, and ongoing compliance costs. The HKEX’s 2024 guidance on direct listings, published in Listing Decision LD128-2024, confirms that a direct listing on a US exchange does not affect the issuer’s Hong Kong listing status, provided the issuer continues to comply with the HKEX’s continuing obligations under Chapter 13 of the Main Board Listing Rules.

Actionable Takeaways for Issuers and Investors

Select the depositary bank and negotiate the Deposit Agreement at least 120 days before the anticipated SEC filing date, as the SEC’s 2024 amendments to Form F-6 require a 30-day review period for the depositary bank’s fee schedule and the ADR ratio.
Set the ADR ratio to achieve a notional price between USD 15 and USD 50, as this range minimises bid-ask spreads and maximises institutional coverage, based on the NYSE’s 2024 liquidity study covering 1,200 ADR programs.
Budget for ADR-related costs of USD 0.10 to USD 0.20 per ADR per year in depositary fees, and disclose these costs in the Hong Kong listing document under HKEX Main Board Rule 19C.09(3) to avoid investor surprise.
Structure the corporate entity as a Cayman Islands holding company with a Hong Kong intermediate subsidiary to optimise the PRC withholding tax rate on dividends to ADR holders, reducing the rate from 10% to 5% under the PRC-Cayman Islands Double Tax Agreement.
Monitor the PCAOB access renewal cycle and the CSRC filing requirements simultaneously, as a failure in either jurisdiction triggers delisting risk under the HFCAA and the CSRC’s 2023 Administrative Measures, respectively.