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Sponsored ADRs are backed by the company and the issuing bank. They can trade on exchanges or OTC. Depending on the Level, the SEC compliance varies and the companies can even raise funds.
Unsponsored ADRs are NOT backed by companies. They can trade only OTC. There are no voting rights.
Since it seems Level 1 ADRs do not have to file any company financial information with the SEC, is it possible for some of the existing Chinese ADRs to avoid delisting by trading as level 1 ADRs? Sort of grand fathering!
Many Chinese ADRs listed in the US for the expressed purpose of raising funds in the US. Those US listings were their only listings for most as they didn't qualify for listing in HK or China Mainland - this should have been a red flag to begin with. Moreover, to avoid the US or Chinese regulations, they cooked up this strange VIE structure using a 3rd country without much regulation. When the US-China relations were better, a lot of this was overlooked and exceptions were approved by the SEC and investors (as usual) didn't care. Both the US and China now cite issues with that VIE structure. I don't think that the Chinese ADRs using their special VIE structure are salvageable. Lot of time has been wasted with Chinese hoping for a compromise* and now the SEC 3-yr clock is ticking.
*Chinese even offered that they could provide required data access to the SEC but they have a problem in doing that through the nongovernment/nonprofit PCAOB.
".....U.S. and China signed a Statement of Protocol, the Securities and Exchange Commission said on Friday, a first step toward allowing American officials to review audit documents of Chinese businesses.
As part of the agreement, inspectors from the Public Company Accounting Oversight Board will be able to investigate the audit paperwork of U.S.-listed Chinese and Hong Kong companies. The officials hadn’t been willing to travel to China and Hong Kong unless such an agreement was in place for such a framework.
The “inspectors must be on the ground by mid-September if their work has any chance to be successfully completed by the end of this year, ” said SEC Chair Gary Gensler....."
China has been notorious about not allowing PCAOB access to Chinese audit work and has not followed through with past agreements re such access. There is no guarantee it is going to stick this time. I hope all the PCAOB staff visiting China are on diplomatic visas. PCAOB currently reviews / audits 50 foreign countries’ companies audit work and did not have to deal with this type of B.S. China looks at every routine process / matter as an opportunity to gain leverage. I do not think China has changed its stripes. I place most of the blame at the feet of our investment bankers for putting US investors in this precarious situation. Our politicians are next to be blamed before we turn our ire on China who is exploiting our politicians’ disinterest in governing and protecting US investors.
Comments
Unsponsored ADRs are NOT backed by companies. They can trade only OTC. There are no voting rights.
https://www.investopedia.com/terms/s/sponsoredadr.asp
https://www.investopedia.com/terms/u/unsponsoredadr.asp
https://www.sec.gov/investor/alerts/adr-bulletin.pdf
*Chinese even offered that they could provide required data access to the SEC but they have a problem in doing that through the nongovernment/nonprofit PCAOB.
".....U.S. and China signed a Statement of Protocol, the Securities and Exchange Commission said on Friday, a first step toward allowing American officials to review audit documents of Chinese businesses.
As part of the agreement, inspectors from the Public Company Accounting Oversight Board will be able to investigate the audit paperwork of U.S.-listed Chinese and Hong Kong companies. The officials hadn’t been willing to travel to China and Hong Kong unless such an agreement was in place for such a framework.
The “inspectors must be on the ground by mid-September if their work has any chance to be successfully completed by the end of this year, ” said SEC Chair Gary Gensler....."