What is an Unsponsored American Depository Receipt (ADR)?

An Unsponsored American Depository Receipt (ADR), though backed by the common stock of an offshore company, is not directly sanctioned by that company and renders the holder un-entitled to the shareholder benefits that come with a sponsored ADR.

How Does an Unsponsored American Depository Receipt (ADR) Work?

An ADR is a financial instrument denominated in U.S. Dollars that allows U.S. investors to invest in the common stock of offshore entities. In the case of sponsored ADRs, wherein the offshore entity engages in and accounts for an ADR's issuance, holders are entitled to certain voting rights as de facto holders of the underlying stock.

Unsponsored ADRs, albeit legitimate, are often issued by proxy by some brokerage entity that holds an offshore company's common stock and does not involve the issuing offshore entity in the ADR's issuance. For this reason, holders of unsponsored ADRs are not entitled to the same rights as those that hold sponsored ADRs.

To illustrate, suppose Bob and Jack both hold ADRs for French company XYZ. Bob holds a sponsored ADR and is regarded as having the same voting rights and entitlements as a holder of XYZ's common stock. Jack, however, holds an unsponsored ADR produced individually by his broker. Though Jack is entitled to the value and dividend rewards offered by XYZ's underlying common stock, he is not entitled to the same rights as a common stock holder, because the ADR was produced by his broker without the direct involvement of XYZ.

Why Does an Unsponsored American Depository Receipt (ADR) Matter?

Unsponsored ADRs present a risk on the part of the investor since they are not sanctioned by the issuer of the underlying stock and as a result they are only as trustworthy as the issuing broker.