What is an initial public offering?
Times have changed?
For what reasons, does a company complete an IPO?
What is meant by an ADR?
What advantages do issuers enjoy with an ADR?
What are the advantages for investors with ADRs?
How ADRs are created?
ADRs, ADSs, and GDRs: Which is which?

What is an initial public offering?
An IPO is defined by when a company sells stocks to the public for the first time. Stock is sold in the primary market at an offering price that is configured by a deal’s managing underwriters and carried out by the full syndicate on the transaction. After pricing of the deal, shares of the offering are traded in the secondary market or what new issue professionals refer to as the aftermarket. Stock sold in the primary and secondary markets are assisted by investment bankers or underwriters that promote the offering through a road show.

Times have changed?
In the early days of the Nasdaq’s run, a deal with a hot or red-hot rating would be impossible for an individual investor to get shares of. Changing times on Wall Street have prompted alternative methods of underwriting to come about. One such is the OpenIPO or Dutch auction system implored by W.R. Hambrecht. In a Dutch auction, the playing field is leveled to allow individual investors a chance in purchasing shares of a company at the IPO price. This process will be explained in greater detail on Current Offerings.

For what reasons, does a company complete an IPO?
Most consider an IPO as a marketing event or coming out party. Technically, they’re right because IPOs are done to generate capital and create a liquid stock for the company to utilize in M&A transactions. When a company files an S-1, S-2, S-11 or SB-2 (types of IPO filings with the United States Securities and Exchange Commission), the company must indicate what they plan to use the proceeds for. In most cases, proceeds will help pay down debt, fund expansion and general corporate purposes.

What is meant by an ADR?
An ADR or American Depositary Receipt is an instrument used by non-U.S. companies, to offer and trade their shares in the U.S. marketplace. ADRs, when used in an IPO, typically carry no or limited voting power and are issued on calculated ratio. For example, in the IPO of China Life Insurance (ticker: LFC), investors purchasing shares in the ADR structured offering represent 40 shares.

What advantages do issuers enjoy with an ADR?
Notable foreign companies use ADRs to tap a U.S. investor base, increasing exposure and to generate capital. In late 2003, domesticated fasciations for Chinese-based initial public offerings started to take place. China Life Insurance and Ctrip.com (ticker: CTRP), an overseas clone of online travel planner Expedia, saw shares jump 86% and 78%, respectively.

What are the advantages for investors with ADRs?
For U.S. Investors, ADRs provide exposure to international companies without many of the obstacles that can occur when investing directly in foreign capital markets. ADRs trade and settle according to the practices and regulations of U.S. financial markets. ADRs generally pay dividends in U.S. dollars, thereby avoiding the need to deal with foreign currency transactions. Investing directly in a foreign stock in its local stock market often involves significant transaction or custodian costs and investing in ADRs eliminates many of those costs.

How ADRs are created?
ADRs are created when a broker buys shares in a foreign security in its home stock market, and then deposits the shares with a custodian bank, known as the depositary. The depositary then issues certificates in the U.S. that represent a certain number of the deposited securities as ADRs. The Bank of New York is a major facilitator of ADRs.

ADRs, ADSs, and GDRs: Which is which?
The term ADSs, or American Depositary Shares, often is used interchangeably with ADR. Here is the difference: ADRs are the actual certificates issued to represent ownership of ADSs and can represent several ADS shares for each ADR.
Sometimes ADRs are also referred to as GDRs, or Global Depository Receipts. The only difference in GDRs is that they can be issued in two or more markets simultaneously. This term is most often heard in connection with global share offerings or when a non-U.S. based company wants to raise money by listing in several capital markets at once.