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Dr receipt format for Finance

hello and welcome to a mayor Braun Citigroup joint presentation on depository receipt programs also commonly known as a DRS or a DSS first I'd like to take a moment and go through a few housekeeping items useful to ask questions please use the Q&A widget on your screen we will try to address questions throughout the webinar otherwise we will get back to you via email for those seeking CLE credit today please download the affirmation form and the evaluation form found in your resources widget on the screen we will announce the CLE code once during the middle of the presentation and please return both forms for CLE credit the presentation and supplemental materials are available for download from your resources widget we will also distribute these via email after the webinar I'm very excited today to be presenting here both myself David Baxton by way of background I'm a partner mayor bronze capital markets practice and have been practicing in this area for over 20 years a very significant part of my practice throughout these 20 years has been in the area of international companies seeking to raise capital in the United States primarily on NASDAQ or the New York Stock Exchange many of whom have chosen to Dunn to do so through the offering of American Depositary Shares or a DRS I'm joined by Ganesh and Shelby who will introduce themselves hi everyone I'm Shelby Stratton I am a senior analyst at Citibank and I joined Citibank through the capital markets program I started out in agency and trusts on the product team and have since rotated into the Depositary Receipts team working in an account management and product instruction thanks for having safe sure I am Dan you serve with that I had global global account management team for our business I have been in this business for past 10 years helping issuers access cross-border capital markets have been in banking for over all 15 years have worked in consumer business corporate strategy and M&A and on trading floor excited to be over here terrific so for the first part of this I'm going to turn it over to this to the Citigroup team to address a few questions particularly things like you know what is a depository receipt you know and why might companies from around the world be interested in actually choosing this product Duncan thanks Dave so to start with a little bit of a history on the depositary receipt product this product has actually been around since the late 1920s and was originated to assist US investors seeking to purchase shares of non-us corporations and the product still serves the same purpose today but has also evolved and is still a widely accepted flexible instrument that provides issuers worldwide with access to investors outside of their home markets and for a reference point ing to the US Federal Reserve at the end of 2019 total US investment in non US equities was about eight point seven trillion and also for reference DRS accounted for just over a trillion of that so getting into the basics of what is the depositary receipt this is a negotiable certificate that's issued by depository bank that evidences ownership and securities of non-us corporations each depository receipt evidences a depository share which represents a specific number of underlying shares of the ordinary shares in the local market the term DR depository receipt that we'll be using a lot this afternoon is commonly used to refer to both the physical certificate as well as the security itself and depository receipts are generally subject to the trading and settlement procedures of the market in which they're trading on in the rules and regulation of the exchange or the venue that is trading on as well and they're forming variants of this product first American Depositary Receipts which will probably be the primary focus of today's presentation but also global Depositary Receipts global depository notes in local depository receipts which we'll also be covering so more civics on the breakdown of the types of Depositary Receipts Depositary Receipts can be offered publicly in the US privately place or issue to an international offering the structure of the program usually defines the segment of investors that can purchase these securities so for starters American Depositary Receipts offer investors the ease of trading on the familiar exchanges not having to deal with foreign exchange currencies payment of dividends and US dollars and represent ownership and shares of a foreign company that trades in the US on the New York Stock Exchange Nasdaq or an over-the-counter market global Depositary Receipts are offered to investors in two or more markets outside of the issuers home country you can be public or private and are usually offered pursuant to rule 144 a for US buyers that are qualified institutional buyers or an international offering person into Regulation S and I'll skip to the last bullet local Depositary Receipts first so these are programs that extend the traditional ADR program to markets globally such as Hong Kong Japan and then finally global depository notes this is the debt equivalent that allows international investors to invest in a domestic bond outside of their home market this is particularly attractive for countries with currencies that do not settle through your Euroclear and variations of these products really represent the wide range of demand of investors globally to access securities that are outside of their home markets so to break it down even further between a DRS and GDRs for a DRS there are three different levels in these different levels represent different goals of what the issuer is ultimately trying to achieve the first level is an over-the-counter listing and this is usually the most cost effective way for a non-us company to have its equity traded in the US and to access incremental pools of available capital there are three different on trading levels OTC pink oTCQB and OTCQX OTC pink being the least stringent and OTCQX being exclusively for companies that the financial standards and undergo a qualitative review and then we have our level two and level three programs and these are ad are programs that are listed on the New York Stock Exchange and Nasdaq and must adhere to more stringent financial requirements as well as Securities Act of 1933 and Securities Exchange Act of 1934 as well as on US GAAP conformation level tooth this is when an issuer with shares on a US exchange but a level three is when a foreign issuer does a capital raising and an IPO on a US exchange in this process is similar to an IPO that's not an ADR form as well so the issuer a Lexington says no bank to advise me underwrite the shares as well as market the ATR s to u.s. investors and once the offering complete the ADR program is maintained as a listed facility and can typically accept ongoing deposits from investors for ATR issuance and issue is also have the ability to do follow-on offerings as well and I was going to say a common question that we get is like which is the right ADR program to have for the issuer and the answer really is case specific but if somebody wants to do a capital raising with access to widest set of investors level threes they don't ADR program right that will enable issuers to do that obviously that comes with added cost and compliance burden you know you could always you know raise capital quickly by placing it outside US which a lot of issuers from Korea Avon India have done that you know CIS countries like Kazakhstan Russia have done that as well and more recently China has you know loved for Chinese companies to list on London Stock Exchange you know to raise capital why are GTRs a level one program is a very low touch you know program from an issuer perspective so for somebody looking to you know provide us investors an opportunity to invest that may be the right vehicles without you know without capital raising typically you would see that issue who have level one program on an average they have 1% of freefloat market cap so you know just to give some context you know on that front and then obviously level to listing not very common not many issuers go for just listing without capital raise most of the time issuers who have a strategic objective let's just say they're looking to acquire a company a US company down the line and want to issue a DRS as acquisition currency have typically done a level 2 program so in recent history it's not very common but nevertheless it allows for companies to list without raising capital sure and for those companies that are traded in a home market and may even be very prominent in their home market a lot of times you know they as they think about a long term strategy of accessing the US capital markets you know the level 1 ADR particularly in the QX variant where it's really the highest level in new Ganesh maybe you could talk about some of the Investor Relations benefits there but but you know that really is a lot of times the first proactive step that international companies take as they embark on the journey towards you know accessing the US capital markets and so you know what what are some of the benefits there and and and I also agree that the level to obviously statistically is very unpopular because in a lot of ways the level 2 is all of the burden with none of the capital raising benefits you know there have been some companies who have done it but maybe just talked about kind of you know the level one kind of in the in the milestone that that is in the sort of you know longer-term journey sure so I'm for this purpose is I'm going to club level one along with unspotted ideas which is essentially both of them trade over-the-counter in one case issuer has involvement and in other case issuer does not but as I said you have roughly thousand plus programs you know in this space average freefloat market cap is one percent it's a wide range tool so it ranges from 0% to like 8% but 1% is a good benchmark so I would say for for a program to be successful in the level one space I would say that you know you know having a decent free your market cap is essential then you know for for issuers who have identified investors who have restrictions in investing in local securities if they've identified a set of investors and levels and program makes a good fit and as you said it's not uncommon for for for issuers when they see a successful unspun surd or a level 1 program they might think of going to the next stage which is listing but some of the issuers have also taken a view that they wanted to be a level 1 program right so it really became becomes a very case-specific discussion but this space has grown I think since the rule change in 2008 you know the over the counter space has grown a lot and some of the issuers get a good validation of the demand from the investor side when they see the statistics on the over-the-counter programs all caught up and so to cover some of the benefits of this charity your cross lessons can help foreign companies draw interest of new investors and grandkids gain greater visibility of the company's products the depository receipt allows for an increased pool of capital allowing for potentially more or larger equity offerings as well as convenience liquidity through an increased amount of trading in both the local and foreign markets further listing in country with radiant rigorous regulatory requirements such as the US or UK promotes company discipline and consider all transparency to investors further the national bureau of economic suggests that foreign firms listed in the US can have significantly higher evaluations and foreign firms not listed in the US and this listing premium can be attributed in part to higher visibility from skåne when introducing products and new securities to these market further issuers can QCD ours to access institutional investors that may be prohibited or limited from investing in foreign and US investors can also receive a lot of benefit from this product so first US investors can achieve geographic diversification within their portfolio as well as the ADR providing a high level of convenience for investors such as settlement and trading ing to u.s. market practices payment in quotation in US dollars and generally the includes the product is to provide investors seamless access to these foreign companies as if they were trading exactly like a local US security I think the the fourth bullet point on the investor side is really important right it is it the product essentially solves for access issues so within the US you have investors who have restrictions for example separately managed accounts can invest only in US dollar denominated securities so what that means is if they want exposure to international companies ADR or DRS generally is the only route that they can take so DRS helps all solve for that you know any access related issues so you will see that you know fidelity or Vanguard funds you know we'll hold ordinary shares in the local market but they'll also hold a DRS and that's because the underlying funds have mandate restrictions and therefore for them a DRS or DRS is a very you know valuable vehicle to do to have in place and one of the other things that that at least we hear when we talk to companies is again it at least regardless of whether a company is only doing this you know for the for the reason of you know accommodating a particular group of investors or whether the company is actually looking at this as the first step in a very long journey the fact is it really invariably raises the company's Investor Relations profile you know process in game you know to a whole nother level particularly if they take advantage of sort of the highest level within the fill level one and take advantage of the services that the depository receipt providers like City can offer you know even for the level one issuers and absolutely that's a video so you know as part of her services we offer Investor Relations as a value add service and what we have often seen is that you know having an ADR program increases foreign ownership in the local stock sometimes as well so what we advise our clients is do not look at just the ADR piece look at foreign ownership in totality because investors may get interested in your program because you have an ADR you have visibility but they end up buying sometimes local shares where they can and that's not a bad thing at the end of the day you're creating incremental foreign demand so DRS helped build that visibility dr helps build that awareness and you see that benefit and we have done some you know analysis to show that companies who have had DRS in place are also do also see benefit in cost of capital so they see reduction in cost of capital so there are empirical studies out there you put out some studies there are other studies out there which if sort of shown that so that's a very valid point and the very occurs you know key consideration in thinking of TR programs great so in terms of some of the legal considerations here at Kadesh you mentioned this before but 2008 actually made this a whole lot easier for many foreign issuers in terms of accessing the market and so you know lawyers you know invariably keep things complicated but there's a rule under the 1934 Act which is called rule 12 G 3 2b which essentially serves as an exemption from the reporting requirements of of the 1934 Act which in the u.s. is the primary regulation that governs SEC reporting and compliance and so up until that point people actually had to go through an application process you know for foreign issuers and submit materials and and and it wasn't that straightforward and that what this change did was you could create a level 1 ADR program as long as you publish in English on the website there's certain periodic information which invariably is actually when we talk about the kinds of companies that you know it would be relevant to choose these programs at this point in time I think pretty much almost every issuer that might be a candidate for a level one program would actually have already or with very minor modifications investor relations part of its website in English where with minor accommodations it could actually be eligible for this Truong of establishing a level one ADR program as we've all mentioned before the level one program is actually the simplest program for foreign issuers it's so simple in fact that depository banks can do this on an unspun serd basis and you know over the years we certainly have had calls from clients saying hey this depository just established an ATS program for us what does it mean and what do we do and how do we deal with it and we didn't even want this and what does that mean you know in a lot of respects what that is is really the depository Bank you know you know just just you know facilitating demand really from investors for all the reasons that we've talked about before what I would say on the legal side is that the level 1 ADR is one of the simplest products to establish from a legal perspective the form F six registration statement that registers that security under the Securities Act of 1933 is probably the simplest form of registration statement that's out there it essentially is a very very short form that you know has as exhibits to it the deposit agreement that is entered into between the issuer the depository bank and then you know it's a tri-party agreement you know because the holders and beneficial owners of the ad SS that are issued under that agreement you know also have the benefit of that agreement one other point here is that the in the US the level 1 ADR is actually trade you know in the over-the-counter market as Ganesh and Shelby have mentioned you know one of the things that's that's a nuance but I think it is an important nuance for people to understand and it has certainly been reinforced to us by the various depository council is that today I'm like in the 1990s you know invariably almost all of these are are in the form of book entry American Depositary Shares so the actual receipt that that that decades ago people would get that would represent a deposit of underlying securities at a custodian in the local market you know in most programs that receipt actually is never even issued in most programs you know what's actually issued traded you know when when when underwriters you know in an offering for example buy those securities from an issuer you know through the through the depository and the whole chain everything is done in book entry and and it's really an American depository share and so for those on the phone and for those interested a lot of times if you're doing a securities offering in this product and you happen to get back that kind of markup from depository counsel all they're really doing is reflecting the reality of how these securities trade get a sad one statistical point on this so just to your earlier point from the 2008 12 III to be change was so significant at that point in time before the rule change you had roughly 300 programs that were over-the-counter today you have more than 1200 the liquidity has gone up year over year the trading volumes trading value has gone up your investors participating in these programs have gone up as well so when you look at it from a demand perspective this change has been beneficial for both investors certainly but also for issuers because now they're able to drive incremental demand for the company's share that's that's great so turning to just the nuance and the distinction between the sponsored and E and the unspotted program yes I'm slide on slide eight here so as mentioned before one of the things that's unique about this product is that unlike many other securities products this is a product that also has a variant which you know a depository bank can actually just establish you know to facilitate trading in an issuer securities I would say that we're where we get involved as lawyers is far more often when it's the sponsored variety meaning a company actually wants to go out and take the step whether it's because they actually want to do something as aggressive as beyond the q-x part of the OTC market which is you know you know a closer in the spectrum to you know what what what an actual listing would look like or whether even if it's just to facilitate trading and what I still call the pin sheets because that's what yeah that's kind of how it was referred to then so but that's that's the sponsored variety you know one of the things that I often get asked and we'll talk about the liability framework later on in this presentation but one of the things that I often get asked is okay how much management time and how difficult is this really to establish and I know I just said form f6 is probably the simplest form a company can file with the SEC which is all true I would note that that form f6 needs to be signed by the top few executives of a company and also by the majority of its board and so yes sometimes that's very easy in some companies that's not easy at all and it's just something that you know it's worth worth worth keeping in mind I would say on the deposit agreements at this point you know over the years you know there has been you know various you know I wouldn't dramas too strong a word but there have has been various back-and-forth about certain topics like pre-release transactions or other things like that but I think it is safe to say that at this point it's very rare certainly in my practice where you know the deposit agreement becomes a gating item for an issue it's a typical standard New York law governed agreement you know with with you know typical indemnification provisions and other things that you know maybe to someone from the outside the u.s. they may not love them but I've never seen that agreement be a impediment to actually someone moving forward with something they otherwise wanted to do and that experience is very similar I think you know it may seem overwhelming for somebody undertaking this exercise for the first time but making sure that you have you know a qualified and experienced US firm like Mayor Brown and then a depository bank has done this and you know what the years you know is important and that could make the whole experience really really seamless that's that's great just to spend another moment on the home sponsored side of a DRS and slide 9 so so yes I know sometimes we do get these calls from issuers you know the reality is I'm not aware that other than you know a dialogue between the issue or in the investment and the depository bank that there's anything that can really be done about it I personally and we'll talk about liability in the end I personally think that the risks to companies of this are extremely remote you know clearly depending on the litigation climate and the regulatory environment you know there are some there are some who just find this whole concept offensive that you know a security can kind of be be established against someone's well almost I think you know in a similar way in Europe and in different contexts more on the debt context than the equity context you know people are also kind of going and taking debt securities and listing them and people are finding all sorts of consequences with them I can really say that that it's rare that this becomes an issue for someone beyond maybe a phone call and particularly once we can walk through ok what's what what does this really mean what's really likely to be the liability profile here if any and you know you have to do anything and all those sorts of questions I don't know Ganesh and Shelby do you ever get calls from issuers saying hey what did you guys just do for us so by the way we completely with you in that establishing a program without issuer involvement is not something that we like as well and we don't do that so at City although we are not legally required to get issued to sign any document any deposit agreement or f6 we would typically reach out to the company and make sure that they are in principle okay with us establishing a none sponsored program so that's why if you will see we've lost out on some opportunities because we're an issuer has said that I am NOT okay with you doing this we haven't established a program but our competitors have so you've lost out on business on that but you know we put clients first and we've always taken a view that unless clients you know give a sort of no objection this is not a legal document or anything like that but just an in principle okay to proceed we would not establish so it's at City all the unspotted programs that we have established we have made sure that we you know communicate with the issuer and go ahead only after they were stopped they've given sort of a no objection it sometimes becomes very ironic in that our competition has already established a program it's already out there the issuer tells us don't do it but we are like it's already out there right now we provide additional Mis or you know reports to event or run sponsored clients and said you at least get more color with us or get insights as to what is happening in your program so sometimes that happens but we believe that you know without issuer knowing or without issuer sort of you know no objection it's it's probably not appropriate to sort of you know establish the program so that's you know from our perspective and then from time to time we get we do get questions as to what does it mean for a company you know what does it mean from from from a liability perspective and things like that and we suggested the company that they should talk to their us counsel because we don't give legal advice and but for some reason if they're not comfortable with us establishing then we'll not establish the program so we always try to put client first in that context although legally we are not required to do that so one of the things I want to go through quickly on time slide 11 is just the touch briefly on the concept of fees because for people who don't know this area they would they would kind of view the depositary as you know another service provider that needs to be paid for but but what's what can you tell us about fees sure of Sylvia listed so fees are an investor pay model and the typical fees that are charged are issuance and cancellation fees these are five cents each and so when dr is issued into for an american posterity on issued on the New York Stock Exchange or Nasdaq the Orang over-the-counter market the investor would be charged a five cent fee for the creation of that ADR and then likewise if the ADR is been cancelled in the investor once liquidity there would be a five cent cancellation fee now in the secondary market there is a secondary market for a TRS it's not all issuance and cancellation there are no issuance fees for the purchase of a DRS in the secondary traded market so I think one one important distinction I was make though is when companies are doing an IPO City a depository Bank would not charge issuance fees for issuance of a DRS and an IPO so typically we don't charge unless issuer says they wanted to have it that way so the issuance and cancellation fee that Shelby was talking about was post establishment of a program let's just say after capital raising then investors go cross-border meaning an area investor you know brings us ideas and says cancel it and give us ordinary shares you charge cancellation fees or when investors go through the creation process you would charge issuances in that instance but on IPOs issuance fees is typically waived yeah I think that's very helpful so then turning to slide 12 it's just important to keep in mind the various duties Act and I can do three Act registration requirements the way the Securities Act looks at this is when you issue an ADR you're actually offering ADR you're actually doing two if you're offering to securities once the underlying shares typically deposited locally with a custodian in the local market and and the American Depositary Shares and so as we mentioned the ours are registered on this very simple form of six for those doing a level three program and actually doing a capital raising and registering the underlying ordinary shares that's a form F one the form F one is in many ways similar not entirely but in many ways similar to the u.s. domestic company formats one it does have a typical SEC review and comment process that's typically for the first nowadays confidential submission usually around thirty days and the processes are very similar I think the benefits of F 1 and the benefits of form private issue or disclosure will get to but but but I still tell companies and as we look to the to the ongoing requirements on the next slide on twenty F which is the annual reporting requirement that when you compare the level of detail and work particularly on the ongoing reporting site as we're now deep into 10k season and going into proxy season you know the foreign private issuer is being exempt from from the proxies from section sixteen reporting from a lot of the more onerous public company requirements it actually is certainly the case that a form twenty F which is the the annual report of the foreign private issuer is a lot of work but in our experience it's still less work than a typical US domestic company has to go through over the course of the year you know one of the other things on slide 14 just looking at things to be aware of particularly as companies look at a DSS and the level 3 capital raising contexts are that you know you are going to have to create a company that's ready to be a public company in the United States and whether that's complying even with the reduced form private issue or corporate governance regimes you know having CEO and CFO certifications with particularly the annual report on 20 F or just setting up the company for ultimately sarbanes-oxley internal control over financial reporting audits those are the four o4b audits even you know if not initially because many of the emerging growth companies for example are but at least overtime now those are important things to plan for so speaking speaking of emerging growth company and before I do so I'm going to read out the CLE code the CLE code is Oh 2 MB 25 RP so 0 2 MB 25 RP so turning back to the emerging growth company accommodations part of the JOBS Act in 2012 and enhanced through the more recent fast act this was essentially saying that we want an on-ramp for emerging growth companies to be able to access the public markets and sort of you know ease them into the reporting and compliance burdens of being a US public company and there are a variety of accommodations that an emergent growth company can take advantage of and and and essentially the way to think about it although that's the definitions a little more detailed it's a company with less than a billion point oh seven of revenues will qualify and be able to take advantage of these accommodations they do last up to five years or until the last day that the revenue threshold is exceeded or if a company issues more than a billion dollars of non convertible debt during the three years or essentially if they have more than seven hundred million of public float which is equity held by non affiliates that point they would also fall into the definition of a large accelerated filer and once you do that there is a transition period but you basically have to report on the accelerated filers the large accelerator file or timetable in terms of the the form private issuer accommodations so there are many in their significance so as as I mentioned before they form private issuers are exempt from the proxy rules they're also exempt from section 16 so you know that means that foreign private issuers don't have to have their executives file things like form fours and form threes and these are you know you know forms that essentially report you know buys and sells and the issuer securities option grants and variety of other things which is certainly you know a fairly significant compliance burden for US companies as is the proxy process the other thing that's different is unlike domestic companies that that are required to do quarterly reporting on Form 10-q with specific line items that it calls for the foreign private issuers are able to report to furnish reports on form 6-k far less stringent again the twenty F is far less stringent and then even in terms of the financial statements you have two major varieties of financial statements that you can have you could have IFRS you know as adopted by the International Accounting Standards Board and for many foreign private issuers that is the way to go that's how at this point particularly in Europe and in many places around the world that's how companies are reporting anyway so so that you know what used to be years ago a very significant gating item to accessing the u.s. capital markets was you know how can we write you know how long and how much work will be involved in reconciling a company's financials to US GAAP and so having the ability to use you know IASB IFRS you know it's very significant certainly in our practice and in looking at the deals that get filed you know reconciliation is not something that is certainly a full-blown reconciliation is not something that we see it's not nearly as prominent an issue as it was certainly in the 90s and before these before these accommodations came into play one thing to note that's that many issuers should be aware of is that the testing of foreign private issuers status because people get confused about this sometimes and it's important to know so you lose your foreign private issuers status if - if there are two big parts of this right the first is more than 50% of your shares are held you know by US person or citizen or resident and for this purpose we look at the ADR depository for example as the u.s. person so all the shares that a company has at the custodian that are represented by American Depositary Shares all of that blah is going to be looked at as us and for a lot of companies this means that particularly after their IPO in the US and especially after a follow-on or two it's very likely you know for a lot of companies that more than 50% of the shares are held by a US and if you think about that if it just stopped there you'd say well then how is it that I see companies you know and I won't name specific companies but very large companies that have a very significant ATS component out there how come they're still filing 6 KS and 20s and you know where is their proxy and why aren't we seeing that and the answer lies with it with the next part of it so it has to be that component but then also a majority of the directors or executive officers after the u.s. citizens or residents more than 50% of the assets have to be in the US or the business has to be principally administered in the US and so for a lot of the companies in the profile that I just mentioned they're headquartered in let's just say Europe they have their executive team in Europe they have you know the the majority of the directors in Europe or around the world non-us certainly they don't have more than 50% of their assets in the US they may have a sizeable US presence but these are they want the profile of who I'm talking about our large global multinationals and so and they could certainly defend that their business is not administered principally in the US and so you have a result where sometimes you could have a relatively smaller emerging growth company that goes public maybe gain some traction does a few follow-on offerings and all of a sudden loses its foreign private issuers status because particularly if it expands in the u.s. you know it will it will you know first you know you know lose on the first prong of it because more than 50% of the shares you know including Counting that a DRS as US shares would be would be us and then it would lose on the second prong whereas some of these very large multinationals with a DES volume that's that's that's enormous some of the largest issuers in the world they can still maintain their foreign private issuers status and and if I can add this is a very valid point because what we have seen especially for emerging growth companies who have taken advantage of jobs at in the life sciences space quite a few of them started with a very small float in the US but because most of the investors in that industry are in the u.s. they did multiple offerings in the US and eventually a big part of their float in couple of cases close to hundred percent was in the US right but they were still able to take advantage of the foreign private issuers status because of you know the second prong right so that's a very valid point especially for that sector which has been taken most advantage of the emerging growth concept the one other thing which I would like to add is even if you are a foreign issuer you could still have a TR program it's not very common we have handful of cases that there are foreign issuers because their board sits in the US as well although they're a foreign company but you know but they still have an ATR program so technically that still that's just viable but most companies would fall in the category of a you know the explanation that you just provide it so they can still retain the foreign private issuer status sure and I think it is important to mention life sciences obviously there are certain sectors you know second life sciences being the most prominent where the infrastructure for the industry is so much more present in the u.s. that there's a lot of evidence that shows that there's a tremendous benefit from choosing this route we've talked a lot about the benefits of Depositary Receipts but we also want to cover the benefits of Depositary Receipts in regards to other options so foreign issuers also have the option to do a direct listing and oftentimes when we talk to issuers or councils that have helped out with the direct listening to the US we found that issuers were unaware of a lot of the benefits of Depositary Receipts and the overall structure so a few of the main benefits that we like to commonly cover include first asset servicing so the depository bank manages a lot of service parte communications third-party vendors on behalf the issuer such as the department of the share registrar transfer agent payment of dividends handling of AGM UGM proxy safekeeping and settlements and if an issuer were to go to rest the issue would have to provide asset servicing to investors and deal with these service providers on their own without the help of a depository Bank further there is the ability for share price alignment so at the beginning of the ADR program the issuer can set the ADR ratio and ultimately determine the price of their depository receipt and the ratio again is the number of underlying ordinary shares represented by the depository receipt a lot of times we see a one to one ratio but this can also be a multiple or a fraction of underlying shares and a few factors that issuers should usually look at would be industry peers regional peers exchange options general investor appeal of the price where's the value at and then not only can this be established at the beginning of the program but this ratio can be adjusted throughout the duration of the program as well if the issuer needs to bring the share price back up to the exchange requirements or vice versa if the share price is doing really well and they want to inject a little bit of liquidity back into the program they can adjust the ratio there as well again the deposit agreement an agreement we've talked about a lot today provides a high level of flexibility that bridges a lot of the regulatory differences between markets and allows for easy termination of the depository receipt facility differentiated voting rights and differential treatment for other distributions such as a right offering and then finally one of the most significant benefits of a depository receipt program ing to a lot of the issuers that we sponsor our financial contributions and as we mentioned depository receipts are an investor pay model so the depositary Bank we will collect these fees from investors and we'll give a large portion of these fees back to the issuers to help offset program costs such as legal expenses exchange lesan costs costs any um any type of program related expense these contributions can be used to offset this and we've talked a lot about issuance and cancellation activity and this is also referred to as fungibility or the availability and marking conditions to switch in and out of the dr form in the ordinary form so to clarify how this process works more specifically an investor would contact their broker indicating that they would like to purchase a depositary receipt the broker would did reach out to a local broker who then would have purchased the ordinary shares in the local market and these shares are deposited with a local custodian the custodian that instructs the depository bank to issue the Depositary Receipts that are represented by the shares of custodian holding the depository bank issues these Depositary Receipts and delivers them in physical form or as they've mentioned most commonly in book entry form through either DTC Euroclear or clearstream and then the broker delivers the depository receipts to the investor usually in the form of credits to their account and also this can work in the other way for the cancellation process but this does provide a lot of liquidity for investors and allows a lot of investors to move in and out of positions of sufficient size dave has covered a lot of the closing documents already so I won't repeat a lot of that but from the depository Bank side the two main agreements that are required to establish a dr program include the deposit agreement which is an agreement between the issuer the depository bank as well as the investors in this details the fees that we've talked about so the issuance and cancellation fees also we haven't mentioned yet usually the depository banks will charge an annual dividend or deposit area service fee as well and then we also have the engagement letter and this is the confidential agreement just between the issuer and a depository bank and Dave in your experience I don't know if there's any specific instances in which you were fall into positive grants or engagement letters on behalf of issuers that will be relevant so a couple things one is that you know very very generally but you know that this document is not filed with the SOC and I say certainly city and the issuers are very happy about that so the engagement letter there you know the other thing I would say is that you know a lot of this is really an education process for a lot of the issuers around the world who really come at this you know before you know knowing much about the depositories but thinking that they want to have just regular shares listed and though in the in the on the exchange here in the US and so you know it's really only at that point where they start to realize the economics and particularly the IPO economics I think people once they realize the IPO economics you know just tend to get a lot more comfortable I don't answer questions shall we see a lot of drama about that letter itself I think I think if the SEC had whatever mandates filing it I think that would be maybe a little bit more but the reality is the SEC is going the other way it's more and more there's more and more accommodation for you know not filing a lot of this sort of stuff the one other observation I would make before turning to liability is that there are a lot of traps for the unwary in the dr issuance process as as companies do capital raisings and as you need to close these capital raising transactions and the simple reason is that closing that transaction starts with with a share issuance process in the local market and so whether you're dealing with with with the UK or Europe or whether you're dealing with Latin America or Asia you're you're starting a process that is far more complex even in terms of the steps involved than a typical US domestic company from wherever in the United States they're just doing a you know a simple dtc closing and so there are any number of pitfalls for the unwary there I think the good news is is that you know failed settlements are extraordinarily rare and we never never here so in knockout of wood and so we it's just really people need to be aware that they're settling capital-raising 380 RS they need to really plan out the steps and you know if it hasn't been done you know well in advance of pricing which would certainly be our advice certainly by the time you price in particularly in a t plus to settlement environment really need to have a plan for how that process is going to work so far be it for us to leave liability until the end because liability is actually the question that we certainly get asked about the most whether its issuers even thinking about a level 1 program and certainly those issuers that are thinking about you know capital raising in the US and and Level 3's and and and let me just say that I think I think there's been a convergence of two factors at least over the last decade or so and that's that well there's no question that the US has a robust plaintiffs bar and you know particularly for companies that do do public offerings in the US the section 11 of the Securities Act that that gives people a private right of action for people who sell securities on the basis of you know materially misleading or either directly or by omission information and public offerings and and for some without even a due diligence defense for many others with a due diligence defense I think that's been a deterrent over the years for people accessing the u.s. capital markets and I'm never one to sugarcoat that risk and of course that the antidote is to actually have a working group involve professionals involved that do their best to make sure both the issuer level and in the whole working group really that that by the time you know we price a deal that the disclosure package is free of material misstatements or omissions but the convergence that I'm mentioning is also the fact that in many markets around the world whether it's mar in Europe or whether it's other regulations around the world you know it's not the things in the US have changed that much but it's that things you know people who thought that the rush you probably saw maybe in the early 2000s to you know of GDR issuers to London from certain companies or whatever that you know arguably was designed to kind of you know skirt the US liability regime I think in Europe it's gotten you know a lot more stringent as well and so clearly things that companies need to think about and consider but but I think there is a little bit of that regulatory convergence and they're just just looking at section 11 specifically which is you know probably one of the more famous ones so as mentioned the issuer actually is absolutely liable for material misstatements or omissions in the registration statement for the issuer itself they don't have a due diligence defense they don't have a good faith defense the people who do have a good faith defense of directors and officers and the underwriters and and even within that there are parts of the registration statement of which the prospectus is a part where there are certain expertised portions so those include the audited financials and there the defense that the this group of people will have the officers directors or underwriters they won't be liable if they can if they had no reasonable ground to believe that that the statements you know at the time the registration statement became effective or untrue and so you know that is that is something in you know the length of you diligence process that we go through in the US securities offering you know that's that's that's part of it and obviously you know with with the expertised portion you know as long as they had they would be they had confidence that the expertise part of the registration statement again the audited financials you know you know fairly represented and was a fair copy of the of the actual audited financial report you know that's also part of that defense for the non expertise portions the the due diligence defenses the reasonable investigation one and that's you know after a reasonable investigation you know they had reasonable grounds to believe and did believe that when the registration statement was declared effective the on expertised portions were true and there were no material misstatements or omissions there and so you know that's that's really the liability framework i think just just taking a step back which is which is always useful here and in same with with with section 1282 we'll talk about in a moment in most most securities enforcement actions we see if you take the element of fraud out of the equation and I realize that fraud is it is very broad and you can you can you know you know there are very few cases of just blatant 100 percent fraud but but if you take that out of the equation I think we can cut we can comfortably tell that to you to issuers even those who are looking at 144a where the liability frameworks a little bit different if you take that element out you know of course you know it requires diligence but it's not that likely that if a professional company is doing everything properly and has the proper controls and procedures and the proper infrastructure set up at the company that you know that that class action lawsuits for example will be successful the u.s. disclosure framework is just that it's based on disclosure it's based on giving investors all the information that a reasonable investor would have to know and have been making have them make then make an investment decision which could be the wrong decision as long as they had the proper disclosure and the proper information so for section 12 a 2 it's a right of action for damages or rescission which no one wants to see particularly not in an underwritten offering you know guess the person you know that that sold the security to someone by means of a prospectus or an oral communication with a material misstatement or omission now there is a due diligence defense there it's couched somewhat differently but but I think that's also you know something that that you know people need to be aware of they do one other thing that's changed you know certainly since securities reform was that you know really the liability is at the time of sale and that's what this rule 159 did and so even though when we do a deal there's a final prospectus at the end that will contain the final pricing terms or the final terms of the deal the assessment of liability is determined you know at the time at or prior to the time of sale and so that's that's really there you can't talk about securities offerings without talking about 10 B 5 and which is an anti-fraud and anti manipulation provision and that's basically a provision in the 1934 Act which forbids the use of manipulative or deceptive devices in connection with the purchase or sale of any securities and so as we show here on the slide you know the issuer employees or agents can be liable for false and misleading information or suppressing material information and that's regardless of whether even the issue or any of its employees or agents purchased or sold any securities you know this really comes up in two contexts both the context of the securities offering as well as the context of the periodic reporting what I would say is that first of all proving the elements of the 10 B 5 1 claim of a tip of a 10 B 5 claim are very specific so this is not the one where you can just go and file a class-action lawsuit this is the one where you have to prove things like the legal terminology is see enter or intend to deceive and it's very fact-specific and you have to show damages and reliance and a lot of other factors which again absent fraud which are really the cases where people most often recover under these things it's something important to know and and you know and and something to consider but I think a properly structured company you know can it can address those you know the final few slides that we have here just talked about many of the things that we've talked about including capital raising and investor trends including a very interesting initiative that the Shanghai and London Stock Exchange have lunch together and finally global depository notes which are very interesting product that you know that that city is really shown leadership and that enable investors to buy in dollar form securities in various local emerging markets throughout the world that are shown on slide 29 here and and can be a product that you know may make sense particularly for some investors or even for some some issuers here before we close I'll read the CLE quote code one more time it's 0 2 MB 25 RP we all thank you very much for dialing in and anyone who has questions can certainly email any of us we'd be very happy to follow up thank you