Equities
Common & Preferred Shares

NI 41-101 — The Prospectus Requirement

Purpose of a Prospectus

A prospectus is a full, true, and plain disclosure of all material facts relating to the securities being distributed. Its core purpose is investor protection — ensuring no investor is disadvantaged by asymmetric information. The prospectus must be filed with and receipted by the relevant provincial securities regulator before any securities can be sold to the public.

Application to Primary and Secondary Distributions

Application to Takeovers (Bid Prospectus)

When an acquirer makes a takeover bid using shares as consideration (offering their own shares to purchase the target's shares), they must provide a takeover bid circular (or bid prospectus in certain transactions). This document gives target shareholders the information needed to evaluate the offer. Securities regulators ensure this document is complete and not misleading before shareholders vote or tender.

Comprehensive Disclosure Requirements

A full prospectus under NI 41-101 must contain, at minimum:

• Business description: What the company does, its history, its industry and competitive position
• Use of proceeds: Exactly how the money raised will be used — this prevents "bait and switch" situations
• Financial statements: Audited financial statements for the most recent fiscal years
• Management's Discussion & Analysis (MD&A): Management's analysis of financial results and outlook
• Risk factors: All material risks that could affect the security's value — these must be specific, not boilerplate
• Description of securities: Exact rights attached to the shares being sold (voting, dividends, dissolution)
• Management and director information: Compensation, experience, any conflicts of interest
• Material contracts: Key agreements the company has entered into
• Legal proceedings: Any material ongoing or threatened litigation

Advertising and Marketing Restrictions

Once a prospectus is filed but before it receives a receipt (the "waiting period"), issuers and dealers can distribute a preliminary prospectus (sometimes called a "red herring" — because early versions had a red-bordered notice on the cover) and begin marketing, but they cannot confirm sales or accept binding commitments.

• Road shows: Permitted during the waiting period to generate interest among institutional investors
• Green sheets: Internal documents used by dealers to summarize the offering for their sales teams — not given to clients
• Tombstone ads: Simple factual announcements that an offering is taking place (name, price, amount) — permitted but must not be promotional
• No false or misleading advertising: All marketing must be consistent with the prospectus and must not contain claims not supported in the filed document

Timely Disclosure Requirements

Once a company is a reporting issuer (public company), it is subject to ongoing continuous disclosure obligations under NI 51-102 Continuous Disclosure Obligations. Key timely disclosure obligations include:

• Material change reports: When a material change occurs (a change that would reasonably be expected to significantly affect the price of the securities), it must be reported immediately (usually within 10 days) via a Material Change Report filed on SEDAR+
• Annual Information Form (AIF): Annual comprehensive disclosure document filed with securities regulators
• Annual and interim financial statements with accompanying MD&A
• Trading halt: If material undisclosed information exists, the company may request a halt in trading until disclosure is made

NI 45-106 — Prospectus Exemptions

A prospectus is expensive, time-consuming (often takes months), and burdensome for certain types of transactions where investors are sophisticated enough to protect themselves. NI 45-106 provides a list of exemptions that allow securities to be distributed without a prospectus, subject to specific conditions. Securities sold under these exemptions are called exempt market securities or private placements.

Resale Restrictions on Exempt Market Securities

Securities acquired through a prospectus exemption are subject to resale restrictions — they cannot be freely traded on the open market immediately. Under NI 45-102 Resale of Securities, exempt market securities typically have a 4-month seasoning period before they can be resold (in most Canadian jurisdictions). After this period, they can generally be resold freely. This restriction compensates for the reduced disclosure compared to a prospectus offering.

The Accredited Investor — Definition and Thresholds

An accredited investor is defined in NI 45-106 s.1.1 as a person or entity deemed sophisticated enough not to require the protection of a prospectus. This is the most heavily tested exemption category on the RSE exam.

Individual Accredited Investor Thresholds

Institutional Accredited Investors

Institutions that automatically qualify include: Schedule I and II banks, trust companies, insurance companies, registered dealers, registered advisers, registered portfolio managers, pension funds with net assets > $100M, investment funds, and corporations with net assets > $5M.

Exempt Market Securities and Private Placements

Securities sold under NI 45-106 exemptions are called exempt market securities. When a company privately negotiates the sale of securities to a select group of investors without a public prospectus, this is called a private placement. Key characteristics:

• Faster capital raising: No regulator review waiting period — can close in days rather than months
• Lower cost: No expensive prospectus preparation, legal review, or underwriting spread
• Less disclosure: Issuer does not have to publicly disclose all material facts (only what the exemption requires)
• Restricted resale: Investors cannot immediately sell on the open market — minimum 4-month hold in most jurisdictions
• Illiquid: No public trading market for the security during the hold period
• Higher risk: Less regulatory protection means investors must conduct their own due diligence

Dividend Rights

Common shareholders have the right to receive dividends if and when declared by the Board of Directors. Key principles:

• Dividends are not guaranteed: Unlike bond coupons, common share dividends are not a legal obligation. The Board declares dividends at their discretion based on profitability, cash flow, capital needs, and corporate policy.
• Residual claimants: Common shareholders receive dividends only after preferred shareholders have been paid. They are last in the equity dividend hierarchy.
• Multi-class dividend rights: Some companies create share classes with different dividend rights. Example: Class A shares might receive a higher dividend per share than Class B shares.
• Special dividends: In addition to regular (quarterly) dividends, companies may declare special (one-time, extra) dividends from unusual profits or asset sales.

Voting Rights

Voting rights allow shareholders to vote on significant corporate matters at Annual General Meetings (AGMs) and Special Meetings. Key matters subject to shareholder vote include: election of directors, approval of auditors, major corporate transactions (mergers, acquisitions), amendments to the corporation's articles, executive compensation (say-on-pay), and issuance of new shares.

Classes of Voting Rights

Rights to Surplus on Dissolution (Liquidation)

When a company is wound up (dissolved or bankrupt), its assets are distributed in a strict priority order. Common shareholders have the last (residual) claim — they receive whatever assets remain after all other claimants are paid. This is why common shares carry the highest risk but also the highest potential return.

Structure and the CDR Ratio

Rights of CDR Holders

• Proportional economic interest: CDR holders receive the economic benefits of owning the underlying shares proportional to their CDR ratio — including dividends (if any), paid in Canadian dollars
• No direct voting rights: CDR holders do NOT have voting rights at the shareholder level for the underlying company (e.g., an Amazon CDR holder cannot vote at Amazon's annual meeting). The depositary institution holds the legal title to the shares.
• Currency-hedged returns: Returns in CAD are determined by the stock's price performance, not by CAD/USD exchange rate movements
• Tradeable on Cboe Canada (formerly NEO Exchange): CDRs trade on a Canadian exchange like regular stocks — through any standard brokerage account
• Fractional ownership: Allows Canadian investors to access high-priced US stocks at ~$20/CDR rather than hundreds or thousands of dollars for a full share

CDRs vs. Direct US Stock Ownership — Comparison

Dividends — Declaration, Key Dates, and Tax Treatment

How Dividends Are Declared

The Board of Directors declares dividends. No shareholder vote is required. The announcement includes the dividend amount per share, the record date, and the payment date. Once declared, the dividend becomes a legal obligation of the company.

The Four Critical Dividend Dates

Types of Dividends

Tax Treatment of Canadian Dividends

Canada has one of the most favourable tax treatments in the world for Canadian-source dividends received by individual investors. The mechanics involve two steps:

• Step 1 — Gross-up: The dividend received is "grossed up" (increased by a set percentage) to approximate the pre-tax corporate income from which the dividend was paid. For eligible dividends (from public companies paying at the general corporate tax rate): gross-up is 38%. For non-eligible dividends (from small business income taxed at lower rates): gross-up is 15%.
• Step 2 — Dividend Tax Credit (DTC): A credit is then applied to reduce the federal and provincial tax payable. The DTC is designed to eliminate (or substantially reduce) double taxation — since the corporation already paid tax on the income before paying the dividend.

The practical result: For many Canadian investors, eligible dividends are taxed at a significantly lower effective rate than equivalent interest income. This makes dividend-paying Canadian stocks particularly attractive for non-registered accounts.

Stock Splits and Consolidations (Reverse Splits)

Stock Split

A stock split increases the number of shares outstanding while proportionally reducing the price per share. The total market capitalization and each shareholder's total investment value remain unchanged immediately after the split.

Why companies split their stock: High share prices make shares less accessible to small retail investors and can reduce trading liquidity. A split brings the price into a more accessible range, increasing market participation and potentially the investor base.

Stock Consolidation (Reverse Split)

The opposite of a split — the number of shares is reduced while the price increases proportionally. Example: A 1-for-5 consolidation reduces shares by 80% and multiplies the price by 5. Total market cap unchanged.

Impact on Adjusted Cost Base (ACB)

Both splits and consolidations require the shareholder to recalculate their Adjusted Cost Base (ACB) per share. The total ACB of the position remains unchanged — but the per-share ACB changes with the new share count. This is critical for calculating capital gains or losses on future dispositions.

Share Buybacks (Normal Course Issuer Bids — NCIB)

A share buyback (also called a Normal Course Issuer Bid or NCIB in Canada) occurs when a company repurchases its own outstanding shares on the open market. The repurchased shares may be cancelled or held as treasury shares.

Mechanics and Regulatory Requirements

• Company must receive regulatory approval from the exchange (TSX, Cboe Canada) before buying back shares
• NCIB is subject to daily purchase volume limits — typically the greater of 25% of average daily trading volume or 1,000 shares
• The NCIB period is usually for one year; can be renewed
• Company must publicly announce the NCIB before beginning purchases
• Shares repurchased on the TSX must be purchased at market price (not at a premium, unlike a formal bid)

Impact of Share Buybacks on Shareholders

Types of Preferred Shares

Dividend Rights of Preferred Shares

Preferred shareholders have priority over common shareholders in receiving dividends. Key principles:

• Priority payment: Preferred dividends must be paid (or at least declared) before any common dividend can be paid
• Fixed amount: Unlike common dividends, preferred dividends are for a specified amount (e.g., $0.3125 per share quarterly on a $25 par, 5% preferred)
• Not a legal obligation: Despite their priority, preferred dividends are NOT a contractual obligation like bond interest. The Board can suspend preferred dividends without triggering a default — but this is extremely rare for major issuers and is a major signal of financial distress
• Cumulative feature protects income: For cumulative preferreds, any suspension creates a growing arrearage that must be cleared before common shareholders can receive anything

Voting Rights of Preferred Shareholders

Preferred shareholders generally do NOT have voting rights under normal circumstances. However, they typically gain limited voting rights if:

• The company has failed to pay dividends for a specified number of quarters (typically 6–8 quarters for cumulative preferreds)
• A vote on matters that directly affect preferred shareholder rights is held (e.g., changes to the preferred share terms)
• The company proposes a merger or acquisition that would alter preferred share rights

Rights on Dissolution

On dissolution/bankruptcy, preferred shareholders receive their par value ($25) plus any accumulated dividends BEFORE common shareholders receive anything — but only AFTER all debt (secured and unsecured creditors) is paid. In most real bankruptcies, preferred shareholders receive nothing because the company's assets are insufficient to pay even the debt holders in full.

Rate-Reset Preferred Shares — Detailed Mechanics

Rate-reset preferreds are the dominant structure in Canada and deserve detailed understanding. They reset their dividend every 5 years:

Investor Options at Each Reset Date

At each 5-year reset date, the investor has two choices (and the issuer has a third option):

Tax Treatment of Preferred Share Dividends

Canadian preferred share dividends from Canadian public companies qualify for the Canadian Dividend Tax Credit (DTC) — the same favourable treatment as common share dividends. This is a major advantage over bond interest income, which is fully taxable at the investor's marginal rate. For many investors in the middle tax brackets, this makes preferred shares highly tax-efficient for non-registered accounts.

Dividend Discount Model (DDM) — Discounted Cash Flow of Dividends

The DDM values a share as the present value of all future expected dividends. The logic: a share's value equals what you get from holding it forever — the stream of dividends discounted at the required rate of return.

Gordon Growth Model (Constant Growth DDM)

The most commonly tested version assumes dividends grow at a constant rate (g) forever:

Preferred Share Valuation with DDM (Zero-Growth)

For a perpetual preferred share paying a fixed dividend (no growth), the valuation simplifies to a perpetuity:

Discounted Cash Flow (DCF) Approach

The DCF model values a share by discounting all future free cash flows (not just dividends) back to the present. This is the most theoretically rigorous approach and is widely used by equity analysts for companies that don't pay dividends but generate significant cash flow.

Price-Earnings (P/E) and Growth Models

Basic P/E Valuation

The P/E ratio is the most widely used equity valuation metric in practice. It compares the current share price to the company's earnings per share (EPS). To value a stock using P/E:

PEG Ratio (Price/Earnings to Growth)

The PEG ratio adjusts the P/E ratio for the company's expected earnings growth rate. It helps identify whether a high P/E is justified by high growth.

Interactive Equity Valuation Calculators