September 2016
Preliminary Terms
No. 1,040
Registration Statement
Nos. 333-200365; 333-200365-12
Dated August 29, 2016
Filed pursuant to
Rule 433
M
organ
S
tanley
F
inance
LLC
Structured
Investments
Opportunities in U.S. Equities
Trigger PLUS Based on the Value of the S&P
500
®
Index due October 5, 2022
Trigger Performance Leveraged Upside Securities
SM
Fully and Unconditionally Guaranteed by Morgan
Stanley
Principal at Risk Securities
The Trigger PLUS offered are unsecured obligations of Morgan
Stanley Finance LLC (“MSFL”) and are fully and unconditionally guaranteed by Morgan Stanley. The Trigger PLUS will
pay no interest, do not guarantee any return of principal at maturity and have the terms described in the accompanying product
supplement for PLUS, index supplement and prospectus, as supplemented or modified by this document. At maturity, if the underlying
index has
appreciated
in value, investors will receive the stated principal amount of their investment plus leveraged upside
performance of the underlying index. If the underlying index
depreciates
in value but the final index value is greater
than or equal to the trigger level, investors will receive the stated principal amount of their investment. However, if the underlying
index has
depreciated
in value so that the final index value is less than the trigger level, investors will lose a significant
portion or all of their investment, resulting in a 1% loss for every 1% decline in the index value over the term of the Trigger
PLUS. Under these circumstances, the payment at maturity will be less than 65% of the stated principal amount and could be zero.
Accordingly, you may lose your entire investment. These long-dated Trigger PLUS are for investors who seek an equity index-based
return and who are willing to risk their principal and forgo current income in exchange for the upside leverage feature and the
limited protection against loss that applies only if the final index value is greater than or equal to the trigger level.
Investors
may lose their entire initial investment in the Trigger PLUS.
These long-dated Trigger PLUS are notes issued as part of MSFL’s
Series A Global Medium-Term Notes program.
All payments are subject to our credit risk. If we default
on our obligations, you could lose some or all of your investment. These Trigger PLUS are not secured obligations and you will
not have any security interest in, or otherwise have any access to, any underlying reference asset or assets.
Summary Terms
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Issuer:
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Morgan Stanley Finance LLC
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Guarantor:
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Morgan Stanley
|
Maturity date:
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October 5, 2022
|
Underlying index:
|
S&P 500
®
Index
|
Aggregate principal amount:
|
$
|
Payment at maturity per Trigger PLUS:
|
If the final index value is greater than the initial index value:
$10 + leveraged upside payment
If the final index value is less than or equal to the initial
index value but is greater than or equal to the trigger level:
$10
If the final index value is less than the trigger level:
$10 × index performance factor
Under these circumstances, the payment at maturity will be
less than the stated principal amount of $10 and will represent a loss of more than 35%, and possibly all, of your investment.
|
Leveraged upside payment:
|
$10 × leverage factor × index percent increase
|
Index percent increase:
|
(final index value – initial index value) / initial index value
|
Initial index value:
|
, which is the index closing value on the pricing date
|
Final index value:
|
The index closing value on the valuation date
|
Trigger level
|
, which is 65% of the initial index value
|
Valuation date:
|
September 30, 2022, subject to postponement for non-index business days and certain market disruption events
|
Leverage factor:
|
154%
|
Index performance factor:
|
Final index value
divided
by the initial index value
|
Stated principal amount:
|
$10 per Trigger PLUS
|
Issue price:
|
$10 per Trigger PLUS (see “Commissions and issue price” below)
|
Pricing date:
|
September 30, 2016
|
Original issue date:
|
October 5, 2016 (3 business days after the pricing date)
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CUSIP:
|
61766F136
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ISIN:
|
US61766F1369
|
Listing:
|
The Trigger PLUS will not be listed on any securities exchange.
|
Agent:
|
Morgan Stanley & Co. LLC (“MS & Co.”), an affiliate of MSFL and a wholly owned subsidiary of Morgan Stanley. See “Supplemental information regarding plan of distribution; conflicts of interest.”
|
Estimated value on the pricing date:
|
Approximately $9.436 per Trigger PLUS, or within $0.30 of that estimate. See “Investment Summary” beginning on page 2.
|
Commissions and issue price:
|
Price to public
|
Agent’s commissions and fees
|
Proceeds to us
(3)
|
Per Trigger PLUS
|
$10
|
$0.30
(1)
|
|
|
|
$0.05
(2)
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$9.65
|
Total
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$
|
$
|
$
|
|
(1)
|
Selected dealers, including Morgan Stanley Wealth Management
(an affiliate of the agent), and their financial advisors will collectively receive from the agent, MS & Co., a fixed sales
commission of $0.30 for each Trigger PLUS they sell. See “Supplemental information regarding plan of distribution; conflicts
of interest.” For additional information, see “Plan of Distribution (Conflicts of Interest)” in the accompanying
product supplement for PLUS.
|
|
(2)
|
Reflects a structuring fee payable to Morgan Stanley
Wealth Management by the agent or its affiliates of $0.05 for each Trigger PLUS.
|
|
(3)
|
See “Use of proceeds and hedging” on page
11.
|
The Trigger PLUS involve risks not associated with an investment
in ordinary debt securities. See “Risk Factors” beginning on page 7.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved these securities, or determined if this document or the accompanying product supplement,
index supplement and prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The Trigger PLUS are not deposits or savings accounts and
are not insured by the Federal Deposit Insurance Corporation or any other governmental agency or instrumentality, nor are they
obligations of, or guaranteed by, a bank.
You should read this document together with the related product
supplement, index supplement and prospectus, each of which can be accessed via the hyperlinks below. Please also see “Additional
Information About the Trigger PLUS” at the end of this document.
As used in this document, “we,” “us”
and “our” refer to Morgan Stanley or MSFL, or Morgan Stanley and MSFL collectively, as the context requires.
Product
Supplement for PLUS dated February 29, 2016
Index
Supplement dated February 29, 2016
Prospectus
dated February 16, 2016
M
organ
S
tanley
F
inance
LLC
Trigger PLUS Based on the Value of the S&P 500
®
Index due October 5, 2022
Trigger Performance Leveraged Upside Securities
SM
Principal at Risk Securities
Investment Summary
Trigger Performance Leveraged Upside Securities
Principal at Risk Securities
The Trigger PLUS Based on the Value of the S&P 500
®
Index due October 5, 2022
(the "Trigger PLUS") can be used:
|
§
|
As an alternative to direct exposure to the underlying index that enhances returns for any positive performance of the underlying
index
|
|
§
|
To enhance returns and potentially outperform the underlying index in a bullish scenario
|
|
§
|
To provide limited protection against a loss of principal in the event of a decline of the underlying index as of the valuation
date but only if the final index value is greater than or equal to the trigger level
|
Maturity:
|
6 years
|
|
|
Leverage factor:
|
154%
|
|
|
Trigger level:
|
65% of the initial index value
|
|
|
Minimum payment at maturity:
|
None. You could lose your entire initial investment in the Trigger PLUS.
|
|
|
Coupon:
|
None
|
The original issue price of each Trigger PLUS is $10. This price
includes costs associated with issuing, selling, structuring and hedging the Trigger PLUS, which are borne by you, and, consequently,
the estimated value of the Trigger PLUS on the pricing date will be less than $10. We estimate that the value of each Trigger PLUS
on the pricing date will be approximately $9.436, or within $0.30 of that estimate. Our estimate of the value of the Trigger PLUS
as determined on the pricing date will be set forth in the final pricing supplement.
What goes into the estimated value on the pricing date?
In valuing the Trigger PLUS on the pricing date, we take into
account that the Trigger PLUS comprise both a debt component and a performance-based component linked to the underlying index.
The estimated value of the Trigger PLUS is determined using our own pricing and valuation models, market inputs and assumptions
relating to the underlying index, instruments based on the underlying index, volatility and other factors including current and
expected interest rates, as well as an interest rate related to our secondary market credit spread, which is the implied interest
rate at which our conventional fixed rate debt trades in the secondary market.
What determines the economic terms of the Trigger PLUS?
In determining the economic terms of the Trigger PLUS, including
the leverage factor and the trigger level, we use an internal funding rate, which is likely to be lower than our secondary market
credit spreads and therefore advantageous to us. If the issuing, selling, structuring and hedging costs borne by you were lower
or if the internal funding rate were higher, one or more of the economic terms of the Trigger PLUS would be more favorable to you.
What is the relationship between the estimated value on the
pricing date and the secondary market price of the Trigger PLUS?
The price at which MS & Co. purchases the Trigger PLUS in
the secondary market, absent changes in market conditions, including those related to the underlying index, may vary from, and
be lower than, the estimated value on the pricing date, because the secondary market price takes into account our secondary market
credit spread as well as the bid-offer spread that MS & Co. would charge in a secondary market transaction of this type and
other factors. However, because the costs associated with issuing, selling, structuring and hedging the Trigger PLUS are not fully
deducted upon issuance, for a period of up to 6 months following the issue date, to the extent that MS & Co. may buy or sell
the Trigger PLUS in the secondary market, absent changes in market conditions, including those related to the underlying index,
and to our secondary market credit spreads, it would do so based on values higher than the estimated value. We expect that those
higher values will also be reflected in your brokerage account statements.
MS & Co. may, but is not obligated to, make a market in the
Trigger PLUS, and, if it once chooses to make a market, may cease doing so at any time.
M
organ
S
tanley
F
inance
LLC
Trigger PLUS Based on the Value of the S&P 500
®
Index due October 5, 2022
Trigger Performance Leveraged Upside Securities
SM
Principal at Risk Securities
Key Investment Rationale
Trigger PLUS offer leveraged exposure to any positive performance
of the underlying index. In exchange for the leverage feature, investors are exposed to the risk of loss of a significant portion
or all of their investment due to the trigger feature. At maturity, an investor will receive an amount in cash based upon the closing
value of the underlying index on the valuation date. The Trigger PLUS are unsecured obligations of ours, and all payments on the
Trigger PLUS are subject to our credit risk.
Investors may lose their entire initial investment in the Trigger PLUS.
|
|
Leveraged Performance
|
The Trigger PLUS offer investors an opportunity to capture enhanced returns relative to a direct investment in the underlying index.
|
Trigger Feature
|
At maturity, even if the underlying index has declined over the term of the Trigger PLUS, you will receive your stated principal amount but only if the final index value is
greater than or equal to
the trigger level.
|
Upside Scenario
|
The underlying index increases in value, and, at maturity, the Trigger PLUS redeem for the stated principal amount of $10 plus 154% of the index percent increase.
|
Par Scenario
|
The final index value is less than or equal to the initial index value but is greater than or equal to the trigger level. In this case, you receive the stated principal amount of $10 at maturity even though the underlying index has depreciated.
|
Downside Scenario
|
The final index value is less than the trigger level. In this case, the Trigger PLUS redeem for at least 35% less than the stated principal amount, and this decrease will be by an amount proportionate to the full decline in the value of the underlying index over the term of the Trigger PLUS.
|
M
organ
S
tanley
F
inance
LLC
Trigger PLUS Based on the Value of the S&P 500
®
Index due October 5, 2022
Trigger Performance Leveraged Upside Securities
SM
Principal at Risk Securities
How the Trigger PLUS Work
Payoff Diagram
The payoff diagram below illustrates the payment at maturity
on the Trigger PLUS based on the following terms:
Stated principal amount:
|
$10 per Trigger PLUS
|
|
|
Leverage factor:
|
154%
|
|
|
Trigger level:
|
65% of the initial index value
|
|
|
Minimum payment at maturity:
|
None
|
|
|
Trigger PLUS Payoff Diagram
|
—
The underlying index
—
The Trigger
PLUS
|
How it works
§
Upside
Scenario.
If the final index value is greater than the initial index value, investors will receive the $10 stated
principal amount
plus
154% of the appreciation of the underlying index over the term of the Trigger PLUS.
|
§
|
If the underlying index appreciates 2%, the investor would receive a 3.08% return, or $10.308 per Trigger PLUS.
|
|
§
|
Par Scenario.
If the final index value is less than or equal to the initial
index value but is greater than or equal to the trigger level, investors will receive the $10 stated principal amount.
|
|
§
|
If the underlying index depreciates 25%, investors will receive the $10 stated principal amount.
|
M
organ
S
tanley
F
inance
LLC
Trigger PLUS Based on the Value of the S&P 500
®
Index due October 5, 2022
Trigger Performance Leveraged Upside Securities
SM
Principal at Risk Securities
|
§
|
Downside Scenario.
If the final index value is less than the trigger level,
investors will receive an amount significantly less than the $10 stated principal amount, based on a 1% loss of principal for each
1% decline in the underlying index.
|
|
§
|
If the underlying index depreciates 50%, investors will lose 50% of their principal and receive only $5 per Trigger PLUS at
maturity, or 50% of the stated principal amount.
|
M
organ
S
tanley
F
inance
LLC
Trigger PLUS Based on the Value of the S&P 500
®
Index due October 5, 2022
Trigger Performance Leveraged Upside Securities
SM
Principal at Risk Securities
Risk Factors
The following is a non-exhaustive list of certain key risk
factors for investors in the Trigger PLUS. For further discussion of these and other risks, you should read the section entitled
“Risk Factors” in the accompanying product supplement for PLUS, index supplement and prospectus. We also urge you to
consult your investment, legal, tax, accounting and other advisers in connection with your investment in the Trigger PLUS.
|
§
|
The Trigger PLUS do not pay interest or guarantee return of any principal.
The terms of the Trigger PLUS differ from
those of ordinary debt securities in that the Trigger PLUS do not pay interest or guarantee payment of any principal at maturity.
If the final index value is less than the trigger level (which is 65% of the initial index value), the payout at maturity will
be an amount in cash that is at least 35% less than the $10 stated principal amount of each Trigger PLUS, and this decrease will
be by an amount proportionate to the full decrease in the value of the underlying index. There is no minimum payment at maturity
on the Trigger PLUS, and you could lose your entire investment.
|
|
§
|
The market price of the Trigger PLUS will be influenced by many unpredictable factors.
Several factors, many of which
are beyond our control, will influence the value of the Trigger PLUS in the secondary market and the price at which MS & Co.
may be willing to purchase or sell the Trigger PLUS in the secondary market, including the value, volatility (frequency and magnitude
of changes in value) and dividend yield of the underlying index, interest and yield rates in the market, time remaining until the
Trigger PLUS mature, geopolitical conditions and economic, financial, political, regulatory or judicial events that affect the
underlying index or equities markets generally and which may affect the final index value of the underlying index and any actual
or anticipated changes in our credit ratings or credit spreads. Generally, the longer the time remaining to maturity, the more
the market price of the Trigger PLUS will be affected by the other factors described above. The value of the underlying index may
be, and has recently been, volatile, and we can give you no assurance that the volatility will lessen. See “S&P 500
®
Index Overview” below. You may receive less, and possibly significantly less, than the stated principal amount per
Trigger PLUS if you try to sell your Trigger PLUS prior to maturity.
|
|
§
|
The Trigger PLUS are subject to our credit risk, and any actual or anticipated changes to our credit ratings or credit spreads
may adversely affect the market value of the Trigger PLUS.
You are dependent on our ability to pay all amounts due on the Trigger
PLUS at maturity and therefore you are subject to our credit risk. If we default on our obligations under the Trigger PLUS, your
investment would be at risk and you could lose some or all of your investment. As a result, the market value of the Trigger PLUS
prior to maturity will be affected by changes in the market’s view of our creditworthiness. Any actual or anticipated decline
in our credit ratings or increase in the credit spreads charged by the market for taking our credit risk is likely to adversely
affect the market value of the Trigger PLUS.
|
|
§
|
As a finance subsidiary, MSFL has no independent operations and will have no independent assets.
As a finance subsidiary,
MSFL has no independent operations beyond the issuance and administration of its securities and will have no independent assets
available for distributions to holders of MSFL securities if they make claims in respect of such securities in a bankruptcy, resolution
or similar proceeding. Accordingly, any recoveries by such holders will be limited to those available under the related guarantee
by Morgan Stanley and that guarantee will rank
pari passu
with all other unsecured, unsubordinated obligations of Morgan
Stanley. Holders will have recourse only to a single claim against Morgan Stanley and its assets under the guarantee. Holders of
securities issued by MSFL should accordingly assume that in any such proceedings they would not have any priority over and should
be treated
pari passu
with the claims of other unsecured, unsubordinated creditors of Morgan Stanley, including holders
of Morgan Stanley-issued securities.
|
|
§
|
The amount payable on the Trigger PLUS is not linked to the value of the underlying index at any time other than the valuation
date.
The final index value will be based on the index closing value on the valuation date, subject to postponement for non-index
business days and certain market disruption events. Even if the value of the underlying index appreciates prior to the valuation
date but then drops by the valuation date, the payment at maturity will be less, and may be significantly less, than it would have
been had the payment at maturity been linked to the value of the underlying index prior to such drop. Although the actual value
of the underlying index on the stated maturity date or at other times during the term of the Trigger PLUS may be higher than the
index closing value on the valuation date, the payment at maturity will be based solely on the index closing value on the valuation
date.
|
|
§
|
Investing in the Trigger PLUS is not equivalent to investing in the underlying index.
Investing in the Trigger PLUS
is not equivalent to investing in the underlying index or its component stocks. As an investor in the Trigger PLUS, you will not
have voting rights or rights to receive dividends or other distributions or any other rights with respect to stocks that constitute
the underlying index.
|
|
§
|
The rate we are willing to pay for securities of this type, maturity and issuance size is likely to be lower than the rate
implied by our secondary market credit spreads and advantageous to us. Both the lower rate and the inclusion of costs
|
M
organ
S
tanley
F
inance
LLC
Trigger PLUS Based on the Value of the S&P 500
®
Index due October 5, 2022
Trigger Performance Leveraged Upside Securities
SM
Principal at Risk Securities
associated with issuing,
selling, structuring and hedging the Trigger PLUS in the original issue price reduce the economic terms of the Trigger PLUS, cause
the estimated value of the Trigger PLUS to be less than the original issue price and will adversely affect secondary market prices.
Assuming no change in market conditions or any other relevant factors, the prices, if any, at which dealers, including MS &
Co., may be willing to purchase the Trigger PLUS in secondary market transactions will likely be significantly lower than the original
issue price, because secondary market prices will exclude the issuing, selling, structuring and hedging-related costs that are
included in the original issue price and borne by you and because the secondary market prices will reflect our secondary market
credit spreads and the bid-offer spread that any dealer would charge in a secondary market transaction of this type as well as
other factors.
The inclusion of the costs of issuing, selling, structuring
and hedging the Trigger PLUS in the original issue price and the lower rate we are willing to pay as issuer make the economic terms
of the Trigger PLUS less favorable to you than they otherwise would be.
However, because the costs associated with issuing,
selling, structuring and hedging the Trigger PLUS are not fully deducted upon issuance, for a period of up to 6 months following
the issue date, to the extent that MS & Co. may buy or sell the Trigger PLUS in the secondary market, absent changes in market
conditions, including those related to the underlying index, and to our secondary market credit spreads, it would do so based on
values higher than the estimated value, and we expect that those higher values will also be reflected in your brokerage account
statements.
|
§
|
Adjustments to the underlying index could adversely affect the value of the Trigger PLUS.
The underlying index publisher
may add, delete or substitute the stocks constituting the underlying index or make other methodological changes that could change
the value of the underlying index. The underlying index publisher may discontinue or suspend calculation or publication of the
underlying index at any time. In these circumstances, the calculation agent will have the sole discretion to substitute a successor
index that is comparable to the discontinued underlying index and is not precluded from considering indices that are calculated
and published by the calculation agent or any of its affiliates. If the calculation agent determines that there is no appropriate
successor index, the payment at maturity on the Trigger PLUS will be an amount based on the closing values at maturity of the securities
composing the underlying index at the time of such discontinuance, without rebalancing or substitution, computed by the calculation
agent in accordance with the formula for calculating the underlying index last in effect prior to discontinuance of the underlying
index.
|
|
§
|
The estimated value of the Trigger PLUS is determined by reference to our pricing and valuation models, which may differ
from those of other dealers and is not a maximum or minimum secondary market price.
These pricing and valuation models are
proprietary and rely in part on subjective views of certain market inputs and certain assumptions about future events, which may
prove to be incorrect. As a result, because there is no market-standard way to value these types of securities, our models may
yield a higher estimated value of the Trigger PLUS than those generated by others, including other dealers in the market, if they
attempted to value the Trigger PLUS. In addition, the estimated value on the pricing date does not represent a minimum or maximum
price at which dealers, including MS & Co., would be willing to purchase your Trigger PLUS in the secondary market (if any
exists) at any time. The value of your Trigger PLUS at any time after the date of this document will vary based on many factors
that cannot be predicted with accuracy, including our creditworthiness and changes in market conditions. See also “The market
price of the Trigger PLUS will be influenced by many unpredictable factors” above.
|
|
§
|
The Trigger PLUS will not be listed on any securities exchange and secondary trading may be limited.
The Trigger PLUS
will not be listed on any securities exchange. Therefore, there may be little or no secondary market for the Trigger PLUS. MS &
Co. may, but is not obligated to, make a market in the Trigger PLUS and, if it once chooses to make a market, may cease doing so
at any time. When it does make a market, it will generally do so for transactions of routine secondary market size at prices based
on its estimate of the current value of the Trigger PLUS, taking into account its bid/offer spread, our credit spreads, market
volatility, the notional size of the proposed sale, the cost of unwinding any related hedging positions, the time remaining to
maturity and the likelihood that it will be able to resell the Trigger PLUS. Even if there is a secondary market, it may not provide
enough liquidity to allow you to trade or sell the Trigger PLUS easily. Since other broker-dealers may not participate significantly
in the secondary market for the Trigger PLUS, the price at which you may be able to trade your Trigger PLUS is likely to depend
on the price, if any, at which MS & Co. is willing to transact. If, at any time, MS & Co. were to cease making a market
in the Trigger PLUS, it is likely that there would be no secondary market for the Trigger PLUS. Accordingly, you should be willing
to hold your Trigger PLUS to maturity.
|
|
§
|
The calculation agent, which is a subsidiary of Morgan Stanley and an affiliate of MSFL, will make determinations with respect
to the Trigger PLUS.
As calculation agent, MS & Co. will determine the initial index value, the trigger level and the final
index value, including whether the underlying index has decreased to below the trigger level, and will calculate the amount of
cash you receive at maturity, if any. Moreover, certain determinations made by MS & Co., in its capacity as calculation agent,
may require it to exercise discretion and make subjective judgments, such as with respect to the occurrence or non-occurrence of
market disruption events and the selection of a successor index or calculation of the final index value in the event of a market
|
M
organ
S
tanley
F
inance
LLC
Trigger PLUS Based on the Value of the S&P 500
®
Index due October 5, 2022
Trigger Performance Leveraged Upside Securities
SM
Principal at Risk Securities
disruption event or discontinuance
of the underlying index. These potentially subjective determinations may adversely affect the payout to you at maturity, if any.
For further information regarding these types of determinations, see “Description of PLUS—Postponement of Valuation
Date(s)” and “—Calculation Agent and Calculations” and related definitions in the accompanying product
supplement. In addition, MS & Co. has determined the estimated value of the Trigger PLUS on the pricing date.
|
§
|
Hedging and trading activity by our affiliates could potentially adversely affect the value of the Trigger PLUS.
One
or more of our affiliates and/or third-party dealers expect to carry out hedging activities related to the Trigger PLUS (and possibly
to other instruments linked to the underlying index or its component stocks), including trading in the stocks that constitute the
underlying index as well as in other instruments related to the underlying index. As a result, these entities may be unwinding
or adjusting hedge positions during the term of the Trigger PLUS, and the hedging strategy may involve greater and more frequent
dynamic adjustments to the hedge as the valuation date approaches. Some of our affiliates also trade the stocks that constitute
the underlying index and other financial instruments related to the underlying index on a regular basis as part of their general
broker-dealer and other businesses. Any of these hedging or trading activities on or prior to the pricing date could potentially
increase the initial index value, and, therefore, could increase the trigger level, which is the level at or above which the underlying
index must close on the valuation date so that investors do not suffer a significant loss on their initial investment in the Trigger
PLUS. Additionally, such hedging or trading activities during the term of the Trigger PLUS, including on the valuation date, could
potentially affect whether the value of the underlying index on the valuation date is below the trigger level, and, therefore,
whether an investor would receive significantly less than the stated principal amount of the Trigger PLUS at maturity.
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|
§
|
The U.S. federal income tax consequences of an investment in the Trigger PLUS are uncertain.
Please read the discussion
under “Additional provisions—Tax considerations” in this document and the discussion under “United States
Federal Taxation” in the accompanying product supplement for PLUS
(together the “Tax Disclosure Sections”)
concerning the U.S. federal income tax consequences of an investment in the Trigger PLUS. If the Internal Revenue Service (the
“IRS”) were successful in asserting an alternative treatment, the timing and character of income on the Trigger PLUS
might differ significantly from the tax treatment described in the Tax Disclosure Sections. For example, under one possible treatment,
the IRS could seek to recharacterize the Trigger PLUS as debt instruments. In that event, U.S. Holders would be required to accrue
into income original issue discount on the Trigger PLUS every year at a “comparable yield” determined at the time of
issuance and recognize all income and gain in respect of the Trigger PLUS as ordinary income. Additionally, as discussed under
“United States Federal Taxation—FATCA Legislation” in the accompanying product supplement for PLUS, the withholding
rules commonly referred to as “FATCA” would apply to the Trigger PLUS if they were recharacterized as debt instruments.
The risk that financial instruments providing for buffers, triggers or similar downside protection features, such as the Trigger
PLUS, would be recharacterized as debt is greater than the risk of recharacterization for comparable financial instruments that
do not have such features. We do not plan to request a ruling from the IRS regarding the tax treatment of the Trigger PLUS, and
the IRS or a court may not agree with the tax treatment described in the Tax Disclosure Sections.
|
In 2007, the U.S. Treasury Department
and the IRS released a notice requesting comments on the U.S. federal income tax treatment of “prepaid forward contracts”
and similar instruments. The notice focuses in particular on whether to require holders of these instruments to accrue income over
the term of their investment. It also asks for comments on a number of related topics, including the character of income or loss
with respect to these instruments; whether short-term instruments should be subject to any such accrual regime; the relevance of
factors such as the exchange-traded status of the instruments and the nature of the underlying property to which the instruments
are linked; the degree, if any, to which income (including any mandated accruals) realized by non-U.S. investors should be subject
to withholding tax; and whether these instruments are or should be subject to the “constructive ownership” rule, which
very generally can operate to recharacterize certain long-term capital gain as ordinary income and impose an interest charge. While
the notice requests comments on appropriate transition rules and effective dates, any Treasury regulations or other guidance promulgated
after consideration of these issues could materially and adversely affect the tax consequences of an investment in the Trigger
PLUS, possibly with retroactive effect. Both U.S. and Non-U.S. Holders should consult their tax advisers regarding the U.S. federal
income tax consequences of an investment in the Trigger PLUS, including possible alternative treatments, the issues presented by
this notice and any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction.
M
organ
S
tanley
F
inance
LLC
Trigger PLUS Based on the Value of the S&P 500
®
Index due October 5, 2022
Trigger Performance Leveraged Upside Securities
SM
Principal at Risk Securities
S&P 500
®
Index Overview
The S&P 500
®
Index, which is calculated, maintained
and published by S&P Dow Jones Indices LLC (“S&P”), consists of stocks of 500 component companies selected
to provide a performance benchmark for the U.S. equity markets. The calculation of the S&P 500
®
Index is based
on the relative value of the float adjusted aggregate market capitalization of the 500 component companies as of a particular time
as compared to the aggregate average market capitalization of 500 similar companies during the base period of the years 1941 through
1943. For additional information about the S&P 500
®
Index, see the information set forth under “S&P
500
®
Index” in the accompanying index supplement.
Information as of market close on August 24, 2016:
Bloomberg Ticker Symbol:
|
SPX
|
Current Index Value:
|
2,175.44
|
52 Weeks Ago:
|
1,893.21
|
52 Week High (on 8/15/2016):
|
2,190.15
|
52 Week Low (on 2/11/2016):
|
1,829.08
|
The following graph sets forth the daily index closing values
of the underlying index for each quarter in the period from January 1, 2011 through August 24, 2016. The related table sets forth
the published high and low closing values, as well as end-of-quarter closing values, of the underlying index for each quarter in
the same period. The index closing value of the underlying index on August 24, 2016 was 2,175.44. We obtained the information in
the table and graph below from Bloomberg Financial Markets, without independent verification. The underlying index has at times
experienced periods of high volatility. You should not take the historical values of the underlying index as an indication of its
future performance, and no assurance can be given as to the index closing value of the underlying index on the valuation date.
S&P 500
®
Index Daily Index Closing Values
January 1, 2011 to August
24, 2016
|
|
M
organ
S
tanley
F
inance
LLC
Trigger PLUS Based on the Value of the S&P 500
®
Index due October 5, 2022
Trigger Performance Leveraged Upside Securities
SM
Principal at Risk Securities
S&P 500
®
Index
|
High
|
Low
|
Period End
|
2011
|
|
|
|
First Quarter
|
1,343.01
|
1,256.88
|
1,325.83
|
Second Quarter
|
1,363.61
|
1,265.42
|
1,320.64
|
Third Quarter
|
1,353.22
|
1,119.46
|
1,131.42
|
Fourth Quarter
|
1,285.09
|
1,099.23
|
1,257.60
|
2012
|
|
|
|
First Quarter
|
1,416.51
|
1,277.06
|
1,408.47
|
Second Quarter
|
1,419.04
|
1,278.04
|
1,362.16
|
Third Quarter
|
1,465.77
|
1,334.76
|
1,440.67
|
Fourth Quarter
|
1,461.40
|
1,353.33
|
1,426.19
|
2013
|
|
|
|
First Quarter
|
1,569.19
|
1,457.15
|
1,569.19
|
Second Quarter
|
1,669.16
|
1,541.61
|
1,606.28
|
Third Quarter
|
1,725.52
|
1,614.08
|
1,681.55
|
Fourth Quarter
|
1,848.36
|
1,655.45
|
1,848.36
|
2014
|
|
|
|
First Quarter
|
1,878.04
|
1,741.89
|
1,872.34
|
Second Quarter
|
1,962.87
|
1,815.69
|
1,960.23
|
Third Quarter
|
2,011.36
|
1,909.57
|
1,972.29
|
Fourth Quarter
|
2,090.57
|
1,862.49
|
2,058.90
|
2015
|
|
|
|
First Quarter
|
2,117.39
|
1,992.67
|
2,067.89
|
Second Quarter
|
2,130.82
|
2,057.64
|
2,063.11
|
Third Quarter
|
2,128.28
|
1,867.61
|
1,920.03
|
Fourth Quarter
|
2,109.79
|
1,923.82
|
2,043.94
|
2016
|
|
|
|
First Quarter
|
2,063.95
|
1,829.08
|
2,059.74
|
Second Quarter
|
2,119.12
|
2,000.54
|
2,098.86
|
Third Quarter (through August 24, 2016)
|
2,190.15
|
2,088.55
|
2,175.44
|
License Agreement between Morgan Stanley and Standard &
Poor’s Financial Services LLC
“Standard & Poor’s
®
,” “S&P
®
,”
“S&P 500
®
,” “Standard & Poor’s 500” and “500” are trademarks of
Standard and Poor’s Financial Services LLC and have been licensed for use by S&P Dow Jones Indices LLC and Morgan Stanley.
See “S&P 500
®
Index” in the accompanying index supplement.
M
organ
S
tanley
F
inance
LLC
Trigger PLUS Based on the Value of the S&P 500
®
Index due October 5, 2022
Trigger Performance Leveraged Upside Securities
SM
Principal at Risk Securities
Additional Information About the Trigger PLUS
Please read this information in conjunction with the summary
terms on the front cover of this document.
Additional Provisions
:
|
|
Underlying index publisher:
|
S&P Dow Jones Indices LLC
|
Interest:
|
None
|
Bull market or bear market PLUS:
|
Bull market PLUS
|
Postponement of maturity date:
|
If the scheduled valuation date is not an index business day or if a market disruption event
occurs on that day so that the valuation date as postponed falls less than two business days prior to the scheduled maturity
date, the maturity date of the Trigger PLUS will be postponed to the second business day following that valuation date as
postponed.
|
Denominations:
|
$10 per Trigger PLUS and integral multiples thereof
|
Minimum ticketing size:
|
$1,000 / 100 Trigger PLUS
|
Tax considerations:
|
Although there is uncertainty
regarding the U.S. federal income tax consequences of an investment in the Trigger PLUS due to the lack of governing authority,
in the opinion of our counsel, Davis Polk & Wardwell LLP, under current law, and based on current market conditions,
a Trigger PLUS should be treated as a single financial contract that is an “open transaction” for U.S. federal
income tax purposes.
Assuming this treatment
of the Trigger PLUS is respected and subject to the discussion in “United States Federal Taxation” in the
accompanying product supplement for PLUS, the following U.S. federal income tax consequences should result based on current
law:
·
A
U.S. Holder should not be required to recognize taxable income over the term of the Trigger PLUS prior to settlement,
other than pursuant to a sale or exchange.
·
Upon
sale, exchange or settlement of the Trigger PLUS, a U.S. Holder should recognize gain or loss equal to the difference
between the amount realized and the U.S. Holder’s tax basis in the Trigger PLUS. Such gain or loss should be long-term
capital gain or loss if the investor has held the Trigger PLUS for more than one year, and short-term capital gain or
loss otherwise.
In
2007, the U.S. Treasury Department and the Internal Revenue Service (the “IRS”) released a notice requesting
comments on the U.S. federal income tax treatment of “prepaid forward contracts” and similar instruments.
The notice focuses in particular on whether to require holders of these instruments to accrue income over the term of
their investment. It also asks for comments on a number of related topics, including the character of income or loss with
respect to these instruments; whether short-term instruments should be subject to any such accrual regime; the relevance
of factors such as the exchange-traded status of the instruments and the nature of the underlying property to which the
instruments are linked; the degree, if any, to which income (including any mandated accruals) realized by non-U.S. investors
should be subject to withholding tax; and whether these instruments are or should be subject to the “constructive
ownership” rule, which very generally can operate to recharacterize certain long-term capital gain as ordinary income
and impose an interest charge. While the notice requests comments on appropriate transition rules and effective dates,
any Treasury regulations or other guidance promulgated after consideration of these issues could materially and adversely
affect the tax consequences of an investment in the Trigger PLUS, possibly with retroactive effect.
Both U.S. and non-U.S.
investors considering an investment in the Trigger PLUS should read the discussion under “Risk Factors” in
this document and the discussion under “United States Federal Taxation” in the accompanying product supplement
for PLUS and consult their tax advisers regarding all aspects of the U.S. federal income tax consequences of an investment
in the Trigger PLUS, including possible alternative treatments, the issues presented by the aforementioned notice and
any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction.
The discussion in the
preceding paragraphs under “Tax considerations” and the discussion contained in the section entitled “United
States Federal Taxation” in the accompanying product supplement for PLUS, insofar as they purport to describe provisions
of U.S. federal income tax laws or legal conclusions with respect thereto, constitute the full opinion of Davis Polk &
Wardwell LLP regarding the material U.S. federal tax consequences of an investment in the Trigger PLUS.
|
Trustee:
|
The Bank of New York Mellon
|
Calculation agent:
|
MS & Co.
|
Use of proceeds and hedging:
|
The proceeds from the sale
of the Trigger PLUS will be used by us for general corporate purposes. We will receive, in aggregate, $10 per Trigger
PLUS issued, because, when we enter into hedging transactions in order to meet our obligations under the Trigger PLUS,
our hedging counterparty will reimburse the cost of the agent’s
|
M
organ
S
tanley
F
inance
LLC
Trigger PLUS Based on the Value of the S&P 500
®
Index due October 5, 2022
Trigger Performance Leveraged Upside Securities
SM
Principal at Risk Securities
|
commissions. The costs
of the Trigger PLUS borne by you and described beginning on page 2 above comprise the agent’s commissions and the
cost of issuing, structuring and hedging the Trigger PLUS.
On or prior to the pricing
date, we will hedge our anticipated exposure in connection with the Trigger PLUS by entering into hedging transactions
with our affiliates and/or third party dealers. We expect our hedging counterparties to take positions in stocks of the
underlying index, futures and options contracts on the underlying index and any component stocks of the underlying index
listed on major securities markets or positions in any other available securities or instruments that they may wish to
use in connection with such hedging. Such purchase activity could potentially increase the value of the underlying index
on the pricing date, and, therefore, could increase the trigger level, which is the level at or above which the underlying
index must close on the valuation date so that investors do not suffer a significant loss on their initial investment
in the Trigger PLUS. In addition, through our affiliates, we are likely to modify our hedge position throughout the term
of the Trigger PLUS, including on the valuation date, by purchasing and selling the stocks constituting the underlying
index, futures or options contracts on the underlying index or its component stocks listed on major securities markets
or positions in any other available securities or instruments that we may wish to use in connection with such hedging
activities. As a result, these entities may be unwinding or adjusting hedge positions during the term of the Trigger PLUS,
and the hedging strategy may involve greater and more frequent dynamic adjustments to the hedge as the valuation date
approaches. We cannot give any assurance that our hedging activities will not affect the value of the underlying index,
and, therefore, adversely affect the value of the Trigger PLUS or the payment you will receive at maturity, if any. For
further information on our use of proceeds and hedging, see “Use of Proceeds and Hedging” in the accompanying
product supplement for PLUS.
|
Benefit plan investor considerations:
|
Each fiduciary of a pension,
profit-sharing or other employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended
(“ERISA”) (a “Plan”), should consider the fiduciary standards of ERISA in the context of the Plan’s
particular circumstances before authorizing an investment in the Trigger PLUS. Accordingly, among other factors, the fiduciary
should consider whether the investment would satisfy the prudence and diversification requirements of ERISA and would
be consistent with the documents and instruments governing the Plan.
In addition, we and certain
of our affiliates, including MS & Co., may each be considered a “party in interest” within the meaning
of ERISA, or a “disqualified person” within the meaning of the Internal Revenue Code of 1986, as amended (the
“Code”), with respect to many Plans, as well as many individual retirement accounts and Keogh plans (also
“Plans”). ERISA Section 406 and Section 4975 of the Code generally prohibit transactions between Plans and
parties in interest or disqualified persons. Prohibited transactions within the meaning of ERISA or the Code would likely
arise, for example, if the Trigger PLUS are acquired by or with the assets of a Plan with respect to which MS & Co.
or any of its affiliates is a service provider or other party in interest, unless the Trigger PLUS are acquired pursuant
to an exemption from the “prohibited transaction” rules. A violation of these “prohibited transaction”
rules could result in an excise tax or other liabilities under ERISA and/or Section 4975 of the Code for such persons,
unless exemptive relief is available under an applicable statutory or administrative exemption.
The U.S. Department of
Labor has issued five prohibited transaction class exemptions (“PTCEs”) that may provide exemptive relief
for direct or indirect prohibited transactions resulting from the purchase or holding of the Trigger PLUS. Those class
exemptions are PTCE 96-23 (for certain transactions determined by in-house asset managers), PTCE 95-60 (for certain transactions
involving insurance company general accounts), PTCE 91-38 (for certain transactions involving bank collective investment
funds), PTCE 90-1 (for certain transactions involving insurance company separate accounts) and PTCE 84-14 (for certain
transactions determined by independent qualified professional asset managers). In addition, ERISA Section 408(b)(17) and
Section 4975(d)(20) of the Code may provide an exemption for the purchase and sale of securities and the related lending
transactions, provided that neither the issuer of the securities nor any of its affiliates has or exercises any discretionary
authority or control or renders any investment advice with respect to the assets of the Plan involved in the transaction
and provided further that the Plan pays no more, and receives no less, than “adequate consideration” in connection
with the transaction (the so-called “service provider” exemption). There can be no assurance that any of these
class or statutory exemptions will be available with respect to transactions involving the Trigger PLUS.
Because we may be considered
a party in interest with respect to many Plans, the Trigger PLUS may not be purchased, held or disposed of by any Plan,
any entity whose underlying assets include “plan assets” by reason of any Plan’s investment in the entity
(a “Plan Asset Entity”) or any person investing “plan assets” of any Plan, unless such purchase,
holding or disposition is eligible for exemptive relief, including relief available under PTCEs 96-23, 95-60, 91-38, 90-1,
84-14 or the service provider exemption or such purchase, holding or disposition is otherwise not prohibited. Any purchaser,
including any fiduciary purchasing on behalf of a Plan, transferee or holder of the Trigger PLUS will be deemed to have
represented, in its corporate and its fiduciary capacity, by its purchase and holding of the Trigger PLUS that either
(a) it is not a Plan or a Plan Asset Entity and is not purchasing such Trigger PLUS on behalf of or with “plan assets”
of any Plan or with any assets of a governmental, non-U.S. or church plan that is subject to any federal, state, local
or non-U.S. law that is substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the Code (“Similar
Law”) or (b) its purchase, holding and disposition are eligible for exemptive relief or such purchase, holding and
disposition are not prohibited by ERISA or Section 4975 of the Code or any Similar Law.
Due to the complexity of
these rules and the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly
important that fiduciaries or other persons considering purchasing the Trigger PLUS on behalf of or with “plan assets”
of any Plan consult with their counsel regarding
|
M
organ
S
tanley
F
inance
LLC
Trigger PLUS Based on the Value of the S&P 500
®
Index due October 5, 2022
Trigger Performance Leveraged Upside Securities
SM
Principal at Risk Securities
|
the availability of exemptive
relief.
The Trigger PLUS are contractual
financial instruments. The financial exposure provided by the Trigger PLUS is not a substitute or proxy for, and is not
intended as a substitute or proxy for, individualized investment management or advice for the benefit of any purchaser
or holder of the Trigger PLUS. The Trigger PLUS have not been designed and will not be administered in a manner intended
to reflect the individualized needs and objectives of any purchaser or holder of the Trigger PLUS.
Each purchaser or holder
of any Trigger PLUS acknowledges and agrees that:
(i)
the
purchaser or holder or its fiduciary has made and shall make all investment decisions for the purchaser or holder and
the purchaser or holder has not relied and shall not rely in any way upon us or our affiliates to act as a fiduciary or
adviser of the purchaser or holder with respect to (A) the design and terms of the Trigger PLUS, (B) the purchaser or
holder’s investment in the Trigger PLUS, or (C) the exercise of or failure to exercise any rights we have under
or with respect to the Trigger PLUS;
(ii)
we
and our affiliates have acted and will act solely for our own account in connection with (A) all transactions relating
to the Trigger PLUS and (B) all hedging transactions in connection with our obligations under the Trigger PLUS;
(iii)
any
and all assets and positions relating to hedging transactions by us or our affiliates are assets and positions of those
entities and are not assets and positions held for the benefit of the purchaser or holder;
(iv)
our
interests are adverse to the interests of the purchaser or holder; and
(v)
neither
we nor any of our affiliates is a fiduciary or adviser of the purchaser or holder in connection with any such assets,
positions or transactions, and any information that we or any of our affiliates may provide is not intended to be impartial
investment advice.
Each purchaser and holder
of the Trigger PLUS has exclusive responsibility for ensuring that its purchase, holding and disposition of the Trigger
PLUS do not violate the prohibited transaction rules of ERISA or the Code or any Similar Law. The sale of any Trigger
PLUS to any Plan or plan subject to Similar Law is in no respect a representation by us or any of our affiliates or representatives
that such an investment meets all relevant legal requirements with respect to investments by plans generally or any particular
plan, or that such an investment is appropriate for plans generally or any particular plan.
However, individual retirement
accounts, individual retirement annuities and Keogh plans, as well as employee benefit plans that permit participants
to direct the investment of their accounts, will not be permitted to purchase or hold the Trigger PLUS if the account,
plan or annuity is for the benefit of an employee of Morgan Stanley or Morgan Stanley Wealth Management or a family member
and the employee receives any compensation (such as, for example, an addition to bonus) based on the purchase of the Trigger
PLUS by the account, plan or annuity.
|
Additional considerations:
|
Client accounts over which Morgan Stanley, Morgan Stanley Wealth Management or any of their
respective subsidiaries have investment discretion are not permitted to purchase the Trigger PLUS, either directly or indirectly.
|
Supplemental information regarding plan of distribution; conflicts
of interest:
|
The agent may distribute
the Trigger PLUS through Morgan Stanley Smith Barney LLC (“Morgan Stanley Wealth Management”), as selected
dealer, or other dealers, which may include Morgan Stanley & Co. International plc (“MSIP”) and Bank Morgan
Stanley AG. Morgan Stanley Wealth Management, MSIP and Bank Morgan Stanley AG are affiliates of ours. Selected dealers,
including Morgan Stanley Wealth Management, and their financial advisors will collectively receive from the agent, Morgan
Stanley & Co. LLC, a fixed sales commission of $0.30 for each Trigger PLUS they sell. In addition, Morgan Stanley
Wealth Management will receive a structuring fee of $0.05 for each Trigger PLUS.
MS & Co. is an affiliate
of MSFL and a wholly owned subsidiary of Morgan Stanley, and it and other affiliates of ours expect to make a profit by
selling, structuring and, when applicable, hedging the Trigger PLUS. When MS & Co. prices this offering of Trigger
PLUS, it will determine the economic terms of the Trigger PLUS such that for each Trigger PLUS the estimated value on
the pricing date will be no lower than the minimum level described in “Investment Summary” beginning on page
2.
MS & Co. will conduct
this offering in compliance with the requirements of FINRA Rule 5121 of the Financial Industry Regulatory Authority, Inc.,
which is commonly referred to as FINRA, regarding a FINRA member firm’s distribution of the securities of an affiliate
and related conflicts of interest. MS & Co. or any of our other affiliates may not make sales in this offering to
any discretionary account. See “Plan of Distribution (Conflicts of Interest)” and “Use of Proceeds and
Hedging” in the accompanying product supplement for PLUS.
|
Contact:
|
Morgan Stanley Wealth Management clients may contact their local Morgan Stanley branch office
or our principal executive offices at 1585 Broadway, New York, New York 10036 (telephone number (866) 477-4776). All
other clients may contact their local brokerage representative. Third-party distributors may contact Morgan Stanley
Structured Investment Sales at (800) 233-1087.
|
Where you can find more information:
|
Morgan Stanley and MSFL
have filed a registration statement (including a prospectus, as supplemented by the product supplement for PLUS and the
index supplement ) with the Securities and Exchange Commission, or SEC, for the offering to which this communication relates.
You should read the prospectus in that registration statement, the product supplement for PLUS, the index supplement and
any other documents relating to this
|
M
organ
S
tanley
F
inance
LLC
Trigger PLUS Based on the Value of the S&P 500
®
Index due October 5, 2022
Trigger Performance Leveraged Upside Securities
SM
Principal at Risk Securities
|
offering that Morgan Stanley
and MSFL have filed with the SEC for more complete information about Morgan Stanley, MSFL and this offering. You may get
these documents without cost by visiting EDGAR on the SEC web site at.www.sec.gov. Alternatively, Morgan Stanley, MSFL,
any underwriter or any dealer participating in the offering will arrange to send you the product supplement for PLUS,
index supplement and prospectus if you so request by calling toll-free 1-(800)-584-6837.
You may access these documents
on the SEC web site at.www.sec.gov as follows:
Product
Supplement for PLUS dated February 29, 2016
Index
Supplement dated February 29, 2016
Prospectus
dated February 16, 2016
Terms used but not defined
in this document are defined in the product supplement for PLUS, in the index supplement or in the prospectus.“Performance
Leveraged Upside Securities
SM
” and “PLUS
SM
” are our service marks.
|
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