These Trigger Autocallable Contingent Yield Notes (the “Securities”)
are unsecured and unsubordinated debt obligations of Morgan Stanley Finance LLC (“MSFL”) and are fully and unconditionally
guaranteed by Morgan Stanley. The Securities provide returns based on the performance of the STOXX
®
Europe 600 Banks
Index (the “Underlying”). If the closing level of the Underlying on a quarterly Observation Date (the “Observation
Date Closing Level”) is equal to or greater than the Coupon Barrier, MSFL will make a Contingent Coupon payment with respect
to that Observation Date. However, if the closing level of the Underlying is less than the Coupon Barrier, no coupon will accrue
or be payable with respect to that Observation Date. In addition, MSFL will automatically call the Securities early if the Observation
Date Closing Level on any quarterly Observation Date beginning after approximately six months (April 27, 2017) is equal to or greater
than the Initial Level. If the Securities are called, MSFL will pay the principal amount plus the Contingent Coupon for that Observation
Date, and no further amounts will be owed to you. If the Securities are not called prior to maturity and the Final Level is equal
to or greater than the Downside Threshold (which will be the same as the Coupon Barrier), MSFL will make a cash payment to you
at maturity equal to the principal amount of your Securities, in addition to the Contingent Coupon with respect to the Final Observation
Date. However, if the Final Level is less than the Downside Threshold, MSFL will pay you significantly less than the full principal
amount, if anything, at maturity, resulting in a loss on your principal amount that is proportionate to the decline in the value
of the Underlying from the Trade Date to the Final Observation Date. The Securities may be appropriate for investors who seek an
opportunity for potentially enhanced income in exchange for the risk of losing their principal at maturity and the risk of receiving
no Contingent Coupons during the term of the Securities. Your return will be solely the Contingent Coupons, if any, and you will
not participate in any appreciation in the Underlying. Generally, the higher the Contingent Coupon Rate on the Securities, the
greater the risk of loss on those Securities.
Investing in the Securities involves significant risks. The Issuer will not pay
a quarterly Contingent Coupon if the Observation Date Closing Level for the Underlying is below the Coupon Barrier. The Issuer
will not automatically call the Securities if the Observation Date Closing Level of the Underlying is below the Initial Level.
You will lose a significant portion or all of your principal amount at maturity if the Securities are not called and the Final
Level of the Underlying is below the Downside Threshold. Generally, the higher the Contingent Coupon Rate for the Securities, the
greater risk of loss on those Securities. If you sell the Securities prior to maturity, you may receive substantially less than
the principal amount even if the level of the Underlying is greater than the Downside Threshold at the time of sale.
This free writing prospectus relates to Trigger Autocallable Contingent
Yield Notes linked to the STOXX
®
Europe 600 Banks Index. The Initial Level, Coupon Barrier and Downside Threshold
will be determined on the Trade Date. The Securities are offered at a minimum investment of $1,000 in denominations of $10 and
integral multiples thereof.
The closing level on any Index Business Day will be determined
based on the level published by the underlying publisher.
* If payable, the Contingent Coupon will be a fixed amount based
on equal quarterly installments at the Contingent Coupon Rate. See “Contingent Coupon” on page 4.
** The actual Coupon Barrier and Downside Threshold will be determined
on the Trade Date.
Morgan Stanley and MSFL have filed a registration statement (including
a prospectus, as supplemented by a product supplement) with the SEC for the offering to which this communication relates. Before
you invest, you should read the prospectus in that registration statement, the product supplement and any other documents relating
to this 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 for free by visiting EDGAR on the SEC website at www.sec.gov. Alternatively, Morgan
Stanley, MSFL, any underwriter or any dealer participating in this offering will arrange to send you the prospectus and the product
supplement if you so request by calling toll-free 1-(800)-584-6837.
You may access the accompanying product supplement and prospectus
on the SEC website at www.sec.gov as follows:
You should rely only on the information incorporated by reference
or provided in this free writing prospectus or the accompanying prospectus and product supplement. We have not authorized anyone
to provide you with different information. We are not making an offer of these Securities in any state where the offer is not permitted.
You should not assume that the information in this free writing prospectus or the accompanying prospectus and product supplement
is accurate as of any date other than the date on the front of this document.
If the terms described in this free writing prospectus are inconsistent
with those described in the accompanying product supplement or prospectus, the terms described in this free writing prospectus
will prevail.
The Issue Price of each Security is $10. This price includes costs
associated with issuing, selling, structuring and hedging the Securities, which are borne by you, and, consequently, the estimated
value of the Securities on the Trade Date will be less than $10. We estimate that the value of each Security on the Trade Date
will be approximately $9.653, or within $0.225 of that estimate. Our estimate of the value of the Securities as determined on the
Trade Date will be set forth in the final pricing supplement.
In valuing the Securities on the Trade Date, we take into account
that the Securities comprise both a debt component and a performance-based component linked to the Underlying. The estimated value
of the Securities is determined using our own pricing and valuation models, market inputs and assumptions relating to the Underlying,
instruments based on the Underlying, 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.
In determining the economic terms of the Securities, including
the Contingent Coupon Rate, the Coupon Barrier and the Downside Threshold, 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 Securities
would be more favorable to you.
The price at which MS & Co. purchases the Securities in the
secondary market, absent changes in market conditions, including those related to the Underlying, may vary from, and be lower than,
the estimated value on the Trade 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 Securities are not fully deducted upon
issuance, for a period of up to 7 months following the Settlement Date, to the extent that MS & Co. may buy or sell the Securities
in the secondary market, absent changes in market conditions, including those related to the Underlying, 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. currently intends, but is not obligated, to make
a market in the Securities, and, if it once chooses to make a market, may cease doing so at any time.
Observation Dates
(1)
and Coupon Payment Dates
(2)
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Observation Dates
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Coupon Payment Dates
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01/27/2017*
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01/31/2017*
|
04/27/2017
|
05/02/2017
|
07/27/2017
|
07/31/2017
|
10/27/2017
|
10/31/2017
|
01/29/2018
|
01/31/2018
|
04/27/2018
|
05/01/2018
|
07/27/2018
|
07/31/2018
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10/29/2018
|
10/31/2018
|
01/28/2019
|
01/30/2019
|
04/29/2019
|
05/01/2019
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07/29/2019
|
07/31/2019
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10/28/2019 (Final Observation Date)
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10/31/2019 (Maturity Date)
|
*The Securities are not callable until the second Observation
Date, which is April 27, 2017.
(1) Subject to postponement in the event of a Market Disruption
Event or for non-Index Business Days. See “Postponement of Determination Dates” in the accompanying product supplement.
(2) If, due to a Market Disruption Event or otherwise, any Observation
Date is postponed so that it falls less than two business days prior to the scheduled Coupon Payment Date, the Coupon Payment Date
will be postponed to the second business day following that Observation Date as postponed,
provided
that the Coupon Payment
Date with respect to the Final Observation Date will be the Maturity Date. No additional coupon will accrue on an account of any
such postponement.
An investment in the Securities involves significant risks. Some
of the risks that apply to the Securities are summarized here, but we urge you to also read the “Risk Factors” section
of the accompanying prospectus and product supplement. You should also consult your investment, legal, tax, accounting and other
advisers before you invest in the Securities.
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The Securities do not guarantee the payment of regular interest
or the return of any principal.
The terms of the Securities differ from those of ordinary debt securities in that the Securities
do not guarantee the payment of regular interest or the return of any of the principal amount at maturity. In addition, while the
Securities will generally offer the possibility of a higher return if the Securities are automatically called than the potential
return payable on our ordinary debt securities with a similar maturity, this higher return potential reflects the risk that you
may not receive a positive return on the Securities and may lose a significant portion or all of your investment if the Securities
have not been called prior to maturity and if the Final Level is less than the Downside Threshold. In this case, you will be exposed
to the decline in the level of the Underlying, as compared to the Initial Level, on a 1-to-1 basis, and the Payment at Maturity
will result in a significant loss of your initial investment that is proportionate to the decline of the Underlying over the term
of the Securities.
You could lose your entire principal amount.
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You will not receive any Contingent Coupon for any quarterly period
where the Observation Date Closing Level is less than or equal to the Coupon Barrier.
A Contingent Coupon will be made with
respect to a quarterly period only if the Observation Date Closing Level is greater than or equal to the Coupon Barrier. If the
Observation Date Closing Level remains below the Coupon Barrier on each Observation Date over the term of the Securities, you will
not receive any Contingent Coupons.
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The Contingent Coupon is based solely on the Observation Date Closing
Level.
Whether the Contingent Coupon will be paid with respect to an Observation Date will be based on the Observation Date
Closing Level. As a result, you will not know whether you will receive the Contingent Coupon with respect to any Coupon Payment
Date until the applicable Observation Date. Moreover, because the Contingent Coupon is based solely on the Observation Date Closing
Level on a specific Observation Date, if such Observation Date Closing Level is less than the Coupon Barrier, you will not receive
any Contingent Coupon with respect to such Observation Date, even if the closing level of the Underlying was higher on other days
during the term of the Securities.
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Investors will not participate in any appreciation in the level
of the Underlying.
Investors will not participate in any appreciation in the level of the Underlying from the Initial Level,
and the return on the Securities will be limited to the Contingent Coupon, if any, that is paid with respect to each Observation
Date on which the Observation Date Closing Level is greater than or equal to the Coupon Barrier prior to an automatic call or maturity,
if any. The return on the Securities will be limited to the Contingent Coupons, if any, regardless of the appreciation of the Underlying,
which could be significant. It is possible that the closing level of the Underlying could be below the Coupon Barrier on most or
all of the Observation Dates so that you may receive few or no Contingent Coupons. In addition, if the Securities are not called
prior to maturity, you may be exposed to the full downside market risk of the Underlying and lose a significant portion or all
of your investment despite not being able to participate in any potential appreciation of the Underlying. If you do not earn sufficient
Contingent Coupons over the term of the Securities, the overall return on the Securities may be less than the amount that would
be paid on a conventional debt security of ours of comparable maturity.
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You may incur a loss on your investment if you sell your Securities
prior to maturity.
The Downside Threshold is observed only on the Final Observation Date and the contingent downside market
exposure applies only at maturity. If you are able to sell your Securities in the secondary market prior to maturity, you may have
to sell them at a loss relative to your initial investment even if the Underlying Share price is above the Downside Threshold at
that time. If you hold the Securities to maturity and the Securities have not been called, MSFL will either repay you the full
principal amount per Security plus the Contingent Coupon, or if the level of the Underlying closes below the Downside Threshold
on the Final Observation Date, MSFL will repay significantly less than the principal amount, if anything, at maturity, resulting
in a loss on your principal amount that is proportionate to the decline in the level of the Underlying from the Trade Date to the
Final Observation Date.
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Early Redemption Risk.
The term of your investment in the Securities may be limited to as short as approximately six
months by the automatic call feature of the Securities. If the Securities are called prior to maturity, you will not be able to
receive any further Contingent Coupon Payments for any future Observation Dates and you may be forced to invest in a lower interest
rate environment and may not be able to reinvest at comparable terms or for similar returns. However, under no circumstances will
the Securities be redeemed in the first six months of the term of the Securities. Generally, the longer the Securities have been
outstanding, the less likely it is that they will be automatically called, because the level of the Underlying will necessarily
have declined from the Initial Level if the Securities were not called following an Observation Date, and there will be less time
remaining until maturity in which the level of the Underlying can recover.
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The Securities are subject to our credit risk, and any actual or
anticipated changes to our credit ratings or our credit spreads may adversely affect the market value of the Securities.
You
are dependent on our ability to pay all amounts due on the Securities, including Contingent Coupons, if any, and any payments upon
an automatic call or at maturity, and therefore you are subject to our credit risk. If we default on our obligations under the
Securities, your investment would be at risk and you could lose some or all of your investment. As a result, the market value of
the Securities 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 Securities.
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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.
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The market price of the Securities will be influenced by many unpredictable
factors.
Several factors, many of which are beyond our control, will influence the value of the Securities in the secondary
market and the price at which MS & Co. may be willing to purchase or sell the Securities in the secondary market. Although
we expect that generally the closing level of the Underlying on any day will affect the value of the Securities more than any other
single factor, other factors that may influence the value of the Securities include:
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the value and volatility (frequency and magnitude of changes in value) of the Underlying,
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whether the Observation Date Closing Level has been below the Coupon Barrier on any Observation Date,
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dividend rates on the stocks comprising the Underlying,
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interest and yield rates in the market,
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time remaining until the Securities mature,
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geopolitical conditions and economic, financial, political, regulatory or judicial events that affect the Underlying or equities
markets generally and which may affect the Final Level,
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the occurrence of certain events affecting the Underlying that may or may not require an adjustment to its composition, and
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any actual or anticipated changes in our credit ratings or credit spreads.
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Some or all of these factors will
influence the terms of the Securities at the time of issuance and the price that you will receive if you are able to sell your
Securities prior to maturity, as the Securities are comprised of both a debt component and a performance-based component linked
to the Underlying, and these are the types of factors that also generally affect the values of debt securities and derivatives
linked to the Underlying. The level of the Underlying may be, and has recently been, volatile, and we can give you no assurance
that the volatility will lessen. See “STOXX
®
Europe 600 Banks Index” below. You may receive less, and
possibly significantly less, than the Principal Amount per Security if you try to sell your Securities prior to maturity.
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A higher Contingent Coupon Rate and/or a lower Downside Threshold
may reflect greater expected volatility of the Underlying, and greater expected volatility generally indicates an increased risk
of declines in the level of the Underlying and, potentially, a significant loss at maturity.
The economic terms for the Securities,
including the Contingent Coupon Rate and the Downside Threshold, are based, in part, on the expected volatility of the Underlying
at the time the terms of the Securities are set. “Volatility” refers to the frequency and magnitude of changes in the
level of the Underlying. Higher expected volatility with respect to the Underlying as of the Trade Date generally indicates a greater
expectation as of that date that the Final Level of the Underlying could ultimately be less than the Downside Threshold on the
Final Observation Date, which would result in a loss of a significant portion or all of the Principal Amount. At the time the terms
of the Securities are set, higher expected volatility will generally be reflected in a higher Contingent Coupon Rate and/or a lower
Downside Threshold, as compared to otherwise comparable securities. Therefore, a relatively higher Contingent Coupon Rate, which
would increase the upside return if the Observation Date Closing Level is greater than or equal to the Coupon Barrier on the quarterly
Observation Dates, may indicate an increased risk that the level of the Underlying will decrease substantially, which would result
in a significant loss at maturity. In addition, and as described above in "The Securities do not guarantee the payment of
regular interest or the return of any principal," in general, the higher potential return on the Securities as compared to
the return payable on our ordinary debt securities with a comparable maturity indicates the risk that you may not receive a positive
return on the Securities and may lose a significant portion or all of your investment. Further, a relatively lower Downside Threshold
may not indicate that the Securities have a greater likelihood of a return of principal at maturity. You should be willing to accept
the downside market risk of the Underlying and the potential to lose a significant portion or all of your Principal Amount at maturity.
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The Securities are linked to the STOXX
®
Europe 600
Banks Index and are subject to risks associated with investments in securities linked to the value of foreign equity securities
–
The Securities are linked to the value of foreign equity securities. Investments in securities linked to the value
of foreign equity securities involve risks associated with the securities markets in those countries, including risks of volatility
in those markets, governmental intervention in those markets and cross-shareholdings in companies in certain countries. Although
the equity securities included in the STOXX
®
Europe 600 Banks Index are traded in foreign currencies, the value
of your Securities (as measured in U.S. dollars) will not be adjusted for any exchange rate fluctuations. Also, there is generally
less publicly available information about foreign companies than about U.S. companies that are subject to the reporting requirements
of the United States Securities and Exchange Commission, and foreign companies are subject to accounting, auditing and financial
reporting standards and requirements different from those applicable to U.S. reporting companies. The prices of securities issued
in foreign markets may be affected by political, economic, financial and social factors in those countries, or global regions,
including changes in government, economic and fiscal policies and currency exchange laws. Local securities markets may trade a
small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation
of holdings difficult or impossible at times. Moreover, the economies in such countries may differ favorably or unfavorably from
the economy in the United States in such respects as growth of gross national product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payment positions.
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Investing in the Securities exposes investors to risks associated
with investments in securities with a concentration in the banking sector
– The stocks included in the Underlying are
stocks of companies whose business is associated with the banking sector. As a result, the value of the Securities may be subject
to greater volatility and may be more adversely affected by a single economic, political or regulatory occurrence affecting this
industry than a different investment linked to securities of a more broadly diversified group of issuers or issuers in a less volatile
industry. The performance of bank stocks may be affected by governmental regulation that may, among other things, limit the amount
and types of loans and other financial commitments that banks can make, the interest rates and fees they can charge and the amount
of capital they must maintain. Profitability is largely dependent on the availability and cost of capital funds, and can fluctuate
significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers can negatively impact
the banking sector. Banks may also be subject to severe price competition. These or other factors or the absence of such factors
could cause the value of some or all of the component stocks included in the Underlying to decline during the term of the Securities.
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The Securities will not be listed on any securities exchange and
secondary trading may be limited.
The Securities will not be listed on any securities exchange. Therefore, there may be little
or no secondary market for the Securities 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 Securities, 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 Securities. MS & Co. currently intends, but is not obligated, to make a market in the Securities.
Even if there is a secondary market, it may not provide enough liquidity to allow you to trade or sell the Securities easily. Because
we do not expect that other broker-dealers will participate significantly in the secondary market for the Securities, the price
at which you may be able to trade your Securities 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 Securities, it is likely that there would be no secondary
market for the Securities. Accordingly, you should be willing to hold your Securities to maturity.
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Investing in the Securities is not equivalent to investing in the
Underlying or the stocks composing the Underlying
– Investing in the Securities is not equivalent to investing in the
Underlying or the stocks that constitute the Underlying. Investors in the Securities will not have voting rights or rights to receive
dividends or other distributions or any other rights with respect to the stocks that constitute the Underlying. Further, you will
no participate in any potential appreciation of the Underlying even though you may be exposed o its full decline at maturity. Additionally,
the Underlying is not a “total return” index, which, in addition to reflecting the market prices of the stocks that
constitute the Underlying, would also reflect dividends paid on such stocks. The return on the Securities will not include such
a total return feature.
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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 associated with issuing, selling, structuring and hedging the Securities in the Issue
Price reduce the economic terms of the Securities, cause the estimated value of the Securities to be less than the 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 Securities in secondary market transactions
will likely be significantly lower than the Issue Price, because secondary market prices will exclude the issuing, selling, structuring
and hedging-related costs that are included in the 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.
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The inclusion of the costs of issuing,
selling, structuring and hedging the Securities in the Issue Price and the lower rate we are willing to pay as issuer make the
economic terms of the Securities less favorable to you than they otherwise would be.
However, because the costs associated
with issuing, selling, structuring and hedging the Securities are not fully deducted upon issuance, for a period of up to 7 months
following the Settlement Date, to the extent that MS & Co. may buy or sell the Securities in the secondary market, absent changes
in market conditions, including those related to the Underlying, 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.
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The estimated value of the Securities 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 Securities than those generated by others,
including other dealers in the market, if they attempted to value the Securities. In addition, the estimated value on the Trade
Date does not represent a minimum or maximum price at which dealers, including MS & Co., would be willing to purchase your
Securities in the secondary market (if any exists) at any time. The value of your Securities at any time after the date of this
free writing prospectus 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 Securities will be influenced by many unpredictable factors”
above.
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Adjustments to the Underlying could adversely affect the value of
the Securities
– The Underlying publisher of the Underlying is responsible for calculating and maintaining the Underlying.
The Underlying publisher may add, delete or substitute the stocks constituting the Underlying or make other methodological changes
required by certain corporate events relating to the stocks constituting the Underlying, such as stock dividends, stock splits,
spin-offs, rights offerings and extraordinary dividends, that could change the value of the Underlying. The Underlying publisher
may discontinue or suspend calculation or publication of the Underlying at any time. In these circumstances, the Calculation Agent
will have the sole discretion to substitute a Successor Underlying that is comparable to the discontinued Underlying, and is permitted
to consider indices that are calculated and published by the Calculation Agent or any of its affiliates. Any of these actions could
adversely affect the value of the Underlying and, consequently, the value of the Securities.
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Hedging and trading activity by our affiliates could potentially
affect the value of the Securities.
One or more of our affiliates and/or third-party dealers expect to carry out hedging activities
related to the Securities (and to other instruments linked to the Underlying), including trading in the stocks that constitute
the Underlying as well as in other instruments related to the Underlying. As a result, these entities may be unwinding or adjusting
hedge positions during the term of the Securities, and the hedging strategy may involve greater and more frequent dynamic adjustments
to the hedge as the Final Observation Date approaches. Some of our subsidiaries also trade the stocks that constitute the Underlying
and other financial instruments related to the Underlying 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 Trade Date could potentially increase the Initial Level, and, as
a result, the Coupon Barrier and Downside Threshold, which is the price at or above which the Underlying must close on each Observation
Date in order for you to earn a Contingent Coupon, or, if the Securities are not called prior to maturity, in order for you to
avoid being exposed to the negative performance of the Underlying at maturity. Additionally, such hedging or trading activities
during the term of the Securities could potentially affect the level of the Underlying on the Observation Dates, and, accordingly,
whether the
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Contingent
Coupon is payable or whether the Securities are automatically called prior to maturity, and, if the Securities are not called
prior to maturity, the payout to you at maturity, if any.
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The
Calculation Agent, which is our affiliate, will make determinations with respect to the Securities.
As Calculation Agent,
MS & Co. will determine the Initial Level, the Coupon Barrier, the Downside Threshold, the Final Level, whether the Securities
will be called following any Observation Date, whether a Contingent Coupon is payable with respect to each Observation Date, whether
a market disruption event has occurred and the payment that you will receive upon a call, on each Coupon Payment Date, if any,
or 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 nonoccurrence of market disruption
events. These potentially subjective determinations may affect the payout to you upon a call, on each Coupon Payment Date, if
any, or at maturity, if any. For further information regarding these types of determinations, see “Description of Auto-Callable
Securities—Postponement of Determination Dates,” “—Discontinuance of Any Underlying Index; Alteration
of Method of Calculation” and “—Calculation Agent and Calculations” in the accompanying product supplement.
In addition, MS & Co. has determined the estimated value of the Securities on the Trade Date.
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Potentially inconsistent research, opinions or recommendations by
Morgan Stanley, MSFL, UBS or our or their respective affiliates
. Morgan Stanley, MSFL, UBS and our or their respective affiliates
may publish research from time to time on financial markets and other matters that may influence the value of the Securities, or
express opinions or provide recommendations that are inconsistent with purchasing or holding the Securities. Any research, opinions
or recommendations expressed by Morgan Stanley, MSFL, UBS or our or their respective affiliates may not be consistent with each
other and may be modified from time to time without notice. Investors should make their own independent investigation of the merits
of investing in the Securities and the Underlying to which the Securities are linked.
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The U.S. federal income tax consequences of an investment in the
Securities are uncertain.
There is no direct legal authority as to the proper treatment of the Securities for U.S. federal
income tax purposes, and, therefore, significant aspects of the tax treatment of the Securities are uncertain.
|
Please
read the discussion under “What Are the Tax Consequences of the Securities” in this free writing prospectus concerning
the U.S. federal income tax consequences of an investment in the Securities.
We intend to
treat a Security for U.S. federal income tax purposes as a single financial contract that provides for a coupon that will be treated
as gross income to you at the time received or accrued, in accordance with your regular method of tax accounting. Under this treatment,
the ordinary income treatment of the coupon payments, in conjunction with the capital loss treatment of any loss recognized upon
the sale, exchange or settlement of the Securities, could result in adverse tax consequences to holders of the Securities because
the deductibility of capital losses is subject to limitations. We do not plan to request a ruling from the Internal Revenue Service
(the “IRS”) regarding the tax treatment of the Securities, and the IRS or a court may not agree with the tax treatment
described herein. If the IRS were successful in asserting an alternative treatment for the Securities, the timing and character
of income or loss on the Securities might differ significantly from the tax treatment described herein. For example, under one
possible treatment, the IRS could seek to recharacterize the Securities as debt instruments. In that event, U.S. Holders would
be required to accrue into income original issue discount on the Securities every year at a “comparable yield” determined
at the time of issuance (as adjusted based on the difference, if any, between the actual and the projected amount of any contingent
payments on the Securities) and recognize all income and gain in respect of the Securities as ordinary income. The risk that financial
instruments providing for buffers, triggers or similar downside protection features, such as the Securities, would be recharacterized
as debt is greater than the risk of recharacterization for comparable financial instruments that do not have such features.
Non-U.S.
Holders should note that we currently intend to withhold on any coupon paid to Non-U.S. Holders generally at a rate of 30%, or
at a reduced rate specified by an applicable income tax treaty under an “other income” or similar provision, and will
not be required to pay any additional amounts with respect to amounts withheld.
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. While it is not clear whether the Securities would be viewed as similar to the prepaid forward contracts
described in the notice, it is possible that any Treasury regulations or other guidance issued after consideration of these issues
could materially and adversely affect the tax consequences of an investment in the Securities, possibly with retroactive effect.
The notice focuses on a number of issues, the most relevant of which for holders of the Securities are the character and timing
of income or loss and the degree, if any, to which income realized by non-U.S. investors should be subject to withholding tax.
Both U.S. and Non-U.S. Holders (as defined below) should consult their tax advisers regarding the U.S. federal income tax consequences
of an investment in the Securities, 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.
Hypothetical Payments on the Securities at Maturity
|
The examples below illustrate the payment upon a call, on the
Coupon Payment Dates and at maturity for a $10 Security on a hypothetical offering of the Securities, with the following assumptions
(the actual terms for the Securities are listed on the cover hereof or will be determined on the Trade Date; amounts may have been
rounded for ease of reference):
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Principal Amount: $10.00
|
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Hypothetical Initial Level: 100
|
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Contingent Coupon Rate: 10.00% per annum
|
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Contingent Coupon: $0.25 per quarter
|
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Observation Dates: Quarterly
|
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Hypothetical Coupon Barrier and Downside Threshold: 74.75, which is
74.75% of the hypothetical Initial Level
|
Example 1 — Securities are Called on the Second Observation
Date (the first Observation Date on which MSFL can call the Securities)
Date
|
Closing Level
|
Payment (per Security)
|
First Observation Date
|
110 (at or above Initial Level)
|
$0.25 (Contingent Coupon — Not Callable)
|
Second Observation Date
|
105 (at or above Initial Level)
|
$10.25 (Settlement Amount)
|
|
Total Payment:
|
$10.50 (5% return)
|
The Underlying closes above the Coupon Barrier on the first Observation
Date, and therefore a Contingent Coupon is paid on the related Coupon Payment Date. MSFL calls the Securities on the second Observation
Date, which is the first Obervation Date on which the Securities can be called. On the call settlement date, MSFL will pay you
a total of $10.25 per Security, reflecting your principal amount plus the Contingent Coupon with respect to the relevant Observation
Date. When added to the Contingent Coupon Payment of $0.25 received in respect of the prior Observation Date, MSFL will have paid
you a total of $10.50 per Security for a 5% total return on the Securities over a 6-month term. No further amount will be owed
to you under the Securities, and you will not participate in any appreciation of the Underlying.
Example 2 — Securities are Called on the Fourth Observation
Date
Date
|
Closing Level
|
Payment (per Security)
|
First Observation Date
|
85 (at or above Coupon Barrier; below Initial Level)
|
$0.25 (Contingent Coupon — Not Callable)
|
Second Observation Date
|
78 (at or above Coupon Barrier; below Initial Level)
|
$0.25 (Contingent Coupon — Not Callable)
|
Third Observation Date
|
92 (at or above Coupon Barrier; below Initial Level)
|
$0.25 (Contingent Coupon — Not Callable)
|
Fourth Observation Date
|
105 (at or above Initial Level)
|
$10.25 (Settlement Amount)
|
|
Total Payment:
|
$11.00 (10% return)
|
Since the Securities are called on the fourth Observation Date
(which is approximately one year after the Trade Date), MSFL will pay you on the call settlement date a total of $10.25 per Security,
reflecting your principal amount plus the Contingent Coupon. When added to the Contingent Coupon payments of $0.75 received in
respect of prior Observation Dates, MSFL will have paid you a total of $11.00 per Security for a 10% total return on the Securities
over a 1-year term. No further amount will be owed to you under the Securities, and you will not participate in any appreciation
of the Underlying.
Example 3 — Securities are NOT Called and the Final Level
of the Underlying is at or above the Downside Threshold
Date
|
Closing Level
|
Payment (per Security)
|
First Observation Date
|
80 (at or above Coupon Barrier; below Initial Level)
|
$0.25 (Contingent Coupon — Not Callable)
|
Second Observation Date
|
55 (below Coupon Barrier and Initial Level)
|
$0.00 (Not Callable)
|
Third to Eleventh Observation Dates
|
Various (all below Coupon Barrier and Initial Level)
|
$0.00 (Not Callable)
|
Final Observation Date
|
85 (at or above Downside Threshold and Coupon Barrier; below Initial Level)
|
$10.25 (Payment at Maturity)
|
|
Total Payment:
|
Approximately $10.50 (5% return)
|
Since the Securities are not called and the Final Level is greater
than or equal to the Downside Threshold, at maturity, MSFL will pay you a total of $10.25 per Security, reflecting your principal
amount plus the Contingent Coupon. When added to the Contingent Coupon payment of $0.25 received in respect of prior Observation
Dates, MSFL will have paid you a total of $10.50 per Security for a 5% total return on the Securities over the 3-year term. You
will not participate in any appreciation of the Underlying.
Example 4 — Securities are NOT Called and the Final Level
of the Underlying is below the Downside Threshold
Date
|
Closing Level
|
Payment (per Security)
|
First Observation Date
|
92 (at or above Coupon Barrier; below Initial Level)
|
$0.25 (Contingent Coupon — Not Callable)
|
Second Observation Date
|
84 (at or above Coupon Barrier; below Initial Level)
|
$0.25 (Contingent Coupon — Not Callable)
|
Third to Eleventh Observation Dates
|
Various (all below Coupon Barrier; below Initial Level)
|
$0.00 (Not Callable)
|
Final Observation Date
|
30 (below Downside Threshold and Coupon Barrier; below Initial Level)
|
$10 + [$10 × Underlying Return] =
$10 + [$10 × -70%] = $3 (Payment at Maturity)
|
|
Total Payment:
|
$3.50 (-65% return)
|
Since the Securities are not called and the Final Level of the
Underlying is below the Downside Threshold, at maturity MSFL will pay you $3.00 per Security. When added to the Contingent Coupon
payments of $0.50 received in respect of prior Observation Dates, MSFL will have paid you $3.50 per Security over the 3-year term,
for a loss on the Securities of 65%.
The Securities differ from ordinary debt securities in that,
among other features, MSFL is not necessarily obligated to repay the full amount of your initial investment. If the Securities
are not called on any Observation Date, you may lose a significant portion or all of your initial investment. Specifically, if
the Securities are not called and the Final Level is less than the Downside Threshold, you will lose 1% (or a fraction thereof)
of your principal amount for each 1% (or a fraction thereof) that the Underlying Return is less than zero. Any payment on the Securities,
including any payment upon an automatic call, any Contingent Coupon or the Payment at Maturity, is dependent on our ability to
satisfy our obligations when they come due. If we are unable to meet our obligations, you may not receive any amounts due to you
under the Securities.
What Are the Tax Consequences of the Securities?
|
Prospective investors should note that the discussion under
the section called “United States Federal Taxation” in the accompanying product supplement does not apply to the Securities
issued under this free writing prospectus and is superseded by the following discussion.
The
following is a general discussion of the material U.S. federal income tax consequences and certain estate tax consequences of
the ownership and disposition of the Securities. This discussion applies only to investors in the Securities who:
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purchase the Securities in
the original offering; and
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hold the Securities as capital
assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”).
|
This
discussion does not describe all of the tax consequences that may be relevant to a holder in light of the holder’s particular
circumstances or to holders subject to special rules, such as:
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certain financial institutions;
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certain dealers and traders
in securities or commodities;
|
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t
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investors holding the Securities
as part of a “straddle,” wash sale, conversion transaction, integrated transaction or constructive sale transaction;
|
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U.S. Holders (as defined
below) whose functional currency is not the U.S. dollar;
|
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partnerships or other entities
classified as partnerships for U.S. federal income tax purposes;
|
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regulated investment companies;
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real estate investment trusts;
or
|
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tax-exempt entities, including
“individual retirement accounts” or “Roth IRAs” as defined in Section 408 or 408A of the Code, respectively.
|
If
an entity that is classified as a partnership for U.S. federal income tax purposes holds the Securities, the U.S. federal income
tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. If you are
a partnership holding the Securities or a partner in such a partnership, you should consult your tax adviser as to the particular
U.S. federal tax consequences of holding and disposing of the Securities to you.
As the law applicable to
the U.S. federal income taxation of instruments such as the Securities is technical and complex, the discussion below necessarily
represents only a general summary. Moreover, the effect of any applicable state, local or non-U.S. tax laws is not discussed, nor
are any alternative minimum tax consequences or consequences resulting from the Medicare tax on investment income.
This
discussion is based on the Code, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations,
all as of the date of this free writing prospectus, changes to any of which subsequent to the date hereof may affect the tax consequences
described herein. Persons considering the purchase of the Securities should consult their tax advisers with regard to the application
of the U.S. federal income tax laws to their particular situations as well as any tax consequences arising under the laws of any
state, local or non-U.S. taxing jurisdiction.
General
Due to
the absence of statutory, judicial or administrative authorities that directly address the treatment of the Securities or instruments
that are similar to the Securities for U.S. federal income tax purposes, no assurance can be given that the Internal Revenue Service
(the “IRS”) or a court will agree with the tax treatment described herein. We intend to treat a Security for U.S. federal
income tax purposes as a single financial contract that provides for a coupon that will be treated as gross income to you at the
time received or accrued in accordance with your regular method of tax accounting. In the opinion of our counsel, Davis Polk &
Wardwell LLP, this treatment of the Securities is reasonable under current law; however, our counsel has advised us that it is
unable to conclude affirmatively that this treatment is more likely than not to be upheld, and that alternative treatments are
possible.
You
should consult your tax adviser regarding all aspects of the U.S. federal tax consequences of an investment in the Securities
(including possible alternative treatments of the Securities). Unless otherwise stated, the following discussion is based on the
treatment of each Security as described in the previous paragraph.
Tax Consequences to U.S. Holders
This section applies to you only if you are
a U.S. Holder. As used herein, the term “U.S. Holder” means a beneficial owner of a Security that is, for U.S. federal
income tax purposes:
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a citizen or individual resident of the United States;
|
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a corporation or other entity taxable as a corporation,
created or organized in or under the laws of the United States, any state thereof or the District of Columbia; or
|
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an estate or trust the income of which is subject
to U.S. federal income taxation regardless of its source.
|
Tax Treatment of the Securities
Assuming the treatment of the Securities as set forth above is
respected, the following U.S. federal income tax consequences should result.
Tax Basis
. A U.S. Holder’s tax
basis in the Securities should equal the amount paid by the U.S. Holder to acquire the Securities.
Tax Treatment of Coupon Payments
.
Any coupon payment on the Securities should be taxable as ordinary income to a U.S. Holder
at the time received or accrued in accordance with the U.S. Holder’s regular method of accounting for U.S. federal income
tax purposes.
Sale, Exchange or Settlement of the Securities
.
Upon a sale, exchange or settlement of the Securities, a U.S. Holder should recognize gain or loss equal to the difference between
the amount realized on the sale, exchange or settlement and the U.S. Holder’s tax basis in the Securities sold, exchanged,
or settled. For this purpose, the amount realized does not include any coupon paid at settlement and may not include sale proceeds
attributable to an accrued coupon, which may be treated as a coupon payment. Any such gain or loss recognized should
be long-term capital gain or loss if the U.S. Holder has held the Securities for more than one year at the time of the sale, exchange
or settlement, and should be short-term capital gain or loss otherwise. The ordinary income treatment of the coupon payments, in
conjunction with the capital loss treatment of any loss recognized upon the sale, exchange or settlement of the Securities, could
result in adverse tax consequences to holders of the Securities because the deductibility of capital losses is subject to limitations.
Possible Alternative Tax Treatments
of an Investment in the Securities
Due
to the absence of authorities that directly address the proper tax treatment of the Securities, no assurance can be given that
the IRS will accept, or that a court will uphold, the treatment described above. In particular, the IRS could seek to analyze the
U.S. federal income tax consequences of owning the Securities under Treasury regulations governing contingent payment debt instruments
(the “Contingent Debt Regulations”). If the IRS were successful in asserting that the Contingent Debt Regulations applied
to the Securities, the timing and character of income thereon would be significantly affected. Among other things, a
U.S. Holder would be required to accrue into income original issue discount on the Securities every year at a “comparable
yield” determined at the time of their issuance, adjusted upward or downward to reflect the difference, if any, between the
actual and the projected amount of any contingent payments on the Securities. Furthermore, any gain realized by a U.S. Holder at
maturity or upon a sale, exchange or other disposition of the Securities would be treated as ordinary income, and any loss realized
would be treated as ordinary loss to the extent of the U.S. Holder’s prior accruals of original issue discount, and as capital
loss thereafter. The risk that financial instruments providing for buffers, triggers or similar downside protection features, such
as the Securities, would be recharacterized as debt is greater than the risk of recharacterization for comparable financial instruments
that do not have such features.
Other
alternative federal income tax treatments of the Securities are possible, which, if applied, could significantly affect the timing
and character of the income or loss with respect to the Securities. 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 on whether to require holders of “prepaid forward contracts” and similar 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; 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; and appropriate
transition rules and effective dates. While it is not clear whether instruments such as the Securities would be viewed as similar
to the prepaid forward contracts described in the notice, 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 Securities, possibly with retroactive
effect. U.S. Holders should consult their tax advisers regarding the U.S. federal income tax consequences of an investment in the
Securities, including possible alternative treatments and the issues presented by this notice.
Backup Withholding and Information
Reporting
Backup
withholding may apply in respect of payments on the Securities and the payment of proceeds from a sale, exchange or other disposition
of the Securities, unless a U.S. Holder provides proof of an applicable exemption or a correct taxpayer identification number and
otherwise complies with applicable requirements of the backup withholding rules. The amounts withheld under the backup withholding
rules are not an additional tax and may be refunded, or credited against the U.S. Holder’s U.S. federal income tax liability,
provided that the required information is timely furnished to the IRS. In addition, information returns will be filed
with the IRS in connection with payments on the Securities and the payment of proceeds from a sale, exchange or other disposition
of the Securities, unless the U.S. Holder provides proof of an applicable exemption from the information reporting rules.
Tax Consequences to Non-U.S. Holders
This section applies to you only if you are
a Non-U.S. Holder. As used herein, the term “Non-U.S. Holder” means a beneficial owner of a Security that is for U.S.
federal income tax purposes:
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an individual who is classified
as a nonresident alien;
|
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a foreign corporation; or
|
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a fo
reign
estate or trust.
|
The term “Non-U.S. Holder” does
not include any of the following holders:
|
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a holder who is an individual
present in the United States for 183 days or more in the taxable year of disposition and who is not otherwise a resident of the
United States for U.S. federal income tax purposes;
|
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|
certain former citizens or
residents of the United States; or
|
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a holder for whom income
or gain in respect of the Securities is effectively connected with the conduct of a trade or
business
in the United States.
|
Such holders should consult their tax advisers
regarding the U.S. federal income tax consequences of an investment in the Securities.
Although
significant aspects of the tax treatment of each Security are uncertain, we intend to withhold on any coupon paid to a Non-U.S.
Holder generally at a rate of 30% or at a reduced rate specified by an applicable income tax treaty under an “other income”
or similar provision. We will not be required to pay any additional amounts with respect to amounts withheld. In order to claim
an exemption from or a reduction in the 30% withholding tax, a Non-U.S. Holder of the Securities must comply with certification
requirements to establish that it is not a U.S. person and is eligible for such an exemption or reduction under an applicable tax
treaty. If you are a Non-U.S. Holder, you should consult your tax adviser regarding the tax treatment of the Securities, including
the possibility of obtaining a refund of any withholding tax and the certification requirement described above.
U.S. Federal Estate Tax
Individual Non-U.S. Holders and entities
the property of which is potentially includible in such an individual’s gross estate for U.S. federal estate tax purposes
(for example, a trust funded by such an individual and with respect to which the individual has retained certain interests or powers),
should note that, absent an applicable treaty exemption, the Securities may be treated as U.S. situs property subject to U.S. federal
estate tax. Prospective investors that are non-U.S. individuals, or are entities of the type described above, should consult their
tax advisers regarding the U.S. federal estate tax consequences of an investment in the Securities.
Backup Withholding and Information
Reporting
Information
returns will be filed with the IRS in connection with any coupon payment and may be filed with the IRS in connection with the payment
at maturity on the Securities and the payment of proceeds from a sale, exchange or other disposition. A Non-
U.S. Holder may be subject
to backup withholding in respect of amounts paid to the Non-U.S. Holder, unless such Non-U.S. Holder complies with certification
procedures to establish that it is not a U.S. person for U.S. federal income tax purposes or otherwise establishes an exemption.
The amount of any backup withholding from a payment to a Non-U.S. Holder will be allowed as a credit against the Non-U.S. Holder’s
U.S. federal income tax liability and may entitle the Non-U.S. Holder to a refund, provided that the required information is timely
furnished to the IRS.
FATCA Legislation
Legislation
commonly referred to as “FATCA” generally imposes a withholding tax of 30% on payments to certain non-U.S. entities
(including financial intermediaries) with respect to certain financial instruments, unless various U.S. information reporting
and due diligence requirements have been satisfied. An intergovernmental agreement between the United States and the non-U.S.
entity’s jurisdiction may modify these requirements. This legislation generally applies to certain financial instruments
that are treated as paying U.S.-source interest or other U.S.-source “fixed or determinable annual or periodical”
income (“FDAP income”). Withholding (if applicable) applies to payments of U.S.-source FDAP income and, for dispositions
after December 31, 2018, to payments of gross proceeds of the disposition (including upon retirement) of certain financial instruments
treated as providing for U.S.-source interest or dividends. While the treatment of the Securities is unclear, you should assume
that any coupon payment with respect to the Securities will be subject to the FATCA rules.
It is also possible in light
of this uncertainty that an applicable withholding agent will treat gross proceeds of a disposition (including upon retirement)
of the Securities after 2018 as being subject to the FATCA rules.
If withholding applies
to the Securities, we will not be required to pay any additional amounts with respect to amounts withheld. Both U.S. and Non-U.S.
Holders should consult their tax advisers regarding the potential application of FATCA to the Securities.
The discussion in the preceding paragraphs
under “What Are the Tax Consequences of the Securities,” insofar as it purports to describe provisions of U.S. federal
income tax laws or legal conclusions with respect thereto, constitutes the full opinion of Davis Polk & Wardwell LLP regarding
the material U.S. federal income tax consequences of an investment in the Securities.
The STOXX
®
Europe 600 Banks Index
|
The STOXX
®
Europe 600 Banks Index is one of the
STOXX
®
Europe 600 Supersector indices that compose the STOXX
®
Europe 600 Index. Each of the 19 STOXX
®
Europe 600 Supersector indices is intended to track a supersector of the STOXX
®
Europe 600 Index, determined by
reference to the Industry Classification Benchmark, an international system for categorizing companies that is maintained by FTSE
International Limited. The STOXX
®
Europe 600 Banks Index includes companies in the banks supersector, which tracks
companies providing a broad range of financial services. The STOXX
®
Europe 600 Index consists of the 600 largest
companies by free-float market capitalization traded on the major exchanges of 18 European countries. The STOXX
®
Europe 600 Banks Index is calculated in euros and is reported by Bloomberg under the ticker symbol “SX7P.” For additional
information about the STOXX
®
Europe 600 Banks Index, see the description of the Underlying in “Annex A: STOXX
®
Europe 600 Banks Index” below.
The following table sets forth the published high and low closing
levels, as well as the end-of-quarter closing levels, of the STOXX
®
Europe 600 Banks Index for each quarter in the
period from January 1, 2011 through October 19, 2016. The closing level of the STOXX
®
Europe 600 Banks Index on
October 19, 2016 was 147.66. We obtained the information in the table below from Bloomberg Financial Markets, without independent
verification. The historical closing levels of the STOXX
®
Europe 600 Banks Index should not be taken as an indication
of future performance, and no assurance can be given as to the closing level of the STOXX
®
Europe 600 Banks Index
on any Observation Date, including the Final Observation Date.
Quarter Begin
|
Quarter End
|
Quarterly High
|
Quarterly Low
|
Quarterly Close
|
1/1/2011
|
3/31/2011
|
228.57
|
197.13
|
198.94
|
4/1/2011
|
6/30/2011
|
207.82
|
176.73
|
185.55
|
7/1/2011
|
9/30/2011
|
190.67
|
119.03
|
133.68
|
10/1/2011
|
12/31/2011
|
149.02
|
115.87
|
132.54
|
1/1/2012
|
3/31/2012
|
161.25
|
126.17
|
149.32
|
4/1/2012
|
6/30/2012
|
150.02
|
119.72
|
132.79
|
7/1/2012
|
9/30/2012
|
156.25
|
120.96
|
147.70
|
10/1/2012
|
12/31/2012
|
165.62
|
148.54
|
163.19
|
1/1/2013
|
3/31/2013
|
179.22
|
162.59
|
163.21
|
4/1/2013
|
6/30/2013
|
184.14
|
157.21
|
160.55
|
7/1/2013
|
9/30/2013
|
189.25
|
160.65
|
182.79
|
10/1/2013
|
12/31/2013
|
196.50
|
182.12
|
194.21
|
1/1/2014
|
3/31/2014
|
209.29
|
191.60
|
199.92
|
4/1/2014
|
6/30/2014
|
208.14
|
192.32
|
192.32
|
7/1/2014
|
9/30/2014
|
204.21
|
185.85
|
200.12
|
10/1/2014
|
12/31/2014
|
199.85
|
178.56
|
188.77
|
1/1/2015
|
3/31/2015
|
216.11
|
178.42
|
214.28
|
4/1/2015
|
6/30/2015
|
223.22
|
211.54
|
212.36
|
7/1/2015
|
9/30/2015
|
226.45
|
180.26
|
184.39
|
10/1/2015
|
12/31/2015
|
197.29
|
172.94
|
182.63
|
1/1/2016
|
3/31/2016
|
178.77
|
130.48
|
144.38
|
4/1/2016
|
6/30/2016
|
157.22
|
119.18
|
125.48
|
7/1/2016
|
9/30/2016
|
148.03
|
117.52
|
140.11
|
10/1/2016
|
10/19/2016*
|
147.66
|
140.00
|
147.66
|
* Available information for the indicated period includes
data for less than the entire calendar quarter, and accordingly, the “Quarterly High,” “Quarterly Low”
and “Quarterly Close” data indicated are for this shortened period.
The
graph below illustrates the performance of the STOXX
®
Europe 600 Banks Index from January 1, 2008 through October
19, 2016, based on information from Bloomberg.
Past performance of the STOXX
®
Europe 600 Banks Index is not
indicative of the future performance of the STOXX
®
Europe 600 Banks Index.
* The dashed line indicates the hypothetical Coupon Barrier and
Downside Threshold, assuming the closing level of the STOXX
®
Europe 600 Banks Index on October 19, 2016 were the
Initial Level.
Past performance is not indicative of future results.
Additional Terms of the Securities
|
The accompanying product supplement refers to the Principal
Amount as the “Stated Principal Amount,” the Initial Level as the “Initial Index Value,” the Trade Date
as the “Pricing Date,” the Observation Dates as the “Determination Dates,” the Final Observation Date as
the “Final Determination Date,” the Coupon Barrier/Downside Threshold as the “Downside Threshold Level”
and the day on which any automatic call occurs as the “Early Redemption Date.”
Use of Proceeds and Hedging
|
The proceeds from the sale of the Securities will be used by us
for general corporate purposes. We will receive, in aggregate, $10 per Security issued, because, when we enter into hedging transactions
in order to meet our obligations under the Securities, our hedging counterparty will reimburse the cost of the Agent’s commissions.
The costs of the Securities borne by you and described on page 2 above comprise the Agent’s commissions and the cost of issuing,
structuring and hedging the Securities. See also “Use of Proceeds” in the accompanying prospectus.
On or prior to the Trade Date, we will hedge our anticipated exposure
in connection with the Securities, by entering into hedging transactions with our affiliates and/or third party dealers. We expect
our hedging counterparties to take positions in the constituent stocks of the Underlying, in futures or options contracts on the
Underlying or the constituent stocks of the Underlying, as well as in other instruments related to the Underlying that they may
wish to use in connection with such hedging. Any of these hedging or trading activities on or prior to the Trade Date could potentially
increase the Initial Level, and, as a result, the Coupon Barrier and Downside Threshold of the Underlying, which is the level at
or above which such Underlying must close on each Observation Date in order for you to earn a Contingent Coupon, or, if the Securities
are not called prior to maturity, is the level at or above which the Underlying must close on the Final Observation Date so that
you do not suffer a significant loss on your initial investment in the Securities. In addition, through our affiliates, we are
likely to modify our hedge position throughout the term of the Securities, including on the Final Observation Date, by purchasing
and selling the stocks constituting the Underlying, futures or options contracts on the Underlying or the 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., including by purchasing or selling any such securities or instruments on the Final Observation Date.
As a result, these entities may be unwinding or adjusting hedge positions during the term of the Securities, and the hedging strategy
may involve greater and more frequent dynamic adjustments to the hedge as the Final Observation Date approaches. We cannot give
any assurance that our hedging activities will not affect the value of the Underlying on the Observation Dates, and, therefore,
adversely affect the value of the Securities, whether the Contingent Coupon is payable or whether the Securities are called prior
to maturity and, if not, the payment you will receive at maturity, if any.
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 Securities. 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”). Prohibited transactions within the meaning of
ERISA or the Code would likely arise, for example, if the Securities 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 Securities 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 Securities. 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 Securities.
Because we may be considered a party in interest with respect
to many Plans, the Securities 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 Securities will be deemed to have represented, in its corporate and its fiduciary capacity, by its purchase and holding
of the Securities that either (a) it is not a Plan or a Plan Asset Entity and is not purchasing such Securities 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 Securities on behalf of or with “plan assets” of any Plan consult with their counsel
regarding the availability of exemptive relief.
The Securities are contractual financial instruments. The financial
exposure provided by the Securities 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 Securities. The Securities 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 Securities.
Each purchaser or holder of any Securities 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 Securities, (B) the purchaser or holder’s investment
in the Securities, or (C) the exercise of or failure to exercise any rights we have under or with respect to the Securities;
|
|
(ii)
|
we and our affiliates have acted and will act solely for our own account in connection with (A) all transactions relating to
the Securities and (B) all hedging transactions in connection with our obligations under the Securities;
|
|
(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 Securities has exclusive responsibility
for ensuring that its purchase, holding and disposition of the Securities do not violate the prohibited transaction rules of ERISA
or the Code or any Similar Law. The sale of any Securities 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 Securities if the account, plan or annuity is for the benefit of an employee of Morgan
Stanley or Morgan Stanley Wealth Management or their respective affiliates or a family member and the employee receives any compensation
(such as, for example, an addition to bonus) based on the purchase of the Securities by the account, plan or annuity.
Supplemental Plan of Distribution; Conflicts of Interest
|
MS & Co. will act as the agent for this offering. We will
agree to sell to MS & Co., and MS & Co. will agree to purchase, all of the Securities at the issue price less the underwriting
discount indicated on the cover of this document. UBS Financial Services Inc., acting as dealer, will receive from MS & Co.
a fixed sales commission of $0.20 for each Security it sells.
MS & Co. is our affiliate 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 Securities. When MS & Co. prices this offering of Securities, it will determine the economic terms of the Securities, including
the Contingent Coupon Rate, such that for each Security the estimated value on the Trade Date will be no lower than the minimum
level described in “Additional Information about Morgan Stanley, MSFL and the Securities” on page 2.
MS & Co. will conduct this offering in compliance with the
requirements of Rule 5121 of the Financial Industry Regulatory Authority, Inc. (“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.
In order to facilitate the offering of the Securities, the agent
may engage in transactions that stabilize, maintain or otherwise affect the price of the Securities. Specifically, the agent may
sell more Securities than it is obligated to purchase in connection with the offering, creating a naked short position in the Securities,
for its own account. The agent must close out any naked short position by purchasing the Securities in the open market. A naked
short position is more likely to be created if the agent is concerned that there may be downward pressure on the price of the Securities
in the open market after pricing that could adversely affect investors who purchase in the offering. As an additional means of
facilitating the offering, the agent may bid for, and purchase, the Securities or the stocks constituting the Underlying in the
open market to stabilize the price of the Securities. Any of these activities may raise or maintain the market price of the Securities
above independent market levels or prevent or retard a decline in the market price of the Securities. The agent is not required
to engage in these activities, and may end any of these activities at any time. An affiliate of the agent has entered into a hedging
transaction with us in connection with this offering of Securities. See “—Use of Proceeds and Hedging” above.
Annex A: STOXX
®
Europe 600 Banks Index
|
We have derived all information contained in this document regarding
the STOXX
®
Europe 600 Banks Index, including, without limitation, its make-up, method of calculation and changes
in its components, from publicly available information, without independent verification. This information reflects the policies
of, and is subject to change by, STOXX Limited. The STOXX
®
Europe 600 Banks Index is calculated, maintained and
published by STOXX Limited. STOXX Limited has no obligation to continue to publish, and may discontinue publication of, the STOXX
®
Europe 600 Banks Index.
The STOXX
®
Europe 600 Banks Index is reported
by Bloomberg L.P. under the ticker symbol “SX7P.”
The STOXX
®
Europe 600 Banks
Index is one of the 19 STOXX
®
Europe 600 Supersector indices that compose the STOXX
®
Europe 600
Index. The STOXX
®
Europe 600 Index consists of the 600 largest companies by free-float market capitalization traded
on the major exchanges of 18 European countries.
Each of the 19 STOXX
®
Europe
600 Supersector indices is intended to track a supersector of the STOXX
®
Europe 600 Index, determined by reference
to the Industry Classification Benchmark, an international system for categorizing companies that is maintained by FTSE International
Limited. The STOXX Europe 600 Banks Index includes companies in the banks supersector, which tracks companies providing a broad
range of financial services.
Index Composition
The composition of each of the STOXX
®
Europe 600 Supersector indices is reviewed quarterly, based on the closing stock data on the last trading day of the month following
the implementation of the last quarterly index review. The component stocks are announced on the fourth Tuesday of the month immediately
prior to the review implementation month. Changes to the component stocks are implemented after the close on the third Friday in
each of March, June, September and December and are effective the following trading day.
Corporate actions (including initial public
offerings, mergers and takeovers, spin-offs, delistings and bankruptcies) that affect the STOXX
®
Europe 600 Index
composition are reviewed. Any changes are announced, implemented and effective in line with the type of corporate action and the
magnitude of the effect.
The free-float factors for each component stock
used to calculate the STOXX
®
Europe 600 Supersector indices, as described below, are reviewed, calculated and implemented
on a quarterly basis and are fixed until the next quarterly review.
Index Calculation
The STOXX
®
Europe 600 Supersector
indices are calculated with the “Laspeyres formula,” which measures the aggregate price changes in the component stocks
against a fixed base quantity weight. The formula for calculating each STOXX
®
Europe 600 Supersector index value
at any time can be expressed as follows:
Index value =
|
free float market capitalization of the relevant STOXX
®
Europe 600 Supersector Index
|
|
Divisor
|
|
|
|
The “free float market capitalization
of the relevant STOXX
®
Europe 600 Supersector Index” is equal to the sum of the products of the price, number
of shares, exchange rate from local currency, free-float factor and weighting cap factor for each component stock as of the time
the relevant STOXX Europe 600
®
Supersector index is being calculated.
All components of each STOXX
®
Europe 600 Supersector index are subject to a 30% cap for the largest company and 15% cap for the second largest company. The weighting
cap factors are published on the second Friday of the quarter, one week prior to quarterly review, implementation and calculated
using Thursday’s closing prices. In addition, an intra-quarter capping will be triggered if the largest company exceeds 35%
or the second largest exceeds 20%.
The divisor for each STOXX
®
Europe 600 Supersector index is adjusted to maintain the continuity of the STOXX
®
Europe 600 Supersector index values
despite changes due to corporate actions. The following is a summary of the adjustments to any component stock made for corporate
actions and the effect of such adjustment on the divisor, where shareholders of the component stock will receive “B”
number of shares for every “A” share held (where applicable).
(1)
Split and reverse split:
Adjusted price = closing price × A / B
New number of shares = old number of shares × B / A
Divisor: no change
|
(2)
Rights offering:
|
If the subscription price
is not available or if the subscription price is equal to or greater
than the closing price on
the day before the effective date, then no adjustment is made
Adjusted price = (closing price
× A + subscription price × B) / (A + B)
New number of shares = old
number of shares *(A + B)/ A
Divisor: increases
|
(3)
Stock dividend:
Adjusted price = closing price × A / (A + B)
New number of shares = old number
of shares × (A + B) / A
Divisor: no change
|
(4)
Stock dividend of another company:
Adjusted price = (closing price
× A – price of other company × B) / A
Divisor: decreases
|
(5)
Return of capital and share consideration:
Adjusted price = (closing price –
capital return announced by company × (1-withholding tax)) × A / B
New number of shares = old number of shares × B / A
Divisor: decreases
|
(6)
Repurchase of shares / self tender:
Adjusted price = ((price before
tender × old number of shares) – (tender price × number of tendered shares)) / (old number of shares –
number of tendered shares)
New number of shares = old number of shares – number of
tendered shares
Divisor: decreases
|
(7)
Spin-off:
Adjusted price = (closing price × A – price of spun-off shares × B) / A
Divisor: decreases
|
(8)
Combination stock distribution (dividend or split) and rights offering:
For this corporate action, the following additional assumptions apply:
Shareholders receive B new shares from the distribution and C new shares from the rights offering for every A share held.
If A is not equal to one share, all the following “new number of shares” formulas need to be divided by A:
|
-
If rights are applicable after stock distribution (one action
applicable to other):
Adjusted price = (closing price
× A + subscription price × C × (1 + B / A)) / ((A + B) × ( 1 + C / A))
New number of shares = old number
of shares × ((A + B) × (1 + C / A)) / A
Divisor: increases
|
-
If stock distribution is applicable after rights (one action
applicable to other):
Adjusted price = (closing
price × A + subscription price × C) /((A + C) × (1 + B / A))
New number of shares = old
number of shares × ((A + C) × (1 + B / A))
Divisor: increases
|
-
Stock distribution and rights (neither action is applicable
to the other):
Adjusted price = (closing price × A + subscription price
× C) / (A + B + C)
New number of shares = old number of shares × (A + B +
C) / A
Divisor: increases
|
License Agreement between STOXX Limited
and Morgan Stanley.
STOXX Limited and Morgan Stanley have entered into a non-exclusive license agreement providing for the
license to Morgan Stanley, and certain of its affiliated or subsidiary companies, in exchange for a fee, of the right to use the
STOXX
®
Europe 600 Banks Index, which is owned and published by STOXX Limited, in connection with the Securities.
The license agreement between STOXX Limited
and Morgan Stanley provides that the following language must be set forth in this document:
The Securities are not sponsored, endorsed,
sold or promoted by STOXX Limited. STOXX Limited makes no representation or warranty, express or implied, to the owners of the
Securities or any member of the public regarding the advisability of investing in securities generally or in the Securities particularly.
STOXX Limited’s only relationship to Morgan Stanley is the licensing of certain trademarks, trade names and service marks
of STOXX Limited and the STOXX
®
Europe 600 Banks Index, which is determined, composed and calculated by STOXX Limited
without regard to Morgan Stanley or the Securities. STOXX Limited has no obligation to take the needs of Morgan Stanley or the
owners of the Securities into consideration in determining, composing or calculating the STOXX
®
Europe 600 Banks
Index. STOXX Limited is not responsible for and has not participated in the determination of the timing of, prices at, or quantities
of the Securities to be issued or in the determination or calculation of the equation by which the Securities are to be converted
into cash. STOXX Limited has no obligation or liability in connection with the administration, marketing or trading of the Securities.
STOXX LIMITED DOES NOT GUARANTEE THE ACCURACY
AND/OR THE COMPLETENESS OF THE STOXX
®
EUROPE 600 BANKS INDEX OR ANY DATA INCLUDED THEREIN AND STOXX LIMITED SHALL
HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. STOXX LIMITED MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS
TO RESULTS TO BE OBTAINED BY MORGAN STANLEY, OWNERS OF THE SECURITIES, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE STOXX
®
EUROPE 600 BANKS INDEX OR ANY DATA INCLUDED THEREIN. STOXX LIMITED MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE STOXX
®
EUROPE
600 BANKS INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL STOXX LIMITED HAVE ANY LIABILITY
FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES OR LOSSES, EVEN IF NOTIFIED OF THE POSSIBILITY THEREOF.
THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN STOXX LIMITED AND MORGAN STANLEY.
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