A
dditional Information about Morgan Stanley, MSFL and the Securities
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Morgan Stanley
and MSFL have filed a registration statement (including a prospectus, as supplemented by a prospectus supplement and an index
supplement) with the SEC for the offering to which this communication relates. In connection with your investment, you should
read the prospectus in that registration statement, the prospectus supplement, the index 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, the prospectus supplement and the index supplement if you so request by calling toll-free 1-(800)-584-6837.
You may access the accompanying
prospectus supplement, index supplement and prospectus on the SEC website at
.
www.sec.gov as
follows:
References to “MSFL”
refer only to MSFL, references to “Morgan Stanley” refer only to Morgan Stanley and references to “we,”
“our” and “us” refer to MSFL and Morgan Stanley collectively. In this document, the “Securities”
refers to the Trigger Digital Notes that are offered hereby. Also, references to the accompanying “prospectus”, “prospectus
supplement” and “index supplement” mean the prospectus filed by MSFL and Morgan Stanley dated February 16, 2016,
the prospectus supplement filed by MSFL and Morgan Stanley dated February 16, 2016 and the index supplement filed by MSFL and
Morgan Stanley dated January 30, 2017, respectively.
You should
rely only on the information incorporated by reference or provided in this pricing supplement or the accompanying prospectus supplement,
index supplement and prospectus. 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 pricing
supplement or the accompanying prospectus supplement, index supplement and prospectus is accurate as of any date other than the
date on the front of the applicable document.
If the terms
discussed in this pricing supplement differ from those discussed in the prospectus supplement, index supplement or prospectus,
the terms contained in this pricing supplement will control.
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 is less than $10. We estimate
that the value of each Security on the Trade Date is $9.846.
What goes
into the estimated value on the Trade Date?
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 Shares. The estimated value of the Securities is determined using our own pricing and valuation
models, market inputs and assumptions relating to the Underlying Shares, instruments based on the Underlying Shares, volatility
and other factors including current and expected interest rates, as well as an interest rate related to our secondary market credit
spread, which is the implied interest rate at which our conventional fixed rate debt trades in the secondary market.
What determines
the economic terms of the Securities?
In determining
the economic terms of the Securities, including the Digital Return, the Digital 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.
What is
the relationship between the estimated value on the Trade Date and the secondary market price of the Securities?
The price
at which MS & Co. purchases the Securities in the secondary market, absent changes in market conditions, including those related
to the Underlying Shares, 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 4 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 Shares, 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.
The Securities
may be suitable for you if:
¨
You
fully understand the risks inherent in an investment in the Securities, including the risk of loss of your entire initial
investment.
¨
You
can tolerate a loss of all or a substantial portion of your Principal Amount and you are willing to make an investment
that may have the same downside market risk as the Underlying Shares.
¨
You
understand and accept that you will not participate in any appreciation in the price of the Underlying Shares, which may
be significant, and that your potential return will not exceed the Digital Return specified on the cover hereof.
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You
are willing to invest in the Securities based on the Digital Return indicated on the cover of this pricing supplement.
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You
understand the characteristics of the Underlying Shares.
¨
You
are willing to hold the Securities to maturity, as set forth on the cover of this pricing supplement, and accept that
there may be little or no secondary market for the Securities.
¨
You
are willing to invest in the Securities based on the Digital Barrier and Downside Threshold specified on the cover hereof.
¨
You
can tolerate fluctuations of the price of the Securities prior to maturity that may be similar to or exceed the downside
fluctuations in the price of the Underlying Shares.
¨
You
do not seek current income from your investment and are willing to forgo dividends paid on the Underlying Shares.
¨
You
are willing to assume our credit risk and understand that if we default on our obligations you may not receive any amounts due
to you, including any repayment of principal.
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The Securities may not
be suitable for you if:
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You
do not fully understand the risks inherent in an investment in the Securities, including the risk of loss of your entire
initial investment.
¨
You
cannot tolerate a loss of all or a substantial portion of your Principal Amount, and you are not willing to make an investment
that may have the same downside market risk as an investment in the Underlying Shares.
¨
You
require an investment designed to provide a full return of principal at maturity.
¨
You
are unwilling to invest in the Securities based on the Digital Return indicated on the cover of this pricing supplement.
¨
You
do not understand the characteristics of the Underlying Shares.
¨
You
are unable or unwilling to hold the Securities to maturity, as set forth on the cover of this pricing supplement, or you
seek an investment for which there will be an active secondary market.
¨
You
are unwilling to invest in the Securities based on the Digital Barrier and Downside Threshold specified on the cover hereof.
¨
You
prefer the lower risk, and, therefore, accept the potentially lower returns, of conventional debt securities with comparable
maturities issued by us or another issuer with a similar credit rating.
¨
You
seek current income from your investment or prefer to receive the dividends paid on the Underlying Shares.
¨
You
are not willing or are unable to assume the credit risk associated with us for any payment on the Securities, including
any repayment of principal.
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The investor
suitability considerations identified above are not exhaustive. Whether or not the Securities are a suitable investment for you
will depend on your individual circumstances, and you should reach an investment decision only after you and your investment,
legal, tax, accounting and other advisors have carefully considered the suitability of an investment in the Securities in light
of your particular circumstances. You should also review “Key Risks” on page 5 of this pricing supplement and “Risk
Factors” beginning on page 6 of the accompanying prospectus for risks related to an investment in the Securities. For additional
information about the Underlying Shares, see the information set forth under “The iShares
®
Russell 2000
®
ETF” on page 16.
Final
Terms
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Investment
Timeline
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Issuer
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Morgan Stanley Finance LLC
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Guarantor
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Morgan Stanley
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Issue Price (per Security)
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$10.00 per Security
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Principal Amount
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$10.00 per Security
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Term
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Approximately 2 years
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Underlying Shares
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Shares of the iShares
®
Russell 2000
®
ETF (the “Fund”)
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Digital Return
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11.80%
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Digital Barrier / Downside Threshold
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$97.71, which is approximately 70% of the Initial Price
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Payment at Maturity (per Security)
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If the Final
Price is greater than or equal to the Digital Barrier
, MSFL will pay you an amount calculated as follows:
$10 + ($10
×
Digital Return)
If the Final
Price is less than the Downside Threshold,
MSFL will pay you an amount calculated as follows:
$10 + ($10
×
Underlying Return)
In this case,
you will lose a significant portion or all of your Principal Amount in an amount proportionate to the negative Underlying Return.
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Underlying Return
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Final
Price – Initial Price
Initial
Price
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Initial Price
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$139.59, which is the Closing Price of one share of the Underlying Shares on the Trade Date.
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Final Price
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The Closing Price of one share of the Underlying Shares on the Final Valuation Date
times
the Adjustment Factor on such date.
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Final Valuation Date
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February 15, 2019, subject to postponement in the event of a Market Disruption Event or
for non-Trading Days.
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Adjustment Factor
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1.0, subject to adjustment in the event of certain corporate events affecting the Underlying
Shares.
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CUSIP / ISIN
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61766V461 / US61766V4611
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Calculation Agent
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Morgan Stanley & Co. LLC
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Trade Date
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The
Closing Price of the Underlying Shares (Initial Price) is observed, the Downside Threshold and Digital
Barrier are determined and the Digital Return is set.
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The
Final Price and Underlying Return are determined on the Final Valuation Date.
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Maturity Date
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If
the Final Price is greater than or equal to the Digital Barrier
, MSFL will pay you
a cash payment per Security equal to:
$10 + ($10 × Digital
Return)
If the Final Price is
less than the Downside Threshold
, MSFL will pay you a cash payment per Security equal to:
$10 + ($10 × Underlying
Return)
Under these circumstances,
you will lose a significant portion, and could lose all, of your Principal Amount.
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INVESTING IN THE SECURITIES
INVOLVES SIGNIFICANT RISKS. YOU MAY LOSE A SIGNIFICANT PORTION OR ALL OF YOUR PRINCIPAL AMOUNT. ANY PAYMENT ON THE SECURITIES IS
SUBJECT TO OUR CREDITWORTHINESS. IF WE WERE TO DEFAULT ON OUR PAYMENT OBLIGATIONS, YOU MAY NOT RECEIVE ANY AMOUNTS OWED TO YOU
UNDER THE SECURITIES.
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. You should also consult your investment, legal, tax, accounting
and other advisers in connection with your investment in the Securities.
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The Securities do not guarantee any return of principal –
The terms of the Securities
differ from those of ordinary debt securities in that MSFL will not pay interest and is not necessarily obligated to repay any
of the Principal Amount at maturity. If the Final Price is less than the Downside Threshold (which is 70% of the Initial Price),
you will be exposed to the full negative Underlying Return and the payout owed at maturity by MSFL will be an amount in cash that
is at least 30% less than the $10 Principal Amount of each Security, resulting in a loss proportionate to the decrease in the value
of the Underlying Shares from the Initial Price to the Final Price. This means that while a decrease of up to 30% between the Initial
Price and the Final Price will not result in a loss of principal on the Securities, a decrease in excess of 30% will result in
a loss of a significant portion of the Principal Amount of the Securities despite only a small incremental change in the price
of the Underlying Shares. There is no minimum payment at maturity on the Securities, and, accordingly, you could lose all of your
Principal Amount.
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Your potential return on the Securities will not exceed the Digital Return
— If the
Final Price is greater than or equal to the Digital Barrier, the return potential of the Securities is limited to the Digital Return
in all cases, regardless of the appreciation of the Underlying Shares, which may be significant. As a result, the return on an
investment in the Securities may be less than the return on a direct investment in the Underlying Shares.
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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 on the Final Valuation Date and the contingent repayment of principal 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 Closing Price of the Underlying Shares is above the Downside Threshold at that time.
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The Digital Return applies only if you hold the Securities to maturity –
You should
be willing to hold your Securities to maturity. If you are able to sell your Securities prior to maturity in the secondary market,
the price you receive will likely not reflect the full economic value of the Digital Return or the Securities themselves, and the
return you realize may be less than the Digital Return even if the price of the Underlying Shares is greater than the Digital Barrier.
You can receive the full benefit of the Digital Return from MSFL only if you hold your Securities to maturity.
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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 at maturity, if any, 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 our 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 Securities do not pay interest
– MSFL will not pay any interest with respect to the Securities over the term of the Securities.
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The market price of the Securities may
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 (if at all), including:
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o
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the price of the Underlying Shares at any time,
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o
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the volatility (frequency and magnitude of changes
in price) of the Underlying Shares,
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o
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interest and yield rates in the market,
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o
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geopolitical conditions and economic, financial, political,
regulatory or judicial events that affect the Underlying Shares or stock markets generally and which may affect the Initial Price
and/or the Final Price,
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o
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the time remaining until the Securities mature, and
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o
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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 Shares, and these are the types of factors that also generally affect the values of debt securities and derivatives
linked to the Underlying Shares. For example, you may have to sell your Securities at a substantial discount from the principal
amount of $10 per Security if the price of the Underlying Shares at the time of sale is at, below or moderately above its Initial
Price, and especially if it is near or below the Downside Threshold, or if market interest rates rise. You cannot predict the future
performance of the Underlying Shares based on their historical performance.
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The probability that the Final Price will
be less than the Downside Threshold will depend on the volatility of the Underlying Shares
– “Volatility”
refers to the frequency and magnitude of changes in the price of the Underlying Shares. Higher expected volatility with respect
to the Underlying Shares as of the Trade Date generally indicates a greater chance as of that date that the Final Price will be
less than the Downside Threshold, which would result in a loss of a significant portion or all of your investment at maturity.
However, the Underlying Shares’ volatility can change significantly over the term of the Securities. The price of the
Underlying Shares could fall sharply, resulting in a significant loss of principal. You should be willing to accept the downside
market risk of the Underlying Shares and the potential loss of a significant portion or all of your investment at maturity.
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The Fund is subject to risks associated with small-capitalization companies
– The
Fund seeks investment results that correspond generally to the price and yield performance of the Russell 2000
®
Index (the “Share Underlying Index”). The Russell 2000
®
Index consists of stocks issued by companies
with relatively small market capitalization. These companies often have greater stock price volatility, lower trading volume and
less liquidity than large-capitalization companies and therefore the Russell 2000
®
Index may be more volatile than
indices that consist of stocks issued by large-capitalization companies. Stock prices of small-capitalization companies are also
more vulnerable than those of large-capitalization companies to adverse business and economic developments, and the stocks of small-capitalization
companies may be thinly traded. In addition, small capitalization companies are typically less well-established and less stable
financially than large-capitalization companies and may depend on a small number of key personnel, making them more vulnerable
to loss of personnel. Such companies tend to have smaller revenues, less diverse product lines, smaller shares of their product
or service markets, fewer financial resources and less competitive strengths than large-capitalization companies and are more susceptible
to adverse developments related to their products.
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The performance and market price of the
Fund, particularly during periods of market volatility, may not correlate with the performance of the Share Underlying Index, the
performance of the component securities of the Share Underlying Index or the net asset value per share of the Fund.
The
Fund does not fully replicate the Share Underlying Index and may hold securities that are different than those included in the
Share Underlying Index. In addition, the performance of the Fund will reflect additional transaction costs and fees that
are not included in the calculation of the Share Underlying Index. All of these factors may lead to a lack of correlation
between the performance of the Fund and the Share Underlying Index. In addition, corporate actions (such as mergers and spin-offs)
with respect to the equity securities underlying the Fund may impact the variance between the performances of the Fund and the
Share Underlying Index. Finally, because the shares of the Fund are traded on an exchange and are subject to market
supply and investor demand, the market price of one share of the Fund may differ from the net asset value per share of the Fund.
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In particular, during periods of
market volatility, or unusual trading activity, trading in the securities underlying the Fund may be disrupted or limited, or such
securities may be unavailable in the secondary market. Under these circumstances, the liquidity of the Fund may be adversely
affected, market participants may be unable to calculate accurately the net asset value per share of the Fund, and their ability
to create and redeem shares of the Fund may be disrupted. Under these circumstances, the market price of shares of the Fund may
vary substantially from the net asset value per share of the Fund or the level of the Share Underlying Index.
For all of the foregoing reasons,
the performance of the Fund may not correlate with the performance of the Share Underlying Index, the performance of the component
securities of the Share Underlying Index or the net asset value per share of the Fund. Any of these events could materially
and adversely affect the price of the shares of the Fund and, therefore, the value of the Securities. Additionally, if market
volatility or these events were to occur on the Final Valuation Date, the Calculation Agent would maintain discretion to determine
whether such market volatility or events have caused a Market Disruption Event to occur, and such determination would affect the
Payment at Maturity of the Securities. If the Calculation Agent determines that no Market Disruption Event has taken place,
the payment at maturity would be based solely on the published closing price per share of the Fund on the Final Valuation Date,
even if the Fund’s shares are underperforming the Share Underlying Index or the component securities of the Share Underlying
Index and/or trading below the net asset value per share of the Fund.
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No dividend payments or voting rights
– Owning the Securities is not the same as owning the Underlying Shares or the stocks comprising the Share Underlying Index.
As a holder of the Securities, you will not have voting rights or rights to receive dividends or other distributions or other rights
that holders of shares of the Underlying Shares or stocks held by the Fund would have.
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The amount payable on the Securities is
not linked to the price of the Underlying Shares at any time other than the Final Valuation Date
– The Final Price will
be based on the Closing Price of the Underlying Shares on the Final Valuation Date, subject to postponement for non-Trading Days
and certain Market Disruption Events. Even if the price of the
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Underlying Shares appreciates prior to the Final Valuation Date
but then drops by the Final Valuation Date, the Payment at Maturity may be significantly less than it would have been had the Payment
at Maturity been linked to the price of the Underlying Shares prior to such drop. Although the actual price of the Underlying Shares
on the stated Maturity Date or at other times during the term of the Securities may be higher than the Final Price, the Payment
at Maturity will be based solely on the Closing Price of the Underlying Shares on the Final Valuation Date as compared to the Initial
Price.
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Investing in the Securities is not equivalent
to investing in the Underlying Shares or the stocks composing the Share Underlying Index
– Investing in the Securities
is not equivalent to investing in the Underlying Shares, the Share Underlying Index or the stocks that constitute the Share Underlying
Index. 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 Underlying Shares or the stocks that constitute the Share Underlying Index.
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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 4 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 Shares, 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 pricing supplement 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 may be influenced by many unpredictable factors” above.
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Adjustments to the Underlying Shares or to the Share Underlying Index could adversely affect
the value of the Securities
– The investment adviser to the Fund, BlackRock Fund Advisors (the “Investment Adviser”),
seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Share Underlying
Index. Pursuant to its investment strategy or otherwise, the Investment Advisor may add, delete or substitute the stocks composing
the Fund. Any of these actions could adversely affect the price of the Underlying Shares and, consequently, the value of the Securities.
Russell Investments is responsible for calculating and maintaining the Share Underlying Index. Russell Investments may add, delete
or substitute the stocks constituting the Share Underlying Index or make other methodological changes that could change the value
of the Share Underlying Index. Russell Investments may discontinue or suspend calculation or publication of the Share Underlying
Index at any time. If trading in the Underlying Shares is permanently discontinued and/or the Fund is liquidated or otherwise terminated,
and Russell Investments subsequently discontinues publication of the Share Underlying Index, the Calculation Agent will have the
sole discretion to substitute a successor index that is comparable to the discontinued Share Underlying Index 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 price of the Underlying Shares, and consequently, the value of the Securities.
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The adjustments to the Adjustment Factor
the Calculation Agent is required to make do not cover every corporate event that can affect the shares of the Underlying Shares
– MS & Co., as Calculation Agent, will adjust the Adjustment Factor for certain events affecting the Underlying Shares,
including stock splits and reverse stock splits. However, the Calculation Agent will not make an adjustment for every event that
can affect the Underlying Shares. If an event occurs that does not require the Calculation Agent to adjust the Adjustment Factor,
the market price of the Securities may be materially and adversely affected. The determination by the Calculation Agent to adjust,
or not to adjust, the Adjustment Factor may materially and adversely affect the market price 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. MS &
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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. 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. Even if there is a secondary market, it may not provide enough liquidity to allow you
to trade or sell the Securities easily. Since other broker-dealers may not 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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Hedging and trading activity by our affiliates
could potentially adversely affect the value of the Securities
– One or more of our affiliates and/or third-party dealers
have carried out, and will continue to carry out, hedging activities related to the Securities, including trading in the Underlying
Shares or the constituent stocks of the Share Underlying Index, in futures or options contracts on the Underlying Shares, the Share
Underlying Index or the constituent stocks of the Share Underlying Index, as well as in other instruments related to the Underlying
Shares or the Share Underlying Index. 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
Valuation Date approaches. MS & Co. and some of our other affiliates also trade the Underlying Shares or the constituent stocks
of the Share Underlying Index, in futures or options contracts on the Underlying Shares, the Share Underlying Index or the constituent
stocks of the Share Underlying Index, as well as in other instruments related to the Underlying Shares or the Share Underlying
Index, on a regular basis as part of their general broker-dealer and other businesses. Any of these hedging or trading activities
on or prior to the Trade Date could have increased the Initial Price of the Underlying Shares, and, therefore, could have increased
the Downside Threshold, which is the price at or above which the Underlying Shares must close on the Final Valuation Date so that
investors do not suffer a significant loss on their initial investment in the Securities. Additionally, such hedging or trading
activities during the term of the Securities, including on the Final Valuation Date, could adversely affect the Closing Price of
the Underlying Shares on the Final Valuation Date, and, accordingly, the amount of cash payable at maturity, if any.
|
|
¨
|
Potential conflict of interest
–
As Calculation Agent, MS & Co. has determined the Initial Price, the Digital Return, the Digital Barrier and the Downside Threshold,
will determine the Final Price and whether any Market Disruption Event has occurred, and will calculate the amount payable at maturity,
if any. Moreover, certain determinations made by MS & Co., in its capacity as Calculation Agent, may require it to exercise
discretion and make subjective judgments, such as with respect to the occurrence or non-occurrence of Market Disruption Events,
any adjustment to the Adjustment Factor and the selection of a Successor Index or calculation of the Final Price in the event of
a discontinuance of the Share Underlying Index or a Market Disruption Event. These potentially subjective determinations may adversely
affect the payout to you at maturity, if any. For further information regarding these types of determinations, see “Additional
Terms of the Securities—Postponement of Final Valuation Date and Maturity Date,” “—Discontinuance of the
Underlying Shares and/or Share Underlying Index; Alteration of Method of Calculation,” “—Calculation Agent and
Calculations ” and related definitions below. In addition, MS & Co. has determined the estimated value of the Securities
on the Trade Date.
|
|
¨
|
Potentially inconsistent research, opinions
or recommendations by Morgan Stanley, UBS or our or their respective affiliates
– Morgan Stanley, 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, 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 Shares to which the Securities are linked.
|
|
¨
|
Uncertain Tax Treatment
– Please
note that the discussions in this pricing supplement concerning the U.S. federal income tax consequences of an investment in the
Securities supersede the discussions contained in the accompanying prospectus supplement.
|
Subject to the discussion under
“What Are the Tax Consequences of the Securities” in this pricing supplement, although there is uncertainty regarding
the U.S. federal income tax consequences of an investment in the Securities due to the lack of governing authority, in the opinion
of our counsel, Davis Polk & Wardwell LLP (“our counsel”), under current law, and based on current market conditions,
each Security should be treated as a single financial contract that is an “open transaction” for U.S. federal income
tax purposes.
If the Internal Revenue Service
(the “IRS”) were successful in asserting an alternative treatment for the Securities, the timing and character of income
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 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. We do not plan
to request a ruling from the IRS regarding the tax treatment of the Securities, and the IRS or a court may not agree with the tax
treatment described in this pricing supplement.
In 2007, the U.S. Treasury Department
and the IRS released a notice requesting comments on the U.S. federal income tax treatment of “prepaid forward contracts”
and similar instruments. The notice focuses in particular on whether to require holders of these instruments to accrue income over
the term of their investment. It also asks for comments on a number of related topics, including the character of income or loss
with respect to these instruments; whether short-term instruments should be subject to any such accrual regime; the relevance of
factors such as the exchange-traded status of the instruments and the nature of the underlying property to which the instruments
are linked; the degree, if any, to which income (including any mandated accruals) realized by non-U.S. investors should be subject
to withholding tax; and whether these instruments are or should be subject to the “constructive ownership” rule, which
very generally can operate to recharacterize certain long-term capital gain as ordinary income and impose an interest charge. While
the notice requests comments on appropriate transition rules and effective dates, any Treasury regulations or other guidance promulgated
after consideration of these issues could materially and adversely affect the tax consequences of an investment in the Securities,
possibly with retroactive effect.
Both U.S. and Non-U.S. Holders
should read carefully the discussion under “What Are the Tax Consequences of the Securities” in this pricing supplement
and consult their tax advisers regarding all aspects of the U.S. federal tax consequences of an investment in the Securities as
well as any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction.
Scenario Analysis and Examples at Maturity
|
These examples are
based on hypothetical terms. The actual terms are set forth on the cover of this pricing supplement.
The below scenario analysis
and examples are provided for illustrative purposes only and are hypothetical. They do not purport to be representative of every
possible scenario concerning increases or decreases in the price of the Underlying Shares relative to the Initial Price. We cannot
predict the Final Price on the Final Valuation Date. You should not take the scenario analysis and these examples as an indication
or assurance of the expected performance of the Underlying Shares. The numbers appearing in the examples below have been rounded
for ease of analysis. The following scenario analysis and examples illustrate the payment at maturity for a $10.00 security on
a hypothetical offering of the Securities, based on the following terms*:
Investment term:
|
Approximately 2 years
|
Hypothetical Initial Price:
|
$130.00
|
Hypothetical Digital Barrier /
|
|
Downside Threshold:
|
$91.00 (70% of the hypothetical Initial Price)
|
Digital Return:
|
11.80%
|
*
The actual Initial
Price, Digital Barrier and Downside Threshold for the Securities are specified on the cover of this pricing supplement.
Example 1
—
The price of the Underlying
Shares
increases
from an Initial Price of $130 to a Final Price of $195.
The Final Price is greater than or equal to
the Digital Barrier, and the Payment at Maturity is calculated as follows:
$10 + [$10 × the Digital
Return]
$10 + [$10 × 11.80%]
Payment at Maturity = $10
+ $1.18 = $11.18
Because the Final Price is greater than or equal
to the Digital Barrier, the Payment at Maturity is equal to $11.18 per $10.00 Principal Amount of Securities, resulting in a total
return on the Securities of 11.80%. Investors do not participate in any appreciation of the Underlying Shares.
Example 2
—
The price of the Underlying
Shares
decreases
from an Initial Price of $130 to a Final Price of $123.50.
The Final Price is greater than or equal
to the Digital Barrier, and the Payment at Maturity is calculated as follows:
$10 + [$10 × the Digital
Return]
$10 + [$10 × 11.80%]
Payment at Maturity = $10
+ $1.18 = $11.18
Because the Final Price is greater than or equal
to the Digital Barrier, the Payment at Maturity is equal to $11.18 per $10.00 Principal Amount of Securities, resulting in a total
return on the Securities of 11.80%.
Example 3
—
The price of the Underlying
Shares
decreases
from an Initial Price of $130 to a Final Price of $52.
The Final Price is less than the Downside Threshold,
and the Payment at Maturity is calculated as follows:
Underlying Return = ($52
- $130) / $130 = -60%
Payment at Maturity = = $10
+ ($10 × -60%) = $4.00
Because the Final Price is less than the Downside
Threshold, the Securities will be fully exposed to the decline in the price of the Underlying Shares over the term of the Securities.
Therefore, the Payment at Maturity is equal to $4 per $10 Principal Amount of Securities, resulting in a total loss on the Securities
of 60%.
If the Final Price is below the Downside
Threshold on the Final Valuation Date, the Securities will be fully exposed to the decline in the Underlying Shares, and you will
lose a significant portion or all of your Principal Amount at maturity.
Scenario Analysis – Hypothetical Payment at Maturity for each $10.00 Principal Amount of Securities.
Performance
of the Underlying Shares
|
Performance
of the Securities
|
Final
Price
|
Underlying
Return
|
Digital
Return
|
Payment
at Maturity
|
Return
on Securities Purchased at $10.00 (1)
|
|
$260.00
|
100%
|
11.80%
|
$11.18
|
11.80%
|
|
$247.00
|
90%
|
11.80%
|
$11.18
|
11.80%
|
|
$234.00
|
80%
|
11.80%
|
$11.18
|
11.80%
|
|
$221.00
|
70%
|
11.80%
|
$11.18
|
11.80%
|
|
$208.00
|
60%
|
11.80%
|
$11.18
|
11.80%
|
|
$195.00
|
50%
|
11.80%
|
$11.18
|
11.80%
|
|
$182.00
|
40%
|
11.80%
|
$11.18
|
11.80%
|
|
$169.00
|
30%
|
11.80%
|
$11.18
|
11.80%
|
|
$156.00
|
20%
|
11.80%
|
$11.18
|
11.80%
|
|
$143.00
|
10%
|
11.80%
|
$11.18
|
11.80%
|
|
$130.00
|
0%
|
11.80%
|
$11.18
|
11.80%
|
|
$117.00
|
-10%
|
11.80%
|
$11.18
|
11.80%
|
|
$104.00
|
-20%
|
11.80%
|
$11.18
|
11.80%
|
|
$91.00
|
-30%
|
11.80%
|
$11.18
|
11.80%
|
|
$89.70
|
-31%
|
N/A
|
$6.90
|
-31.00%
|
|
$78.00
|
-40%
|
N/A
|
$6.00
|
-40.00%
|
|
$65.00
|
-50%
|
N/A
|
$5.00
|
-50.00%
|
|
$52.00
|
-60%
|
N/A
|
$4.00
|
-60.00%
|
|
$39.00
|
-70%
|
N/A
|
$3.00
|
-70.00%
|
|
$26.00
|
-80%
|
N/A
|
$2.00
|
-80.00%
|
|
$13.00
|
-90%
|
N/A
|
$1.00
|
-90.00%
|
|
$0.00
|
-100%
|
N/A
|
$0.00
|
-100.00%
|
|
(1) This “Return on Securities”
is the number, expressed as a percentage, that results from comparing the Payment at Maturity per $10 Principal Amount Security
to the purchase price of $10 per Security.
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
prospectus supplement does not apply to the Securities issued under this pricing supplement and is superseded by the following
discussion.
The following
summary is a general discussion of the principal 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:
|
t
|
purchase
the Securities in the original offering; and
|
|
t
|
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:
|
t
|
certain
financial institutions;
|
|
t
|
certain
dealers and traders in securities or commodities;
|
|
t
|
investors
holding the Securities as part of a “straddle,” wash sale, conversion transaction,
integrated transaction or constructive sale transaction;
|
|
t
|
U.S.
Holders (as defined below) whose functional currency is not the U.S. dollar;
|
|
t
|
partnerships
or other entities classified as partnerships for U.S. federal income tax purposes;
|
|
t
|
regulated
investment companies;
|
|
t
|
real
estate investment trusts; or
|
|
t
|
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 pricing supplement, 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
Although there
is uncertainty regarding the U.S. federal income tax consequences of an investment in the Securities due to the lack of governing
authority, in the opinion of our counsel, under current law, and based on current market conditions, each Security should be treated
as a single financial contract that is an “open transaction” for U.S. federal income tax purposes.
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. Accordingly, 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 the Securities 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:
|
t
|
a
citizen or individual resident of the United States;
|
|
t
|
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
|
|
t
|
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 Treatment
Prior to Settlement.
A U.S. Holder should not be required to recognize taxable income over the term of the Securities prior
to settlement, other than pursuant to a sale or exchange as described below.
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.
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. Any gain or loss recognized upon the sale, exchange or settlement of the Securities
should be long-term capital gain or loss if the U.S. Holder has held the Securities for more than one year at such time, and short-term
capital gain or loss otherwise.
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 the contingent payment 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 generally 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 also 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 in particular on whether to require holders of these instruments to accrue income over the term of their investment.
It also asks for comments on a number of related topics, including the character of income or loss with respect to these instruments;
whether short-term instruments should be subject to any such accrual regime; the relevance of factors such as the exchange-traded
status of the instruments and the nature of the underlying property to which the instruments are linked; and whether these instruments
are or should be subject to the “constructive ownership” rule, which very generally can operate to recharacterize
certain long-term capital gain as ordinary income and impose an interest charge. While the notice requests comments on appropriate
transition rules and effective dates, any Treasury regulations or other guidance promulgated after consideration of these issues
could materially and adversely affect the tax consequences of an investment in the 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 the payment on the Securities at maturity 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 may be filed with the
IRS in connection with the payment 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:
|
t
|
an
individual who is classified as a nonresident alien;
|
|
t
|
a
foreign corporation; or
|
|
t
|
a
foreign estate or trust.
|
The term “Non-U.S.
Holder” does not include any of the following holders:
|
t
|
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;
|
|
t
|
certain
former citizens or residents of the United States; or
|
|
t
|
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.
Tax Treatment
upon Sale, Exchange or Settlement of the Securities
In
general.
Assuming the treatment of the Securities as set forth above is respected, and subject to the discussions below concerning
backup withholding
and the possible application of Section 871(m) of the Code
,
a Non-U.S. Holder of the Securities generally will not be subject to U.S. federal income or withholding tax in respect of amounts
paid to the Non-U.S. Holder.
Subject to the
discussions regarding the possible application of Section 871(m) and FATCA, if all or any portion of a Security were recharacterized
as a debt instrument, any payment made to a Non-U.S. Holder with respect to the Securities would not be subject to U.S. federal
withholding tax, provided that:
|
t
|
the
Non-U.S. Holder does not own, directly or by attribution, ten percent or more of the
total combined voting power of all classes of Morgan Stanley stock entitled to vote;
|
|
t
|
the
Non-U.S. Holder is not a controlled foreign corporation related, directly or indirectly,
to Morgan Stanley through stock ownership;
|
|
t
|
the
Non-U.S. Holder is not a bank receiving interest under Section 881(c)(3)(A) of the Code,
and
|
|
t
|
the
certification requirement described below has been fulfilled with respect to the beneficial
owner.
|
Certification
Requirement.
The certification requirement referred to in the preceding paragraph will be fulfilled if the beneficial owner
of a Security (or a financial institution holding a Security on behalf of the beneficial owner) furnishes to the applicable withholding
agent an IRS Form W-8BEN (or other appropriate form) on which the beneficial owner certifies under penalties of perjury that it
is not a U.S. person.
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. Among the issues addressed in the notice is the degree, if any, to which any
income with respect to instruments such as the Securities should be subject to U.S. withholding tax. It is possible that any Treasury
regulations or other guidance issued after consideration of this issue could materially and adversely affect the withholding tax
consequences of ownership and disposition of the Securities, possibly on a retroactive basis. Non-U.S. Holders should note that
we currently do not intend to withhold on any payment made with respect to the Securities to Non-U.S. Holders (subject to compliance
by such holders with the certification requirement described above and to the discussion below regarding FATCA). However, in the
event of a change of law or any formal or informal guidance by the IRS, the U.S. Treasury Department or Congress, we may decide
to withhold on payments made with respect to the Securities to Non-U.S. Holders, and we will not be required to pay any additional
amounts with respect to amounts withheld. Accordingly, Non-U.S. Holders should consult their tax advisers regarding all aspects
of the U.S. federal income tax consequences of an investment in the Securities, including the possible implications of the notice
referred to above.
Section
871(m) Withholding Tax on Dividend Equivalents
Section 871(m)
of the Code and Treasury regulations promulgated thereunder (“Section 871(m)”) generally impose a 30% (or a lower
applicable treaty rate) withholding tax on dividend equivalents paid or deemed paid to Non-U.S. Holders with respect to certain
financial instruments linked to U.S. equities or indices that include U.S. equities (each, an “Underlying Security”).
Subject to certain exceptions, Section 871(m) generally applies to securities that substantially replicate the economic performance
of one or more Underlying Securities, as determined based on tests set forth in the applicable Treasury regulations (a “Specified
Security”). However, the regulations exempt securities issued before January 1, 2018 that do not have a delta of one with
respect to any Underlying Security. Based on our determination that the Securities do not have a delta of one with respect to
any Underlying Security, our counsel is of the opinion that the Securities should not be Specified Securities and, therefore,
should not be subject to Section 871(m).
Our determination
is not binding on the IRS, and the IRS may disagree with this determination. Section 871(m) is complex and its application may
depend on your particular circumstances, including whether you enter into other transactions with respect to an Underlying Security.
If Section 871(m) withholding is required, we will not be required to pay any additional amounts with respect to the amounts so
withheld. You should consult your tax adviser regarding the potential application of Section 871(m) to the Securities.
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
may be filed with the IRS in connection with the payment on the Securities at maturity as well as in connection with the payment
of proceeds from a sale, exchange or other disposition of the Securities. 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. Compliance with the certification
procedures described above under “―Tax Treatment upon Sale, Exchange or Settlement of the Securities – Certification
Requirement” will satisfy the certification requirements necessary to avoid backup withholding as well. 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. If the Securities were
recharacterized as debt instruments, this legislation would apply to any payment of amounts treated as interest and, for dispositions
after December 31, 2018, to payments of gross proceeds of the disposition (including upon retirement) of the Securities. 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 iShares
®
Russell 2000
®
ETF
|
The iShares
®
Russell 2000
®
ETF
is an exchange-traded fund that seeks investment results that correspond generally to the price and yield performance, before fees
and expenses, of the Russell 2000
®
Index. The iShares
®
Russell 2000
®
ETF is managed
by iShares Trust (“iShares”), a registered investment company that consists of numerous separate investment portfolios,
including the iShares
®
Russell 2000
®
ETF. Information provided to or filed with the Securities and
Exchange Commission (the “Commission”) by iShares pursuant to the Securities Act of 1933 and the Investment Company
Act of 1940 can be located by reference to Commission file numbers 333-92935 and 811-09729, respectively, through the Commission’s
website at.www.sec.gov. In addition, information may be obtained from other sources including, but not limited to, press releases,
newspaper articles and other publicly disseminated documents. We make no representation or warranty as to the accuracy or completeness
of such information.
Neither the issuer nor the agent makes any representation that such publicly available documents or any
other publicly available information regarding the iShares
®
Russell 2000
®
ETF is accurate or complete.
The Russell 2000
®
Index is an index calculated,
published and disseminated by Russell Investments, and measures the composite price performance of stocks of 2,000 companies incorporated
in the U.S. and its territories. All 2,000 stocks are traded on a major U.S. exchange and are the 2,000 smallest securities
that form the Russell 3000
®
Index. The Russell 3000 Index is composed of the 3,000 largest U.S. companies
as determined by market capitalization and represents approximately 98% of the U.S. equity market. The Russell 2000
®
Index consists of the smallest 2,000 companies included in the Russell 3000
®
Index and represents a small portion
of the total market capitalization of the Russell 3000
®
Index. The Russell 2000
®
Index
is designed to track the performance of the small capitalization segment of the U.S. equity market. For additional information
about the Russell 2000
®
Index, see the information set forth under “Russell 2000
®
Index”
in the accompanying index supplement.
We and/or our affiliates
may presently or from time to time engage in business with iShares. In the course of such business, we and/or our affiliates may
acquire non-public information with respect to iShares, and neither we nor any of our affiliates undertakes to disclose any such
information to you. In addition, one or more of our affiliates may publish research reports with respect to the Fund. The statements
in the preceding two sentences are not intended to affect the rights of investors in the Securities under the securities laws.
As a purchaser of the Securities, you should undertake an independent investigation of iShares as in your judgment is appropriate
to make an informed decision with respect to an investment in the Securities.
iShares
®
is a registered trademark of BlackRock Institutional Trust Company, N.A. (“BTC”). The Securities are not sponsored,
endorsed, sold, or promoted by BTC. BTC makes no representations or warranties to the owners of the Securities or any member of
the public regarding the advisability of investing in the Securities. BTC has no obligation or liability in connection with the
operation, marketing, trading or sale of the Securities.
iShares® Russell 2000
®
ETF Historical Information
|
The following table sets forth the published high and low Closing
Prices, as well as the end-of-quarter Closing Prices, of the iShares
®
Russell 2000
®
ETF for each
quarter in the period from January 1, 2012 through February 15, 2017. The Closing Price of the iShares
®
Russell
2000
®
ETF on February 15, 2017 was $139.59. We obtained the information in the table below from Bloomberg Financial
Markets, without independent verification. The historical Closing Prices of the iShares
®
Russell 2000
®
ETF should not be taken as an indication of future performance, and no assurance can be given as to the Closing Price of the iShares
®
Russell 2000
®
ETF on the Final Valuation Date.
Quarter Begin
|
Quarter End
|
Quarterly High ($)
|
Quarterly Low ($)
|
Quarterly Close ($)
|
1/1/2012
|
3/31/2012
|
84.41
|
74.56
|
82.85
|
4/1/2012
|
6/30/2012
|
83.79
|
73.64
|
79.65
|
7/1/2012
|
9/30/2012
|
86.40
|
76.68
|
83.46
|
10/1/2012
|
12/31/2012
|
84.69
|
76.88
|
84.29
|
1/1/2013
|
3/31/2013
|
94.80
|
86.65
|
94.26
|
4/1/2013
|
6/30/2013
|
99.51
|
89.58
|
97.16
|
7/1/2013
|
9/30/2013
|
107.10
|
98.08
|
106.62
|
10/1/2013
|
12/31/2013
|
115.31
|
103.67
|
115.31
|
1/1/2014
|
3/31/2014
|
119.83
|
108.64
|
116.34
|
4/1/2014
|
6/30/2014
|
118.81
|
108.88
|
118.81
|
7/1/2014
|
9/30/2014
|
120.02
|
109.35
|
109.35
|
10/1/2014
|
12/31/2014
|
121.08
|
104.30
|
119.67
|
1/1/2015
|
3/31/2015
|
126.03
|
114.69
|
124.35
|
4/1/2015
|
6/30/2015
|
129.01
|
120.85
|
124.86
|
7/1/2015
|
9/30/2015
|
126.31
|
107.53
|
109.20
|
10/1/2015
|
12/31/2015
|
119.85
|
109.01
|
112.51
|
1/1/2016
|
3/31/2016
|
110.62
|
94.80
|
110.62
|
4/1/2016
|
6/30/2016
|
118.43
|
108.69
|
114.97
|
7/1/2016
|
9/30/2016
|
125.70
|
113.69
|
124.21
|
10/1/2016
|
12/31/2016
|
138.31
|
115.00
|
134.85
|
1/1/2017
|
2/15/2017*
|
139.59
|
133.75
|
139.59
|
* 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 only.
The graph below illustrates the performance of the iShares
®
Russell 2000
®
ETF from January 1, 2008 through February 15, 2017, based on information from Bloomberg.
Past
performance of the iShares
®
Russell 2000
®
ETF is not indicative of the future performance of the
iShares
®
Russell 2000
®
ETF.
Additional Terms of the Securities
|
Some Definitions
We have defined some of the terms that we use
frequently in this pricing supplement below:
|
t
|
“Share Underlying Index”
means the Russell 2000
®
Index, which is the index that the Underlying Shares generally seek to track.
|
|
t
|
“Closing Price”
means, subject to the provisions set out under “Discontinuance of the Underlying Shares and/or Share Underlying Index; Alteration
of Method of Calculation” below, for one Underlying Share (or one unit of any other security for which a Closing Price must
be determined) on any Trading Day means:
|
|
o
|
if the Underlying Shares (or any such other security) are listed on
a national securities exchange (other than The NASDAQ Stock Market LLC (“NASDAQ”)), the last reported sale price, regular
way, of the principal trading session on such day on the principal national securities exchange registered under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), on which the Underlying Shares (or any such other security)
are listed,
|
|
o
|
if the Underlying Shares (or any such other security) are securities
of NASDAQ, the official closing price published by NASDAQ on such day, or
|
|
o
|
if the Underlying Shares (or any such other security) are not listed
on any national securities exchange but are included in the OTC Bulletin Board Service (the “OTC Bulletin Board”) operated
by the Financial Industry Regulatory Authority, Inc. (“FINRA”), the last reported sale price of the principal trading
session on the OTC Bulletin Board on such day.
|
If the Underlying Shares (or
any such other security) are listed on any national securities exchange but the last reported sale price or the official closing
price published by such exchange, or by NASDAQ, as applicable, is not available pursuant to the preceding sentence, then the Closing
Price for one Underlying Share (or one unit of any such other security) on any Trading Day will mean the last reported sale price
of the principal trading session on the over-the-counter market as reported on NASDAQ or the OTC Bulletin Board on such day. If
a Market Disruption Event (as defined below) occurs with respect to the Underlying Shares (or any such other security) or the last
reported sale price or the official closing price published by NASDAQ, as applicable, for the Underlying Shares (or any such other
security) is not available pursuant to either of the two preceding sentences, then the Closing Price for any Trading Day will be
the mean, as determined by the Calculation Agent, of the bid prices for the Underlying Shares (or any such other security) for
such Trading Day obtained from as many recognized dealers in such security, but not exceeding three, as will make such bid prices
available to the Calculation Agent. Bids of Morgan Stanley & Co. LLC (“MS & Co.”) and its successors or any
of its affiliates may be included in the calculation of such mean, but only to the extent that any such bid is the highest of the
bids obtained. If no bid prices are provided from any third party dealers, the Closing Price will be determined by the Calculation
Agent in its sole and absolute discretion (acting in good faith) taking into account any information that it deems relevant. The
term “OTC Bulletin Board Service” will include any successor service thereto, or, if applicable, the OTC Reporting
Facility operated by FINRA. This definition of “Closing Price” is subject to the provisions under “—Discontinuance
of the Underlying Shares and/or Share Underlying Index; Alteration of Method of Calculation” below.
|
t
|
“Trading Day”
means a day, as determined by the Calculation Agent, on which trading is generally conducted on the New York Stock Exchange LLC,
NASDAQ, the Chicago Mercantile Exchange and the Chicago Board of Options Exchange and in the over-the-counter market for equity
securities in the United States.
|
|
t
|
“Market Disruption
Event” means:
|
|
(i)
|
the occurrence or existence of any of:
|
(a) a suspension, absence or
material limitation of trading of the Underlying Shares on the primary market for the Underlying Shares for more than two hours
of trading or during the one-half hour period preceding the close of the principal trading session in such market; or a breakdown
or failure in the price and trade reporting systems of the primary market for the Underlying Shares as a result of which the reported
trading prices for the Underlying Shares during the last one-half hour preceding the close of the principal trading session in
such market are materially inaccurate; or the suspension, absence or material limitation of trading on the primary market for trading
in futures or options contracts related to the Underlying Shares, if available, during the one-half hour period preceding the close
of the principal trading session in the applicable market, or
(b) the occurrence or existence
of a suspension, absence or material limitation of trading of securities then constituting 20 percent or more of the value of the
Share Underlying Index on the Relevant Exchanges for such securities for more than two hours of trading or during the one-half
hour period preceding the close of the principal trading session on such Relevant Exchanges, or
(c) the suspension, material
limitation or absence of trading on any major U.S. securities market for trading in futures or options contracts related to the
Share Underlying Index or the Underlying Shares for more than two hours of trading or during the one-half hour period preceding
the close of the principal trading session on such market,
In each case, as determined
by the Calculation Agent in its sole discretion; and
|
(ii)
|
a determination by the Calculation Agent in its sole discretion that any event described in clause
(i) above materially interfered with our ability or the ability of any of our affiliates to unwind or adjust all or a material
portion of the hedge position with respect to the Securities.
|
For the purpose of determining
whether a Market Disruption Event exists at any time, if trading in a security included in the Share Underlying Index is materially
suspended or materially limited at that time, then the relevant percentage contribution of that security to the level of the Share
Underlying Index shall be based on a comparison of (x) the portion of the level of the Share Underlying Index attributable to that
security relative to (y) the overall level of the Share Underlying Index, in each case immediately before that suspension or limitation.
For the purpose of determining
whether a Market Disruption Event has occurred: (1) a limitation on the hours or number of days of trading will not constitute
a Market Disruption Event if it results from an announced change in the regular business hours of the Relevant Exchange or market,
(2) a decision to permanently discontinue trading in the Underlying Shares or in the futures or options contract related to the
Share Underlying Index or the Underlying Shares will not constitute a Market Disruption Event, (3) a suspension of trading in futures
or options contracts on the Share Underlying Index or the Underlying Shares by the primary securities market trading in such contracts
by reason of (a) a price change exceeding limits set by such securities exchange or market, (b) an imbalance of orders relating
to such contracts or (c) a disparity in bid and ask quotes relating to such contracts will constitute a suspension, absence or
material limitation of trading in futures or options contracts related to the Share Underlying Index or the Underlying Shares and
(4) a “suspension, absence or material limitation of trading” on any Relevant Exchange or on the primary market on
which futures or options contracts related to the Share Underlying Index or the Underlying Shares are traded will not include any
time when such securities market is itself closed for trading under ordinary circumstances.
|
t
|
“Relevant Exchange”
means the primary exchange(s) or market(s) of trading for any security (or any combination thereof) then included in the Share
Underlying Index or any Successor Index.
|
Postponement of Final Valuation Date
and Maturity Date
If the scheduled Final Valuation Date is
not a Trading Day or if a Market Disruption Event with respect to the Underlying Shares occurs on the scheduled Final Valuation
Date, the Final Price will be determined on the immediately succeeding Trading Day on which no Market Disruption Event shall have
occurred; provided that the Final Price will not be determined on a date later than the fifth scheduled Trading Day after the scheduled
Final Valuation Date, and if such date is not a Trading Day or if there is a Market Disruption Event on such date, the Calculation
Agent will determine the Closing Price of an Underlying Share on such date as the mean of the bid prices for an Underlying Share
for such date obtained from as many recognized dealers in such security, but not exceeding three, as will make such bid prices
available to the Calculation Agent. Bids of MS & Co. or any of its affiliates may be included in the calculation of such mean,
but only to the extent that any such bid is the highest of the bids obtained. If no bid prices are provided from any third party
dealers, the Closing Price will be determined by the Calculation Agent in its sole and absolute discretion (acting in good faith)
taking into account any information that it deems relevant.
If the Final Valuation Date is postponed
so that it falls less than two business days prior to the scheduled Maturity Date, the Maturity Date will be the second business
day following the Final Valuation Date, as postponed.
Antidilution Adjustments for Securities
linked to Exchange-Traded Funds
If the Underlying Shares are subject to
a stock split or reverse stock split, then once such split has become effective, the Adjustment Factor will be adjusted to equal
the product of the prior Adjustment Factor and the number of shares issued in such stock split or reverse stock split with respect
to one Underlying Share. No such adjustment to the Adjustment Factor will be required unless such adjustment would require a change
of at least 0.1% in the amount being adjusted as then in effect. Any number so adjusted will be rounded to the nearest one hundred-thousandth
with five one-millionths being rounded upward.
Alternate Exchange Calculation in case
of an Event of Default
If an event of default with respect to the
Securities shall have occurred and be continuing, the amount declared due and payable upon any acceleration of the Securities (the
“Acceleration Amount”) will be an amount, determined by the Calculation Agent in its sole discretion, that is equal
to the cost of having a Qualified Financial Institution, of the kind and selected as described below, expressly assume all our
payment and other obligations with respect to the Securities as of that day and as if no default or acceleration had occurred,
or to undertake other obligations providing substantially equivalent economic value to you with respect to the Securities. That
cost will equal:
|
o
|
the lowest amount that a Qualified Financial Institution would charge
to effect this assumption or undertaking, plus
|
|
o
|
the reasonable expenses, including reasonable attorneys’ fees,
incurred by the holders of the Securities in preparing any documentation necessary for this assumption or undertaking.
|
During the Default Quotation Period for
the Securities, which we describe below, the holders of the Securities and/or we may request a Qualified Financial Institution
to provide a quotation of the amount it would charge to effect this assumption or undertaking. If either party obtains a quotation,
it must notify the other party in writing of the quotation. The amount referred to in the first bullet point above will equal the
lowest—or, if there is only one, the only—quotation obtained, and as to which notice is so given, during the Default
Quotation Period. With respect to any quotation, however, the party not obtaining the quotation may object, on reasonable and significant
grounds, to the assumption or undertaking by the Qualified Financial Institution providing the quotation and notify the other party
in writing of those grounds within two business days after the last day of the Default Quotation Period, in which case that quotation
will be disregarded in determining the Acceleration Amount.
Notwithstanding the foregoing, if a voluntary
or involuntary liquidation, bankruptcy or insolvency of, or any analogous proceeding is filed with respect to MSFL or Morgan Stanley,
then depending on applicable bankruptcy law, your claim may be limited to an amount that could be less than the Acceleration Amount.
If the maturity of the Securities is accelerated
because of an event of default as described above, we shall, or shall cause the Calculation Agent to, provide written notice to
the Trustee at its New York office, on which notice the Trustee may conclusively rely, and to the Depositary of the Acceleration
Amount and the aggregate cash amount due, if any, with respect to the Securities as promptly as possible and in no event later
than two business days after the date of such acceleration.
Default Quotation Period
The Default Quotation Period is the period
beginning on the day the Acceleration Amount first becomes due and ending on the third business day after that day, unless:
|
o
|
no quotation of the kind referred to above is obtained, or
|
|
o
|
every quotation of that kind obtained is objected to within five business
days after the due date as described above.
|
If either of these two events occurs, the
Default Quotation Period will continue until the third business day after the first business day on which prompt notice of a quotation
is given as described above. If that quotation is objected to as described above within five business days after that first business
day, however, the Default Quotation Period will continue as described in the prior sentence and this sentence.
In any event, if the Default Quotation Period
and the subsequent two business day objection period have not ended before the Final Valuation Date, then the Acceleration Amount
will equal the principal amount of the Securities.
Qualified Financial Institutions
For the purpose of determining the Acceleration
Amount at any time, a Qualified Financial Institution must be a financial institution organized under the laws of any jurisdiction
in the United States or Europe, which at that time has outstanding debt obligations with a stated maturity of one year or less
from the date of issue and rated either:
|
o
|
A-2 or higher by Standard & Poor’s Ratings Services or any
successor, or any other comparable rating then used by that rating agency, or
|
|
o
|
P-2 or higher by Moody’s Investors Service or any successor, or
any other comparable rating then used by that rating agency.
|
Discontinuance of the Underlying Shares
and/or Share Underlying Index; Alteration of Method of Calculation
If trading in the Underlying Shares on every
applicable national securities exchange, on the OTC Bulletin Board and in the over-the-counter market is permanently discontinued
or the Fund is liquidated or otherwise terminated (a “Discontinuance or Liquidation Event”), the Closing Price of the
Underlying Shares on the Final Valuation Date or the date of acceleration following the Discontinuance or Liquidation Event will
be determined by the Calculation Agent and will be deemed to equal the product of (i) the closing value of the Share Underlying
Index (or any Successor Index, as described below) on such date (taking into account any material changes in the method of calculating
the Share Underlying Index following such Discontinuance or Liquidation Event) and (ii) a fraction, the numerator of which is the
Closing Price of the Underlying Shares and the denominator of which is the closing value of the Share Underlying Index (or any
Successor Index, as described below), each determined as of the last day prior to the occurrence of the Discontinuance or Liquidation
Event on which a Closing Price of the Underlying Shares was available.
If, subsequent to a Discontinuance or Liquidation
Event, the index publisher of the Share Underlying Index discontinues publication of the Share Underlying Index and the index publisher
of the Share Underlying Index or another entity (including MS & Co.) publishes a successor or substitute index that MS &
Co., as the Calculation Agent, determines, in its sole discretion, to be comparable to the discontinued Share Underlying Index
(such index being referred to herein as a “Successor Index”), then any subsequent Closing Price of the Underlying Shares
on any Trading Day following a Discontinuance or Liquidation Event will be
determined by reference to the published value of such
Successor Index at the regular weekday close of trading on such Trading Day.
Upon any selection by the Calculation Agent
of a Successor Index, the Calculation Agent will cause written notice thereof to be furnished to the Trustee, to us and to the
Depositary, as holder of the Securities, within three business days of such selection. We expect that such notice will be made
available to you, as a beneficial owner of such Securities, in accordance with the standard rules and procedures of the Depositary
and its direct and indirect participants.
If, subsequent to a Discontinuance or Liquidation
Event, the index publisher of the Share Underlying Index discontinues publication of the Share Underlying Index prior to, and such
discontinuance is continuing on the Final Valuation Date and MS & Co., as the Calculation Agent, determines, in its sole discretion,
that no Successor Index is available at such time, then the Calculation Agent will determine the Closing Price of the Underlying
Shares for such date. The Closing Price of the Underlying Shares will be computed by the Calculation Agent in accordance with the
formula for calculating the Share Underlying Index last in effect prior to such discontinuance, using the Closing Price (or, if
trading in the relevant securities has been materially suspended or materially limited, its good faith estimate of the closing
price that would have prevailed but for such suspension or limitation) at the close of the principal trading session of the Relevant
Exchange on such date of each security most recently composing the Share Underlying Index without any rebalancing or substitution
of such securities following such discontinuance. Notwithstanding these alternative arrangements, discontinuance of the publication
of the Share Underlying Index may adversely affect the value of the Securities.
Trustee
The “Trustee” for each offering
of notes issued under our Senior Debt Indenture, including the Securities, will be The Bank of New York Mellon, a New York banking
corporation.
Agent
The “agent” is MS & Co.
Calculation Agent and Calculations
The “Calculation Agent” for
the Securities will be MS & Co. As Calculation Agent, MS & Co. will determine, among other things, the Initial Price, the
Digital Barrier, the Downside Threshold, the Final Price, the Underlying Return and the Payment at Maturity.
All determinations made by the Calculation
Agent will be at the sole discretion of the Calculation Agent and will, in the absence of manifest error, be conclusive for all
purposes and binding on you, the Trustee and us.
All calculations with respect to the Payment
at Maturity will be rounded to the nearest one hundred-thousandth, with five one-millionths rounded upward (e.g., .876545 would
be rounded to .87655); all dollar amounts related to determination of the amount of cash payable per Security will be rounded to
the nearest ten-thousandth, with five one hundred-thousandths rounded upward (e.g., .76545 would be rounded up to .7655); and all
dollar amounts paid on the aggregate number of Securities will be rounded to the nearest cent, with one-half cent rounded upward.
Because the Calculation Agent is our affiliate,
the economic interests of the Calculation Agent and its affiliates may be adverse to your interests, as an owner of the Securities,
including with respect to certain determinations and judgments that the Calculation Agent must make in determining the Final Price
or whether a Market Disruption Event has occurred. See “—Discontinuance of the Underlying Shares and/or Share Underlying
Index; Alteration of Method of Calculation,” and the definition of Market Disruption Event. MS & Co. is obligated to
carry out its duties and functions as Calculation Agent in good faith and using its reasonable judgment.
Form of Securities
The Securities will be issued in the form
of one or more fully registered global securities which will be deposited with, or on behalf of, the Depositary and will be registered
in the name of a nominee of the Depositary. The Depositary’s nominee will be the only registered holder of the Securities.
Your beneficial interest in the Securities will be evidenced solely by entries on the books of the securities intermediary acting
on your behalf as a direct or indirect participant in the Depositary. In this pricing supplement, all references to payments or
notices to you will mean payments or notices to the Depositary, as the registered holder of the Securities, for distribution to
participants in accordance with the Depositary’s procedures. For more information regarding the Depositary and book entry
notes, please read “Form of Securities—The Depositary” in the accompanying prospectus supplement and “Securities
Offered on a Global Basis Through the Depositary” in the accompanying prospectus.