February
2017
Preliminary
Terms No. 1,356
Registration
Statement Nos. 333-200365; 333-200365-12
Dated
February 21, 2017
Filed
pursuant to Rule 433
M
organ
S
tanley
F
inance
LLC
Structured Investments
Opportunities in International Equities
Fixed Coupon Auto-Callable Securities due May
24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean
Ltd.
Principal at Risk Securities
The Fixed Coupon Auto-Callable Securities, which we refer to
as the securities, are unsecured obligations of Morgan Stanley Finance LLC (“MSFL”), fully and unconditionally guaranteed
by Morgan Stanley, and do not guarantee the repayment of any principal. The securities offer the opportunity for investors to earn
a fixed monthly coupon at an annual rate of 7.35%. In addition, if the determination closing price of the underlying stock is
greater
than or equal to
the redemption threshold level on any monthly determination date after the first three months, the securities
will be automatically redeemed for an amount per security equal to the stated principal amount and the related monthly coupon.
However, if the securities are not automatically redeemed prior to maturity, the payment at maturity due on the securities will
be, in addition to the final monthly coupon, either (i) if the final share price of the underlying stock is
greater than or
equal to
the downside threshold level, the stated principal amount, or (ii) if the final share price of the underlying stock
is
less than
the downside threshold level, an amount that reflects the full depreciation in the price of the underlying
stock over the term of the securities. Under these circumstances, investors will be exposed to the decline in the underlying stock
on a 1-to-1 basis and will receive a payment at maturity that is significantly less than the stated principal amount of the securities
and that could be zero.
Accordingly, investors could lose their entire initial investment in the securities.
Investors will
not participate in any appreciation of the underlying stock. The securities are for investors who are willing to risk their principal
and forgo the opportunity to participate in any appreciation of the underlying stock in exchange for the opportunity to earn interest
at a potentially above-market rate. The securities are unsecured obligations issued as part of MSFL’s Series A Global Medium-Term
Notes program.
All payments are subject to our credit risk. If we default
on our obligations, you could lose some or all of your investment. These securities are not secured obligations and you will not
have any security interest in, or otherwise have any access to, any underlying reference asset or assets.
SUMMARY TERMS
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Issuer:
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Morgan Stanley Finance LLC
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Guarantor:
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Morgan Stanley
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Underlying stock:
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Transocean Ltd. shares
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Aggregate principal amount:
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$
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Stated principal amount:
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$1,000 per security
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Issue price:
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$1,000 per security
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Pricing date:
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February 21, 2017
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Original issue date:
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February 28, 2017 (5 business days after the pricing date)
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Maturity date:
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May 24, 2018
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Early redemption:
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Following the initial 3-month non-call period, if, on any determination date other than the final determination date, the determination closing price of the underlying stock is
greater than or equal to
the redemption threshold level, the securities will be automatically redeemed for an early redemption payment on the coupon payment date immediately following such determination date. No further payments will be made on the securities once they have been redeemed.
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Early redemption payment:
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The early redemption payment will be an amount equal to (i) the stated principal amount
plus
(ii) the monthly coupon for the related monthly interest period.
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Determination closing price:
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The closing price of the underlying stock on any determination date other than the final determination date
times
the adjustment factor on such determination date
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Monthly coupon:
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Unless the securities have been previously redeemed, a monthly coupon at an annual rate of 7.35% (corresponding to approximately $6.125 per month per security) is paid on each coupon payment date.
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Determination dates:
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May 22, 2017, June 21, 2017, July 21, 2017, August 21, 2017, September 21, 2017, October 23, 2017, November 21, 2017, December 21, 2017, January 22, 2018, February 21, 2018, March 21, 2018, April 23, 2018 and May 17, 2018, subject to postponement for non-trading days and certain market disruption events. We also refer to May 17, 2018 as the final determination date.
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Coupon payment dates:
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March 28, 2017, April 28, 2017, May 30, 2017, June 28, 2017, July 28, 2017, August 28, 2017, September 28, 2017, October 30, 2017, November 29, 2017, December 29, 2017, January 29, 2018, February 28, 2018, March 28, 2018, April 30, 2018 and the maturity date;
provided
that if any such day is not a business day, that coupon payment will be made on the next succeeding business day and no adjustment will be made to any coupon payment made on that succeeding business day; provided further that if, due to a market disruption event or otherwise, a determination date is postponed, the related coupon payment shall be paid on the fifth business day following such determination date as postponed. The monthly coupon for the final monthly interest period will be made on the maturity date.
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Payment at maturity:
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If the securities have not been redeemed prior to the maturity date, investors will receive a payment at maturity per stated principal amount determined as follows:
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·
If the final share price is
greater than or equal to
the downside threshold level:
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(i) the stated principal amount
plus
(ii) the monthly coupon for the final monthly interest period
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·
If the final share price is
less than
the downside threshold level:
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(i) the monthly coupon for the final interest period
plus
(ii) the
product of
(a) the stated principal amount and (b) the share performance factor
Under these circumstances, investors will
lose a significant portion, and may lose all, of their principal.
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Share performance factor:
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The final share price
divided by
the initial share price
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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 stock
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Redemption threshold level:
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$12.502, which is equal to 95% of the initial share price
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Downside threshold level:
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$6.58, which is equal to 50% of the initial share price
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Initial share price:
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$13.16, which is equal to the closing price of the underlying stock on February 17, 2017
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Final share price:
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The closing price of the underlying stock on the final determination date
times
the adjustment factor on such date
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CUSIP:
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61768CFM4
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ISIN:
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US61768CFM47
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Listing:
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The securities will not be listed on any securities exchange.
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Agent:
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Morgan Stanley & Co. LLC (“MS & Co.”), an affiliate of MSFL and a wholly owned subsidiary of Morgan Stanley. See “Supplemental information regarding plan of distribution; conflicts of interest.”
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Estimated value on the pricing date:
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Approximately $965.80 per security, or within $10.00 of that estimate. See “Investment Summary” on page 2.
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Commissions and issue price:
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Price to public
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Agent’s commissions
(1)
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Proceeds to us
(2)
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Per security
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$1,000
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$
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$
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Total
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$
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$
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$
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(1)
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Selected dealers and their financial advisors will
collectively receive from the agent, MS & Co., a fixed sales commission of $ for each security they sell. See “Supplemental
information regarding plan of distribution; conflicts of interest.” For additional information, see “Plan of Distribution
(Conflicts of Interest)” in the accompanying product supplement.
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(2)
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See “Use of proceeds and hedging” on page
19.
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The securities involve risks not associated with an investment
in ordinary debt securities. See “Risk Factors” beginning on page 6.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved these securities, or determined if this document or the accompanying product supplement
and prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The securities are not deposits or savings accounts and are
not insured by the Federal Deposit Insurance Corporation or any other governmental agency or instrumentality, nor are they obligations
of, or guaranteed by, a bank.
You should read this document together with the related product
supplement and prospectus, each of which can be accessed via the hyperlinks below. Please also see “Additional Information
About the Securities” at the end of this document.
As used in this document, “we,” “us”
and “our” refer to Morgan Stanley or MSFL, or Morgan Stanley and MSFL collectively, as the context requires.
Product Supplement for Auto-Callable Securities dated February 29, 2016
Prospectus dated February 16, 2016
Morgan Stanley Finance LLC
Fixed Coupon
Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on
the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
Investment Summary
Fixed Coupon Auto-Callable Securities
Principal at Risk Securities
The Fixed Coupon Auto-Callable Securities due
May 24, 2018, With 3-month Initial Non-Call Period, Based on the Performance of the Shares of Transocean Ltd., which we refer to
as the securities, provide an opportunity for investors to earn a fixed monthly coupon at an annual rate of 7.35%. If the determination
closing price of the underlying stock is
greater than or equal to
the redemption threshold level on any monthly determination
date after the first three months, the securities will be automatically redeemed for an amount per security equal to the stated
principal amount and the related monthly coupon. However, if the securities are not automatically redeemed prior to maturity, the
payment at maturity due on the securities will be, in addition to the final monthly coupon, either (i) if the final share price
of the underlying stock is
greater than or equal to
the downside threshold level, the stated principal amount, or (ii) if
the final share price of the underlying stock is
less than
the downside threshold level, an amount that reflects the full
depreciation in the price of the underlying stock over the term of the securities. Under these circumstances, investors will be
exposed to the decline in the underlying stock on a 1-to-1 basis and will receive a payment at maturity that is significantly less
than the stated principal amount of the securities and that could be zero.
Accordingly, investors could lose their entire initial
investment in the securities.
Investors will not participate in any appreciation of the underlying stock.
The original issue price of each security is
$1,000. 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 pricing date will be less than $1,000. We estimate that the
value of each security on the pricing date will be approximately $965.80, or within $10.00 of that estimate. Our estimate of the
value of the securities as determined on the pricing date will be set forth in the final pricing supplement.
What goes into the estimated value on the pricing date?
In valuing the securities on the pricing date,
we take into account that the securities comprise both a debt component and a performance-based component linked to the underlying
stock. The estimated value of the securities is determined using our own pricing and valuation models, market inputs and assumptions
relating to the underlying stock, instruments based on the underlying stock, 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 monthly coupon rate, the redemption threshold level and the downside threshold level, we use an internal funding
rate, which is likely to be lower than our secondary market credit spreads and therefore advantageous to us. If the issuing, selling,
structuring and hedging costs borne by you were lower or if the internal funding rate were higher, one or more of the economic
terms of the securities would be more favorable to you.
What is the relationship between the estimated value on the
pricing date and the secondary market price of the 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 stock, may vary
from, and be lower than, the estimated value on the pricing date, because the secondary market price takes into account our secondary
market credit spread as well as the bid-offer spread that MS & Co. would charge in a secondary market transaction of this type
and other factors. However, because the costs associated with issuing, selling, structuring and hedging the securities are not
fully deducted upon issuance, for a period of up to 3 months following the issue 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
stock, and to our secondary market credit spreads, it would do so based on values higher than the estimated value. We expect that
those higher values will also be reflected in your brokerage account statements.
MS & Co. may, but is not obligated to,
make a market in the securities and, if it once chooses to make a market, may cease doing so at any time.
Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
Key Investment Rationale
The securities offer investors an opportunity to earn a fixed
monthly coupon at an annual rate of 7.35%.The securities may be redeemed prior to maturity for the stated principal amount per
security
plus
the applicable monthly coupon, and the payment at maturity will vary depending on the final share price of
the underlying stock, as follows:
Scenario 1
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Following the initial 3-month non-call period,
on any determination date other than the final determination date, the determination closing price is
greater than or equal
to
the redemption threshold level.
§
The
securities will be automatically redeemed for (i) the stated principal amount
plus
(ii) the monthly coupon for the related
monthly interest period. No further payments will be made on the securities once they have been redeemed.
§
Investors
will not participate in any appreciation of the underlying stock from the initial share price.
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Scenario 2
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The securities are not automatically redeemed
prior to maturity, and the final share price of the underlying stock is
greater than or equal to
the downside threshold
level.
§
The
payment due at maturity will be (i) the stated principal amount
plus
(ii) the monthly coupon for the final monthly interest
period.
§
Investors
will not participate in any appreciation of the underlying stock from the initial share price.
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Scenario 3
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The securities are not automatically redeemed
prior to maturity, and the final share price of the underlying stock is
less than
the downside threshold level.
§
The
payment due at maturity will be (i) the monthly coupon for the final interest period plus (ii)
the product of
(a) the stated
principal amount and (b) the share performance factor.
§
Investors
will lose a significant portion, and may lose all, of their principal in this scenario.
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Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
Hypothetical Examples
The below examples are based on the following
terms:
Hypothetical Initial Share Price:
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$15.00
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Hypothetical Downside Threshold Level:
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$7.50, which is 50% of the hypothetical initial share price
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Hypothetical Redemption Threshold Level:
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$14.25, which is 95% of the hypothetical initial share price
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Hypothetical Adjustment Factor:
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1.0
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Monthly Coupon:
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7.35% per annum (corresponding to approximately $6.125 per month per security)
1
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Stated Principal Amount:
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$1,000 per security
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1
The actual monthly coupon will be an amount determined
by the calculation agent based on the number of days in the applicable payment period, calculated on a 30/360 day count basis.
The hypothetical monthly coupon of $6.125 is used in these examples for ease of analysis.
How to determine whether the
securities are redeemed early (after the 3-month initial non-call period):
In Example 1, the determination closing price
of the underlying stock is greater than or equal to the hypothetical redemption threshold level of $14.25 on the second determination
date (after the 3-month initial non-call period).
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Example
1
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Determination
Dates (after the 3-month Initial Non-Call Period)
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Hypothetical
Determination Closing Price
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Monthly
Coupon
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Early
Redemption Amount*
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#1
(May 2017)
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$14.00
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$6.125
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N/A
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#2
(June 2017)
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$18.00
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—*
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$1,006.125
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* The Early Redemption Amount includes the unpaid
monthly coupon for the related monthly interest period.
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§
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In
Example 1
, the securities are automatically redeemed following the second determination date (after the 3-month initial
non-call period), as the determination closing price on the second determination date is greater than the redemption threshold
level. You receive the early redemption payment, calculated as follows:
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stated principal
amount + monthly coupon = $1,000 + $6.125 = $1,006.125
In this example, the early redemption
feature limits the term of your investment to approximately 4 months, and you may not be able to reinvest at comparable terms or
returns. If the securities are redeemed early, you will stop receiving monthly coupons. Further, although the underlying stock
has appreciated by 20% from its initial share price as of the second determination date (after the 3-month initial non-call period),
you receive only $1,006.125 per security and do not benefit from such appreciation.
How to determine the payment
at maturity:
In the following examples, the determination
closing price of the underlying stock is less than the redemption threshold level on each determination date prior to the final
determination date, and, consequently, the securities are not automatically redeemed prior to, and remain outstanding until, maturity.In
each of examples 2, 3 and 4 below, investors receive, in addition to the payment at maturity, the monthly coupon of $6.125 throughout
the term of the securities.
Examples 2, 3 and 4 illustrate the payment
at maturity per security based on the final share price.
Example
2
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Hypothetical
Final Share Price
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Payment
at Maturity*
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$17.25
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$1,006.125
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Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
* The Payment at Maturity includes the unpaid
monthly coupon for the final monthly interest period.
Example 2
—The securities are not
redeemed prior to maturity, as the determination closing price is less than the redemption threshold level on each determination
date prior to the final determination date. The final share price has increased 15% above the initial share price to $17.25, and
investors receive at maturity $1,006.125 per security, equal to the stated principal amount
plus
the final monthly coupon.
Even though the underlying stock has increased significantly above the initial share price as of the final determination date,
investors do not participate in any appreciation of the underlying stock.
Example
3
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Hypothetical
Final Share Price
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Payment
at Maturity*
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$12.75
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$1,006.125
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* The Payment at Maturity includes the unpaid
monthly coupon for the final monthly interest period.
Example 3
—The securities are not
redeemed prior to maturity, as the determination closing price is less than the redemption threshold level on each determination
date prior to the final determination date. The final share price has decreased 15.00% below the initial share price to $12.75.
However, because the final share price of the underlying stock is not less than the downside threshold level, investors receive
at maturity $1,006.125 per security, equal to the stated principal amount
plus
the final monthly coupon.
Example
4
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Hypothetical
Final Share Price
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Payment
at Maturity*
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$6.00
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$406.125
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* The Payment at Maturity includes the unpaid
monthly coupon for the final monthly interest period.
Example 4
— The securities are
not redeemed prior to maturity, as the determination closing price is less than the redemption threshold level on each determination
date prior to the final determination date. The final share price has decreased 60% below the initial share price to $6.00. Because
the final share price of the underlying stock is less than the downside threshold level, investors will receive, in addition to
the final monthly coupon, an amount that reflects the full depreciation in the price of the underlying stock over the term of the
securities. The payment at maturity is significantly less than the stated principal amount and is calculated as follows:
Payment at maturity = final
monthly coupon + (stated principal amount × share performance factor) = $6.125 + ($1,000 × 0.4) = $406.125
If the final share price of the underlying
stock is less than the downside threshold level, you will be fully exposed to the depreciation in the price of the underlying stock
at maturity, and your payment at maturity (aside from the final monthly coupon) will be significantly less than the stated principal
amount and could be zero.
Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
Risk Factors
The following is a non-exhaustive list of certain key risk
factors for investors in the securities. For further discussion of these and other risks, you should read the section entitled
“Risk Factors” in the accompanying product supplement and 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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§
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The securities do not guarantee the return of any principal.
The terms of the securities differ from those of ordinary
debt securities in that the securities do not guarantee the return of any of the principal amount at maturity. Instead, if the
securities have not been automatically redeemed prior to maturity and if the final share price is less than the downside threshold
level, you will be exposed to the decline in the closing price of the underlying stock at maturity, as compared to the initial
share price, on a 1-to-1 basis and you will receive a payment at maturity that is less than 50% of the stated principal amount
and could be zero.
There is no minimum payment at maturity, and you could lose your entire investment in the securities.
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§
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Investors will not participate in any appreciation in the price of the underlying stock.
Investors will not participate
in any appreciation in the price of the underlying stock from the initial share price, and the return on the securities will be
limited to the monthly coupon that is paid for each monthly interest period until maturity or an early redemption.
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§
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The automatic early redemption feature may limit the term of your investment to approximately three months. If the securities
are redeemed early, you may not be able to reinvest at comparable terms or returns.
The term
of your investment in the securities may be limited to as short as approximately three months by the automatic early redemption
feature of the securities. If the securities are redeemed prior to maturity, you will receive no more monthly coupons and may be
forced to invest in a lower interest rate environment and may not be able to reinvest at comparable terms or returns. However,
under no circumstances will the securities be redeemed in the first three months of the term of the securities.
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§
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The market price will be influenced by many unpredictable factors.
Several factors
will influence the value of the securities in the secondary market and the price at which MS & Co. may be willing to purchase
or sell the securities in the secondary market. Although we expect that generally the trading price of the underlying stock on
any day, including in relation to the downside threshold level, will affect the value of the securities more than any other single
factor, other factors that may influence the value of the securities include:
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o
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the volatility (frequency and magnitude of changes in value) of the underlying stock,
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o
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dividend rates on the underlying stock,
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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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time remaining until the securities mature,
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o
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geopolitical conditions and economic, financial, political, regulatory or judicial events that affect the underlying stock
and which may affect the final share price of the underlying stock,
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o
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the occurrence of certain events affecting the underlying stock that may or may not require an adjustment to the adjustment
factor, and
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o
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any actual or anticipated changes in our credit ratings or credit spreads.
|
The
price of the underlying stock may be, and has recently been, volatile, and we can give you no assurance that the volatility will
lessen. See “Transocean Ltd.” below. You may receive less, and possibly significantly less, than the stated principal
amount per security if you try to sell your securities prior 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 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
on each coupon payment date, upon automatic redemption or at maturity, and therefore you are subject to our credit risk. If we
default on our obligations under the securities, your investment would be at risk and you could lose some or all of your investment.
As a result, the market value of the securities prior to maturity will be affected by changes in the market’s view of our
creditworthiness. Any actual or anticipated
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Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
decline
in our credit ratings or increase in the credit spreads charged by the market for taking our credit risk is likely to adversely
affect the market value of the securities.
|
§
|
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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|
§
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There are risks associated with investments in securities linked to the value of foreign equity securities.
The securities
are linked to the value of foreign equity securities. Investments in securities linked to the value of foreign equity securities
involve risks associated with the securities markets in those countries, including risks of volatility in those markets, governmental
intervention in those markets and cross-shareholdings in companies in certain countries. Also, there is generally less publicly
available information about foreign companies than about U.S. companies that are subject to the reporting requirements of the United
States Securities and Exchange Commission, and foreign companies are subject to accounting, auditing and financial reporting standards
and requirements different from those applicable to U.S. reporting companies. The prices of securities issued in foreign markets
may be affected by political, economic, financial and social factors in those countries, or global regions, including changes in
government, economic and fiscal policies and currency exchange laws. Local securities markets may trade a small number of securities
and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult
or impossible at times. Moreover, the economies in such countries may differ favorably or unfavorably from the economy in the United
States in such respects as growth of gross national product, rate of inflation, capital reinvestment, resources, self-sufficiency
and balance of payment positions between countries.
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|
§
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Investing in the securities is not equivalent to investing in the shares of Transocean Ltd.
Investors
in the securities will not participate in any appreciation in the underlying stock and will not have voting rights or rights to
receive dividends or other distributions or any other rights with respect to the underlying stock.
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|
§
|
No affiliation with Transocean Ltd.
Transocean Ltd. is not an affiliate of ours, is not involved with this offering in
any way, and has no obligation to consider your interests in taking any corporate actions that might affect the value of the securities.
We have not made any due diligence inquiry with respect to Transocean Ltd. in connection with this offering.
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|
§
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We may engage in business with or involving Transocean Ltd. without regard to your interests.
We or our affiliates may
presently or from time to time engage in business with Transocean Ltd. without regard to your interests and thus may acquire non-public
information about Transocean Ltd. Neither we nor any of our affiliates undertakes to disclose any such information to you. In addition,
we or our affiliates from time to time have published and in the future may publish research reports with respect to Transocean
Ltd., which may or may not recommend that investors buy or hold the underlying stock.
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|
§
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The antidilution adjustments the calculation agent is required to make do not cover every corporate event that could affect
the underlying stock.
MS & Co., as calculation agent, will adjust the adjustment factor for certain corporate events affecting
the underlying stock, such as stock splits and stock dividends, and certain other corporate actions involving the issuer of the
underlying stock, such as mergers. However, the calculation agent will not make an adjustment for every corporate event that can
affect the underlying stock. For example, the calculation agent is not required to make any adjustments if the issuer of the underlying
stock or anyone else makes a partial tender or partial exchange offer for the underlying stock, nor will adjustments be made following
the final determination date. 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.
|
Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
|
§
|
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 & Co.
may, 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.
|
|
§
|
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 original issue price reduce the economic terms of the securities,
cause the estimated value of the securities to be less than the original issue price and will adversely affect secondary market
prices.
Assuming no change in market conditions or any other relevant factors, the prices, if any, at which dealers, including
MS & Co., may be willing to purchase the securities in secondary market transactions will likely be significantly lower than
the original issue price, because secondary market prices will exclude the issuing, selling, structuring and hedging-related costs
that are included in the original issue price and borne by you and because the secondary market prices will reflect our secondary
market credit spreads and the bid-offer spread that any dealer would charge in a secondary market transaction of this type as well
as other factors.
|
The inclusion of the costs of issuing,
selling, structuring and hedging the securities in the original 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 3 months
following the issue 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 stock, 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.
|
§
|
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 pricing 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 document will vary based on many factors that cannot be predicted with accuracy,
including our creditworthiness and changes in market conditions. See also “The market price will be influenced by many unpredictable
factors” above.
|
|
§
|
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 (and to other instruments linked to the underlying stock), including trading in the underlying stock. 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 determination date approaches. Some of our affiliates also
trade the underlying stock and other financial instruments related to the underlying stock 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 February 17, 2017 could have
increased the
|
Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
initial
share price, and, as a result, could have increased (i) the price at or above which the underlying stock must close on any determination
date after the first three months so that the securities are redeemed prior to maturity for the early redemption payment, and
(ii) the downside threshold level, which, if the securities are not redeemed prior to maturity, is the price at or above which
the underlying stock must close on the final determination date in order for you to avoid being exposed to the negative price
performance of the underlying stock at maturity. Additionally, such hedging or trading activities during the term of the securities
could potentially affect the price of the underlying stock on the determination dates, and, accordingly, whether the securities
are automatically called prior to maturity, and, if the securities are not called prior to maturity, the payout to you at maturity,
if any.
|
§
|
The calculation agent, which is a subsidiary of Morgan Stanley and an affiliate of MSFL, will make determinations with respect
to the securities.
As calculation agent, MS & Co. has determined the initial share price, the redemption threshold level
and the downside threshold level, and will determine the final share price, whether the securities will be redeemed following any
determination date, whether a market disruption event has occurred, whether to make any adjustments to the adjustment factor and
the payment that you will receive upon an automatic early redemption or at maturity, if any. Moreover, certain determinations made
by MS & Co., in its capacity as calculation agent, may require it to exercise discretion and make subjective judgments, such
as with respect to the occurrence or nonoccurrence of market disruption events and certain adjustments to the adjustment factor.
These potentially subjective determinations may affect the payout to you upon an automatic early redemption or at maturity, if
any. For further information regarding these types of determinations, see “Description of Auto-Callable Securities—Auto-Callable
Securities Linked to Underlying Shares” and “—Calculation Agent and Calculations” in the accompanying product
supplement. In addition, MS & Co. has determined the estimated value of the securities on the pricing date.
|
|
§
|
The U.S. federal income tax consequences of an investment in the securities are uncertain.
There is no direct legal
authority as to the proper treatment of the securities for U.S. federal income tax purposes, and, therefore, significant aspects
of the tax treatment of the securities are uncertain.
|
Please read the discussion under
“Additional Provisions―Tax considerations” in this document concerning the U.S. federal income tax consequences
of an investment in the securities. We intend to treat a security for U.S. federal income tax purposes as a unit consisting of
(i) a Put Right (as defined below under “Additional Provisions―Tax considerations”) written by you to us that,
if exercised, requires you to pay to us an amount equal to the Deposit (as defined below under “Additional Provisions―Tax
considerations”), in exchange for a cash amount based on the performance of the underlying stock, and (ii) a Deposit with
us of a fixed amount of cash to secure your obligation under the Put Right. Alternative U.S. federal income tax treatments of the
securities are possible, and if the Internal Revenue Service (the “IRS”) were successful in asserting such an alternative
tax treatment for the securities the timing and the character of income on the securities might differ significantly from the tax
treatment described herein. 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 herein.
In 2007, the U.S. Treasury Department
and the IRS released a notice requesting comments on the U.S. federal income tax treatment of “prepaid forward contracts”
and similar instruments. While it is not clear whether the securities would be viewed as similar to the prepaid forward contracts
described in the notice, it is possible that any Treasury regulations or other guidance promulgated after consideration of these
issues could materially and adversely affect the tax consequences of an investment in the securities, possibly with retroactive
effect. The notice focuses on a number of issues, the most relevant of which for holders of the securities are the character and
timing of income or loss (including whether the entire coupon on the securities should be required to be included currently as
ordinary income) and the degree, if any, to which income realized by non-U.S. investors should be subject to withholding tax.
Non-U.S. Holders should note that
we currently do not intend to withhold on any payments made with respect to the securities to Non-U.S. Holders (subject to compliance
by such holders with certification necessary to establish an exemption from withholding and to the discussion under “Additional
Provisions―Tax considerations—FATCA Legislation”).
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 will not be required to pay any additional amounts with respect to amounts withheld.
Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
Both U.S. and Non-U.S. Holders should
consult their tax advisers regarding the U.S. federal income tax consequences of an investment in the securities, including possible
alternative treatments, the issues presented by this notice and any tax consequences arising under the laws of any state, local
or non-U.S. taxing jurisdiction.
Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
Transocean Ltd. Overview
Transocean Ltd., headquartered in Switzerland, is a provider
of offshore contract drilling services for oil and gas wells. The underlying stock is registered under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Information provided to or filed with the Securities and Exchange Commission
by Transocean Ltd. pursuant to the Exchange Act can be located by reference to the Securities and Exchange Commission file number
000-53533 through the Securities and Exchange Commission’s website at
.
www.sec.gov. In addition,
information regarding Transocean Ltd. may be obtained from other sources including, but not limited to, press releases, newspaper
articles and other publicly disseminated documents.
Neither the issuer nor the agent makes any representation that such publicly
available documents or any other publicly available information regarding the issuer of the underlying stock is accurate or complete.
Information as of market close on February 17, 2017:
Bloomberg Ticker Symbol:
|
RIG
|
Exchange:
|
NYSE
|
Current Stock Price:
|
$13.16
|
52 Weeks Ago:
|
$9.13
|
52 Week High (on 1/12/2017):
|
$15.84
|
52 Week Low (on 2/24/2016):
|
$8.20
|
Current Dividend Yield:
|
N/A
|
The following table sets forth the published
high and low closing prices of, as well as dividends on, the underlying stock for each quarter from January 1, 2014 through February
17, 2017. The closing price of the underlying stock on February 17, 2017 was $13.16. The associated graph shows the closing prices
of the underlying stock for each day from January 1, 2012 through February 17, 2017.We obtained the information in the table and
graph below from Bloomberg Financial Markets, without independent verification. The historical performance of the underlying stock
should not be taken as an indication of its future performance, and no assurance can be given as to the price of the underlying
stock at any time, including on the determination dates.
Shares of Transocean Ltd. (CUSIP H8817H100)
|
High ($)
|
Low ($)
|
Dividends ($)
|
2014
|
|
|
|
First Quarter
|
49.10
|
38.84
|
0.56
|
Second Quarter
|
46.00
|
39.45
|
0.75
|
Third Quarter
|
44.72
|
31.97
|
0.75
|
Fourth Quarter
|
31.58
|
16.25
|
0.75
|
2015
|
|
|
|
First Quarter
|
20.44
|
13.60
|
0.75
|
Second Quarter
|
21.39
|
14.72
|
0.15
|
Third Quarter
|
15.80
|
11.60
|
0.15
|
Fourth Quarter
|
16.98
|
12.12
|
–
|
2016
|
|
|
|
First Quarter
|
12.71
|
8.20
|
–
|
Second Quarter
|
12.03
|
8.41
|
–
|
Third Quarter
|
12.84
|
8.84
|
–
|
Fourth Quarter
|
15.54
|
9.29
|
–
|
2017
|
|
|
|
First Quarter (through February 17, 2017)
|
15.84
|
13.16
|
–
|
We make no representation as to the amount
of dividends, if any, that Transocean Ltd. may pay in the future. In any event, as an investor in the Fixed Coupon Auto-Callable
Securities, you will not be entitled to receive dividends, if any, that may be payable on the shares of Transocean Ltd.
Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
Shares of Transocean Ltd. – Daily Closing Prices
January 1, 2012 to February 17, 2017
|
|
* The red solid line indicates the downside
threshold level of $6.58, which is 50% of the the initial share price.
This document relates only to the securities
offered hereby and does not relate to the underlying stock or other securities of Transocean Ltd. We have derived all disclosures
contained in this document regarding Transocean Ltd. stock from the publicly available documents described above. In connection
with the offering of the securities, neither we nor the agent has participated in the preparation of such documents or made any
due diligence inquiry with respect to Transocean Ltd. Neither we nor the agent makes any representation that such publicly available
documents or any other publicly available information regarding Transocean Ltd. is accurate or complete. Furthermore, we cannot
give any assurance that all events occurring prior to the date hereof (including events that would affect the accuracy or completeness
of the publicly available documents described above) that would affect the trading price of the underlying stock (and therefore
the price of the underlying stock at the time we price the securities) have been publicly disclosed. Subsequent disclosure of any
such events or the disclosure of or failure to disclose material future events concerning Transocean Ltd. could affect the value
received at maturity with respect to the securities and therefore the value of the securities.
Neither the issuer nor any of its affiliates
makes any representation to you as to the performance of the underlying stock.
Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
Additional Information About the Securities
Please read this information in conjunction with the summary
terms on the front cover of this document.
Additional Provisions:
|
|
|
Day count convention:
|
|
30/360
|
Interest period:
|
|
Monthly
|
Record date:
|
|
The record date for each coupon payment date shall be the
date one business day prior to such scheduled coupon payment date; provided, however, that any monthly coupon payable at maturity
or upon redemption shall be payable to the person to whom the payment at maturity or early redemption payment, as the case
may be, shall be payable.
|
Underlying
stock:
|
|
The accompanying product supplement refers to the underlying
stock as the “underlying shares.”
|
Underlying
stock issuer:
|
|
Transocean Ltd. The accompanying product supplement
refers to the underlying stock issuer as the “underlying company.”
|
Postponement
of coupon payment dates (including the maturity date):
|
|
If any determination date is postponed due to a non-trading
day or certain market disruption event so that it falls less than two business days prior to the relevant scheduled coupon
payment date (including the maturity date), the coupon payment date (or the maturity date) will be postponed to the second
business day following that determination date as postponed, and no adjustment shall be made to any monthly coupon payment
made on that postponed date.
|
Antidilution
adjustments:
|
|
The following replaces
in its entirety the portion of the section entitled “Antidilution Adjustments” in the accompanying product
supplement for auto-callable securities from the start of paragraph 5 to the end of such section.
5. If (i) there occurs
any reclassification or change of the underlying stock, including, without limitation, as a result of the issuance of
any tracking stock by the underlying stock issuer, (ii) the underlying stock issuer or any surviving entity or subsequent
surviving entity of the underlying stock issuer (the “successor corporation”) has been subject to a merger,
combination or consolidation and is not the surviving entity, (iii) any statutory exchange of securities of the underlying
stock issuer or any successor corporation with another corporation occurs (other than pursuant to clause (ii) above),
(iv) the underlying stock issuer is liquidated, (v) the underlying stock issuer issues to all of its shareholders equity
securities of an issuer other than the underlying stock issuer (other than in a transaction described in clause (ii),
(iii) or (iv) above) (a “spin-off event”) or (vi) a tender or exchange offer or going-private transaction
is consummated for all the outstanding shares of the underlying stock (any such event in clauses (i) through (vi), a “reorganization
event”), the method of determining whether an early redemption has occurred and the amount payable upon an early
redemption date or at maturity for each security will be as follows:
·
Upon
any determination date following the effective date of a reorganization event and prior to the final determination date:
If the exchange property value (as defined below) is greater than or equal to the redemption threshold level, the securities
will be automatically redeemed for an early redemption payment.
·
Upon
the final determination date, if the securities have not previously been automatically redeemed: You will receive for
each security that you hold a payment at maturity equal to:
Ø
If
the exchange property value is greater than or equal to the downside threshold level:
(i) the stated principal amount
plus (ii) the monthly coupon for the final monthly interest period.
Ø
If
the exchange property value is less than the downside threshold level: (i)
the monthly coupon for the final interest
period plus (ii) the product of (a) the stated principal amount and (b) the share performance factor. For purposes of
calculating the share performance factor, the “final share price” will be deemed to equal the per-share cash
value, determined as of the final determination date, of the securities, cash or any other assets distributed to holders
of the underlying stock in or as a result of any such reorganization event, including (A) in the case of the issuance
of tracking stock, the reclassified share of the underlying stock, (B) in the case of a spin-off event, the share of the
underlying stock with respect to which the spun-off security was issued, and (C) in the case of any other reorganization
event where the underlying stock continues to be held by the holders receiving such distribution, the underlying stock
(collectively, the “exchange property”).
If exchange
property includes a cash component, investors will not receive any interest accrued on such cash component. In the event
exchange property consists of securities, those securities will, in turn, be subject to the antidilution adjustments set
forth in paragraphs 1 through 5.
For purposes
of determining whether or not the exchange property value is less than the redemption threshold level or less than the downside
threshold level, “exchange property value” means (x) for any cash received in any reorganization event, the value,
as determined by the Calculation Agent, as of the date of receipt, of such cash received for one share of the underlying stock,
as adjusted by the adjustment factor at the time of such reorganization event, (y) for any property other than cash or securities
received in any such reorganization event, the market value, as determined by the Calculation Agent in its sole discretion, as
of the date of receipt, of such exchange property received for one share of the underlying stock, as adjusted by the adjustment
factor at the time of such reorganization event and (z) for any security received in any such
|
Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
|
|
reorganization
event, an amount equal to the closing price, as of the day on which the exchange property value is determined, per share
of such security multiplied by the quantity of such security received for each share of the underlying stock, as adjusted
by the adjustment factor at the time of such reorganization event.
For purposes
of paragraph 5 above, in the case of a consummated tender or exchange offer or going-private transaction involving consideration
of particular types, exchange property shall be deemed to include the amount of cash or other property delivered by the
offeror in the tender or exchange offer (in an amount determined on the basis of the rate of exchange in such tender or
exchange offer or going-private transaction). In the event of a tender or exchange offer or a going-private transaction
with respect to exchange property in which an offeree may elect to receive cash or other property, exchange property shall
be deemed to include the kind and amount of cash and other property received by offerees who elect to receive cash.
Following
the occurrence of any reorganization event referred to in paragraph 5 above, all references in this offering document
and in the related product supplement with respect to the securities to “the underlying stock” shall be deemed
to refer to the exchange property and references to a “share” or “shares” of the underlying stock
shall be deemed to refer to the applicable unit or units of such exchange property, unless the context otherwise requires.
No adjustment
to the adjustment factor will be required unless such adjustment would require a change of at least 0.1% in the adjustment
factor then in effect. The adjustment factor resulting from any of the adjustments specified above will be rounded to
the nearest one hundred-thousandth, with five one-millionths rounded upward. Adjustments to the adjustment factor will
be made up to the close of business on the final determination date.
No adjustments
to the adjustment factor or method of calculating the adjustment factor will be required other than those specified above.
The adjustments specified above do not cover all events that could affect the determination closing price or the final
share price of the underlying stock, including, without limitation, a partial tender or exchange offer for the underlying
stock.
The Calculation
Agent shall be solely responsible for the determination and calculation of any adjustments to the adjustment factor or
method of calculating the adjustment factor and of any related determinations and calculations with respect to any distributions
of stock, other securities or other property or assets (including cash) in connection with any corporate event described
in paragraphs 1 through 5 above, and its determinations and calculations with respect thereto shall be conclusive in the
absence of manifest error.
The Calculation Agent will
provide information as to any adjustments to the adjustment factor or to the method of calculating the amount payable at maturity
of the securities made pursuant to paragraph 5 above upon written request by any investor in the securities.
|
Listing:
|
|
The securities will not be listed on any securities exchange.
|
Minimum ticketing size:
|
|
$1,000 / 1 security
|
Trustee:
|
|
The Bank of New York Mellon
|
Calculation agent:
|
|
MS & Co.
|
Tax considerations:
|
|
Prospective
investors should note that the discussion under the section called “United States Federal Taxation” in the
accompanying product supplement does not apply to the securities issued under this document and is superseded by the following
discussion.
The following
is a general discussion of the material U.S. federal income tax consequences and certain estate tax consequences of ownership
and disposition of the securities. This discussion applies only to initial investors in the securities who:
•
purchase
the securities at their “issue price,” which will equal the first price at which a substantial amount of the
securities is sold to the public (not including bond houses, brokers, or similar persons or organizations acting in the
capacity of underwriters, placement agents or wholesalers); and
•
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:
•
certain
financial institutions;
•
insurance
companies;
•
certain
dealers and traders in securities or commodities;
•
investors
holding the securities as part of a “straddle,” wash sale, conversion transaction, integrated transaction
or constructive sale transaction;
•
U.S.
Holders (as defined below) whose functional currency is not the U.S. dollar;
•
partnerships
or other entities classified as partnerships for U.S. federal income tax purposes;
|
Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
|
|
•
regulated
investment companies;
•
real
estate investment trusts; or
•
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 hereof, changes to any of which subsequent to the date hereof may affect the tax consequences
described herein. Persons considering the purchase of the securities should consult their tax advisers with regard to
the application of the U.S. federal income tax laws to their particular situations as well as any tax consequences arising
under the laws of any state, local or non-U.S. taxing jurisdiction.
General
Due
to the lack of any controlling legal authority, there is substantial uncertainty regarding the U.S. federal income tax
consequences of an investment in the securities. We intend to treat a security, under current law, for U.S. federal income
tax purposes, as a unit consisting of the following:
(i)
a put right (the “Put Right”) written by you to us that, if exercised,
requires you to pay us an amount equal to the Deposit (as defined below) in exchange for a cash amount based on the performance
o
f the underlying stock;
and
(ii)
a deposit with us of a fixed amount of cash, equal to the issue price, to secure
your obligation under the Put Right (the “Deposit”) that pays interest based on our cost of borrowing at the
time of issuance (the “Yield on the Deposit”).
Based
on the treatment set forth above, a portion of the coupon on the securities will be treated as the Yield on the Deposit,
and the remainder will be attributable to the premium on the Put Right (the “Put Premium”). The Yield on the
Deposit will be determined by us as of the pricing date and set forth in the applicable pricing supplement.
We
will allocate 100% of the issue price of the securities to the Deposit and none to the Put Right. Our allocation of the
issue price between the Put Right and the Deposit will be binding on you, unless you timely and explicitly disclose to
the Internal Revenue Service (the “IRS”) that your allocation is different from ours. This allocation is not,
however, binding on the IRS or a court.
No
statutory, judicial or administrative authority directly addresses the treatment of the securities or instruments similar
to the securities for U.S. federal income tax purposes, and no ruling is being requested from the IRS with respect to
the securities.
Significant aspects of the U.S. federal income tax consequences of an investment in the securities
are uncertain, and no assurance can be given that the IRS or a court will agree with the tax treatment described herein.
In the opinion of our counsel, Davis Polk & Wardwell LLP, the treatment of the securities described above is reasonable
under current law; however, our counsel has advised us that it is unable to conclude affirmatively that this treatment
is more likely than not to be upheld, and that alternative treatments are possible.
Accordingly, you should consult
your tax adviser regarding the U.S. federal income tax consequences of an investment in the securities (including alternative
treatments of the securities). Unless otherwise stated, the following discussion is based on the treatment and the allocation
described above.
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:
•
a
citizen or individual resident of the United States;
•
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
•
an
estate or trust the income of which is subject to U.S. federal income taxation regardless of its
|
Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
|
|
source.
Tax
Treatment of the Securities
Assuming
the treatment of the securities and allocation of the issue price as set forth above are respected, the following U.S.
federal income tax consequences should result.
Coupon
Payments on the Securities.
Under the characterization described above under “—General,” only a
portion of the coupon payments on the securities will be attributable to the Yield on the Deposit. The remainder of the
coupon payments will represent payments attributable to the Put Premium. To the extent attributable to the Yield on the
Deposit, coupon payments on the securities should generally be taxable to a U.S. Holder as ordinary interest income at
the time accrued or received, in accordance with the U.S. Holder’s method of accounting for U.S. federal income
tax purposes.
The
Put Premium will not be taxable to a U.S. Holder upon receipt but will be accounted for as described below.
Tax
Basis.
Based on our determination set forth above, the U.S. Holder’s initial tax basis in the Deposit will be
100% of the issue price. The determination of gain or loss with respect to the Put Right is described below.
Receipt
of Stated Principal Amount in Cash upon Settlement of the Securities.
If a U.S. Holder receives the stated principal
amount of a security in cash (excluding cash attributable to coupon payments on the security, which would be taxed as
described above under “—Coupon Payments on the Securities”), the Put Right will be deemed to have expired
unexercised. In such case, the U.S. Holder will not recognize any gain upon the return of the Deposit, but will recognize
the total amount of Put Premium received by the U.S. Holder over the term of the securities (including Put Premium received
upon settlement) as short-term capital gain at such time.
Receipt
of a Cash Amount Based on the Performance of the Underlying Stock upon Maturity of the Securities.
If a U.S. Holder
receives an amount of cash (excluding cash attributable to coupon payments on the securities, which would be taxed as
described above under “—Coupon Payments on the Securities”) that is less than the stated principal amount
of the securities, the Put Right will be deemed to have been exercised and the U.S. Holder will be deemed to have applied
the Deposit toward the cash settlement of the Put Right. In such case, the U.S. Holder will not recognize any gain or
loss in respect of the Deposit, but will recognize short-term capital gain or loss in an amount equal to the difference
between (i) the amount of cash received by the U.S. Holder at maturity (excluding cash attributable to coupon payments
on the securities), plus the total Put Premium received by the U.S. Holder over the term of the securities (including
the Put Premium received at maturity) and (ii) the Deposit.
Sale
or Exchange of the Securities Prior to Settlement.
Upon the sale or exchange of a security, a U.S. Holder should generally
recognize long-term capital gain or loss with respect to the Deposit if the U.S. Holder has held the securities for more
than one year at the time of such sale or exchange and short-term capital gain or loss otherwise. The U.S. Holder will
also generally recognize short-term capital gain or loss with respect to the Put Right. For the purpose of determining
such gain or loss, a U.S. Holder should apportion the amount realized on the sale or exchange of a security (excluding
any amount attributable to accrued but unpaid Yield on the Deposit, which would be taxed as described under “—Coupon
Payments on the Securities”) between the Deposit and the Put Right based on their respective values on the date
of such sale or exchange. The amount of capital gain or loss on the Deposit will equal the amount realized that is attributable
to the Deposit, less the U.S. Holder’s adjusted tax basis in the Deposit. The amount realized that is attributable
to the Put Right, together with the total Put Premium received by the U.S. Holder over the term of the security, will
be treated as short-term capital gain.
If
the value of the Deposit on the date of such sale or exchange exceeds the total amount realized on the sale or exchange
of the security, the U.S. Holder will be treated as having (i) sold or exchanged the Deposit for an amount equal to its
value on that date and (ii) made a payment (the “Put Right Assumption Payment”) to the purchaser of the security
equal to the amount of such excess, in exchange for the purchaser’s assumption of the U.S. Holder’s rights
and obligations under the Put Right. In such a case, the U.S. Holder will recognize short-term capital gain or loss in
respect of the Put Right in an amount equal to the total Put Premium received by the U.S. Holder over the term of the
security, less the amount of the Put Right Assumption Payment deemed to be made by the U.S. Holder.
Possible
Alternative Tax Treatments of an Investment in the Securities
Due
to the absence of authorities that directly address the proper characterization 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 treat a
security or the Deposit as a debt instrument subject to Treasury regulations governing contingent payment debt instruments (the
“Contingent Debt Regulations”).
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Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
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If
the IRS were successful in asserting that the Contingent Debt Regulations applied to the securities or to the Deposit,
the timing and character of income thereon would be significantly affected. Among other things, a U.S. Holder would be
required to accrue interest income as original issue discount, subject to adjustments, at a “comparable yield”
based on our cost of borrowing. Furthermore, if the securities or Deposit were treated as contingent payment debt instruments,
any gain realized with respect to the securities or the Deposit would generally be treated 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.
Even
if the Contingent Debt Regulations do not apply to the securities, other alternative U.S. federal income tax characterizations
or 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. It is possible, for example, that a security could be treated as
constituting an “open transaction” with the result that the coupon payments on the securities might not be
accounted for separately as giving rise to income to U.S. Holders until the sale, exchange or settlement of the securities.
Alternatively, the entire coupon on the securities could be required to be included in income by a U.S. Holder at the
time received or accrued. Other alternative characterizations are also possible. Accordingly, prospective purchasers should
consult their tax advisers regarding the U.S. federal income tax consequences of an investment in 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. While it is not clear whether the securities would
be viewed as similar to the prepaid forward contracts described in the notice, it is possible that any Treasury regulations
or other guidance promulgated after consideration of these issues could materially and adversely affect the tax consequences
of an investment in the securities, possibly with retroactive effect. The notice focuses on a number of issues, the most
relevant of which for U.S. Holders of the securities is the character and timing of income or loss realized with respect
to these instruments (including whether the Put Premium might be required to be included currently as ordinary income).
Accordingly, prospective investors 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 this notice.
Backup
Withholding and Information Reporting
Backup
withholding may apply in respect of payments on the securities and the payment of proceeds from a sale, exchange or other
disposition of the securities, unless a U.S. Holder provides proof of an applicable exemption or a correct taxpayer identification
number, and otherwise complies with applicable requirements of the backup withholding rules. The amounts withheld under
the backup withholding rules are not an additional tax and may be refunded, or credited against the U.S. Holder’s
U.S. federal income tax liability, provided that the required information is timely furnished to the IRS. In addition,
information returns will be filed with the IRS in connection with payments on the securities and the payment of proceeds
from a sale, exchange or other disposition of the securities, unless the U.S. Holder provides proof of an applicable exemption
from the information reporting rules.
Tax
Consequences to Non-U.S. Holders
This
section applies to you only if you are a Non-U.S. Holder. As used herein, the term “Non-U.S. Holder” means
a beneficial owner of a security that is, for U.S. federal income tax purposes:
•
an
individual who is classified as a nonresident alien;
•
a
foreign corporation; or
•
a
foreign trust or estate.
The term
“Non-U.S. Holder” does not include any of the following holders:
•
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;
•
certain
former citizens or residents of the United States; or
•
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.
General
Assuming
the treatment of the securities as set forth above is respected and subject to the discussions below regarding the potential application
of Section 871(m) of the Code and FATCA, payments with respect to a security, and gain realized on the sale, exchange or other
disposition of such security, should not be
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Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
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subject
to U.S. federal income or withholding tax under current law, provided that:
•
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 our stock entitled to vote;
•
the
Non-U.S. Holder is not a controlled foreign corporation related, directly or indirectly, to us through stock ownership;
•
the
Non-U.S. Holder is not a bank receiving interest under Section 881(c)(3)(A) of the Code; and
•
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.
Possible
Alternative Tax Treatments of an Investment in the Securities
As
described above under “—Tax Consequences to U.S. Holders—Possible Alternative Tax Treatments of an Investment
in the Securities,” the IRS may seek to apply a different characterization and tax treatment from the treatment
described herein. While the U.S. federal income and withholding tax consequences to a Non-U.S. Holder of ownership and
disposition of a security under current law should generally be the same as those described immediately above under current
law, it is possible that a Non-U.S. Holder could be subject to withholding tax under certain recharacterizations of the
securities.
Moreover,
among the issues addressed in the IRS notice described in “—Tax Consequences to U.S. Holders” is the
degree, if any, to which income realized by Non-U.S. Holders should be subject to withholding tax. It is possible that
any Treasury regulations or other guidance promulgated after consideration of this issue could materially and adversely
affect the withholding tax consequences of ownership and disposition of the securities, possibly with retroactive effect.
Accordingly, prospective investors 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 discussed above.
Prospective investors should note that we currently do not intend to withhold on any of the payments 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.
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
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Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
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securities.
Backup
Withholding and Information Reporting
Information
returns will be filed with the IRS in connection with any coupon payment and may be filed with the IRS in connection with
the payment at maturity on the securities and the payment of proceeds from a sale, exchange or other disposition 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
under “—General—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 (“FDAP income”). Withholding (if applicable) applies to payments of U.S.-source
FDAP income and, for dispositions after December 31, 2018, to payments of gross proceeds of the disposition (including
upon retirement) of certain financial instruments treated as providing for U.S.-source interest or dividends. While the
treatment of the securities is unclear, you should assume that any coupon payment on the securities will be treated in
whole or in part as subject to the FATCA rules. If withholding applies to the securities, we will not be required to pay
any additional amounts with respect to amounts withheld. Both U.S. and Non-U.S. Holders should consult their tax advisers
regarding the potential application of FATCA to the securities.
The
discussion in the preceding paragraphs, 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
tax consequences of an investment in the securities.
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Use of proceeds and hedging:
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The proceeds from the sale
of the securities will be used by us for general corporate purposes. We will receive, in aggregate, $1,000 per security
issued, because, when we enter into hedging transactions in order to meet our obligations under the securities, our hedging
counterparty will reimburse the cost of the agent’s commissions. The costs of the securities borne by you and described
on page 2 above comprise the agent’s commissions and the cost of issuing, structuring and hedging the securities.
On or prior to February
17, 2017, we hedged our anticipated exposure in connection with the securities by entering into hedging transactions with our
affiliates and/or third party dealers. We expect our hedging counterparties to have taken positions in the underlying stock, in
futures and/or options contracts on the underlying stock. Such purchase activity could have increased the initial share price,
and, as a result, could have increased (i) the price at or above which the underlying stock must close on any determination date
after the first three months so that the securities are redeemed prior to maturity for the early redemption payment, and (ii)
the downside threshold level, which, if the securities are not redeemed prior to maturity, is the price at or above which the
underlying stock must close on the final determination date in order for you to avoid being exposed to the negative price performance
of the underlying stock at maturity. In addition, through our affiliates, we are likely to modify our hedge position throughout
the life of the securities, including on the determination dates, by purchasing and selling the underlying stock, options contracts
relating to the underlying stock or any other available securities or instruments that we may wish to use in connection with such
hedging activities. As a result, these entities may be unwinding or adjusting hedge positions during the term of the securities,
and the hedging strategy may involve greater and more frequent dynamic adjustments to the hedge as the final determination date
approaches. We cannot give any assurance that our hedging activities will not affect the price of the underlying stock, and, therefore,
adversely affect the value of the securities or the payment you will receive at maturity, if any.
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Benefit plan investor considerations:
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Each fiduciary of a pension,
profit-sharing or other employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended
(“ERISA”) (a “Plan”), should consider the fiduciary standards of ERISA in the context of the Plan’s
particular circumstances before authorizing an investment in the securities. Accordingly, among other factors, the fiduciary
should consider whether the investment would satisfy the prudence and diversification requirements of ERISA and would
be consistent with the documents and instruments governing the Plan.
In addition,
we and certain of our affiliates, including MS & Co., may each be considered a “party in interest” within the
meaning of ERISA, or a “disqualified person” within the meaning of the Internal Revenue Code of 1986, as amended (the
“Code”), with respect to many Plans, as well as many individual retirement accounts and Keogh plans (also “Plans”).
ERISA Section 406 and Code Section 4975 generally prohibit transactions between Plans and parties in interest or disqualified
persons. Prohibited transactions within the meaning of
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Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
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ERISA or the
Code would likely arise, for example, if the securities are acquired by or with the assets of a Plan with respect to which
MS & Co. or any of its affiliates is a service provider or other party in interest, unless the securities are acquired
pursuant to an exemption from the “prohibited transaction” rules. A violation of these “prohibited transaction”
rules could result in an excise tax or other liabilities under ERISA and/or Section 4975 of the Code for such persons,
unless exemptive relief is available under an applicable statutory or administrative exemption.
The U.S. Department
of Labor has issued five prohibited transaction class exemptions (“PTCEs”) that may provide exemptive relief
for direct or indirect prohibited transactions resulting from the purchase or holding of the securities. Those class exemptions
are PTCE 96-23 (for certain transactions determined by in-house asset managers), PTCE 95-60 (for certain transactions
involving insurance company general accounts), PTCE 91-38 (for certain transactions involving bank collective investment
funds), PTCE 90-1 (for certain transactions involving insurance company separate accounts) and PTCE 84-14 (for certain
transactions determined by independent qualified professional asset managers). In addition, ERISA Section 408(b)(17) and
Code Section 4975(d)(20) may provide an exemption for the purchase and sale of securities and the related lending transactions,
provided that neither the issuer of the securities nor any of its affiliates has or exercises any discretionary authority
or control or renders any investment advice with respect to the assets of the Plan involved in the transaction and provided
further that the Plan pays no more, and receives no less, than “adequate consideration” in connection with
the transaction (the so-called “service provider” exemption). There can be no assurance that any of these
class or statutory exemptions will be available with respect to transactions involving the securities.
Because we may
be considered a party in interest with respect to many Plans, the securities may not be purchased, held or disposed of
by any Plan, any entity whose underlying assets include “plan assets” by reason of any Plan’s investment
in the entity (a “Plan Asset Entity”) or any person investing “plan assets” of any Plan, unless
such purchase, holding or disposition is eligible for exemptive relief, including relief available under PTCEs 96-23,
95-60, 91-38, 90-1, 84-14 or the service provider exemption or such purchase, holding or disposition is otherwise not
prohibited. Any purchaser, including any fiduciary purchasing on behalf of a Plan, transferee or holder of the securities
will be deemed to have represented, in its corporate and its fiduciary capacity, by its purchase and holding of the securities
that either (a) it is not a Plan or a Plan Asset Entity and is not purchasing such securities on behalf of or with “plan
assets” of any Plan or with any assets of a governmental, non-U.S. or church plan that is subject to any federal,
state, local or non-U.S. law that is substantially similar to the provisions of Section 406 of ERISA or Section 4975 of
the Code (“Similar Law”) or (b) its purchase, holding and disposition are eligible for exemptive relief or
such purchase, holding and disposition are not prohibited by ERISA or Section 4975 of the Code or any Similar Law.
Due to the complexity
of these rules and the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is
particularly important that fiduciaries or other persons considering purchasing the securities on behalf of or with “plan
assets” of any Plan consult with their counsel regarding the availability of exemptive relief.
The securities
are contractual financial instruments. The financial exposure provided by the securities is not a substitute or proxy
for, and is not intended as a substitute or proxy for, individualized investment management or advice for the benefit
of any purchaser or holder of the securities. The securities have not been designed and will not be administered in a
manner intended to reflect the individualized needs and objectives of any purchaser or holder of the securities.
Each
purchaser or holder of any securities acknowledges and agrees that:
(i) the
purchaser or holder or its fiduciary has made and shall make all investment decisions for the purchaser or holder and
the purchaser or holder has not relied and shall not rely in any way upon us or our affiliates to act as a fiduciary or
adviser of the purchaser or holder with respect to (A) the design and terms of the securities, (B) the purchaser or holder’s
investment in the securities, or (C) the exercise of or failure to exercise any rights we have under or with respect to
the securities;
(ii) we
and our affiliates have acted and will act solely for our own account in connection with (A) all transactions relating
to the securities and (B) all hedging transactions in connection with our obligations under the securities;
(iii) any
and all assets and positions relating to hedging transactions by us or our affiliates are assets and positions of those
entities and are not assets and positions held for the benefit of the purchaser or holder;
(iv) our
interests are adverse to the interests of the purchaser or holder; and
(v) neither
we nor any of our affiliates is a fiduciary or adviser of the purchaser or holder in connection with any such assets,
positions or transactions, and any information that we or any of our affiliates may provide is not intended to be impartial
investment advice.
Each purchaser and holder
of the securities has exclusive responsibility for ensuring that its purchase, holding and disposition of the securities do not
violate the prohibited transaction rules of ERISA or the Code
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Morgan Stanley Finance LLC
Fixed Coupon Auto-Callable Securities due May 24, 2018, With 3-month Initial Non-Call Period
Based on the Performance of the Shares of Transocean Ltd.
Principal at Risk Securities
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or any Similar
Law. The sale of any securities to any Plan or plan subject to Similar Law is in no respect a representation by us or
any of our affiliates or representatives that such an investment meets all relevant legal requirements with respect to
investments by plans generally or any particular plan, or that such an investment is appropriate for plans generally or
any particular plan.
However, individual retirement
accounts, individual retirement annuities and Keogh plans, as well as employee benefit plans that permit participants to direct
the investment of their accounts, will not be permitted to purchase or hold the securities if the account, plan or annuity is
for the benefit of an employee of Morgan Stanley or Morgan Stanley Wealth Management or a family member and the employee receives
any compensation (such as, for example, an addition to bonus) based on the purchase of the securities by the account, plan or
annuity.
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Additional
considerations:
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Client accounts over which Morgan Stanley, Morgan Stanley Wealth Management or any of their
respective subsidiaries have investment discretion are not permitted to purchase the securities, either directly or indirectly.
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Supplemental
information regarding plan of distribution; conflicts of interest:
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Selected dealers
and their financial advisors will collectively receive from the agent, Morgan Stanley & Co. LLC, a fixed sales commission
of $ for each security they sell.
MS & Co.
is an affiliate of MSFL and a wholly owned subsidiary of Morgan Stanley, and it and other affiliates of ours expect to
make a profit by selling, structuring and, when applicable, hedging the securities. When MS & Co. prices this offering
of securities, it will determine the economic terms of the securities such that for each security the estimated value
on the pricing date will be no lower than the minimum level described in “Investment Summary” on page 2.
MS & Co. will conduct
this offering in compliance with the requirements of FINRA Rule 5121 of the Financial Industry Regulatory Authority, Inc., which
is commonly referred to as FINRA, regarding a FINRA member firm’s distribution of the securities of an affiliate and related
conflicts of interest. MS & Co. or any of our other affiliates may not make sales in this offering to any discretionary account.
See “Plan of Distribution (Conflicts of Interest)” and “Use of Proceeds and Hedging” in the accompanying
product supplement for auto-callable securities.
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Contact:
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Morgan Stanley Wealth Management clients may contact their local Morgan Stanley branch office
or our principal executive offices at 1585 Broadway, New York, New York 10036 (telephone number (866) 477-4776). All
other clients may contact their local brokerage representative. Third-party distributors may contact Morgan Stanley
Structured Investment Sales at (800) 233-1087.
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Where you can find more information:
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MSFL and Morgan Stanley
have filed a registration statement (including a prospectus, as supplemented by the product supplement for auto-callable
securities) with the Securities and Exchange Commission, or SEC, for the offering to which this communication relates.
You should read the prospectus in that registration statement, the product supplement for auto-callable securities and
any other documents relating to this offering that MSFL and Morgan Stanley have filed with the SEC for more complete information
about MSFL, Morgan Stanley and this offering. You may get these documents without cost by visiting EDGAR on the SEC web
site at www.sec.gov. Alternatively, MSFL, Morgan Stanley, any underwriter or any dealer participating in the offering
will arrange to send you the prospectus and the product supplement for auto-callable securities if you so request by calling
toll-free 1-(800)-584-6837.
You may access these documents
on the SEC web site at
.
www.sec.gov as follows:
Product Supplement for Auto-Callable Securities dated February 29, 2016
Prospectus dated February 16, 2016
Terms used but not defined
in this document are defined in the product supplement for auto-callable securities or in the prospectus.
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