Additional Information about Morgan Stanley, MSFL and the Securities
|
Morgan Stanley and MSFL have filed
a registration statement (including a prospectus, as supplemented by a product supplement) with the SEC for the offering to which
this communication relates. In connection with your investment, you should read the prospectus in that registration statement,
the product supplement and any other documents relating to this offering that Morgan Stanley and MSFL have filed with the SEC
for more complete information about Morgan Stanley, MSFL and this offering. You may get these documents for free by visiting EDGAR
on the SEC website at
.
www.sec.gov. Alternatively, Morgan Stanley, MSFL, any underwriter or any
dealer participating in this offering will arrange to send you the prospectus and the product supplement if you so request by
calling toll-free 1-(800)-584-6837.
You may access the accompanying
product supplement and prospectus on the SEC website at
.
www.sec.gov as follows:
References to “MSFL”
refer only to MSFL, references to “Morgan Stanley” refer only to Morgan Stanley and references to “we,”
“our” and “us” refer to MSFL and Morgan Stanley collectively. In this document, the “Securities”
refers to the Trigger Autocallable Notes that are offered hereby. Also, references to the accompanying “prospectus,”
and “product supplement” mean the prospectus filed by MSFL and Morgan Stanley dated February 16, 2016 and the product
supplement for auto-callable securities filed by MSFL and Morgan Stanley dated February 29, 2016, respectively.
You should rely only on the information
incorporated by reference or provided in this pricing supplement or the accompanying product supplement and prospectus. We have
not authorized anyone to provide you with different information. We are not making an offer of these Securities in any state where
the offer is not permitted. You should not assume that the information in this pricing supplement or the accompanying product
supplement and prospectus is accurate as of any date other than the date on the front of this document.
If the terms described in this
pricing supplement are inconsistent with those described in the accompanying product supplement or prospectus, the terms described
in this pricing supplement will prevail.
The Issue Price of each Security
is $10. This price includes costs associated with issuing, selling, structuring and hedging the Securities, which are borne by
you, and, consequently, the estimated value of the Securities on the Trade Date is less than $10. We estimate that the value of
each Security on the Trade Date is $9.54.
What goes into the estimated
value on the Trade Date?
In valuing the Securities on the
Trade Date, we take into account that the Securities comprise both a debt component and a performance-based component linked to
the Underlying Shares. The estimated value of the Securities is determined using our own pricing and valuation models, market
inputs and assumptions relating to the Underlying Shares, instruments based on the Underlying Shares, volatility and other factors
including current and expected interest rates, as well as an interest rate related to our secondary market credit spread, which
is the implied interest rate at which our conventional fixed rate debt trades in the secondary market.
What determines the economic
terms of the Securities?
In determining the economic terms
of the Securities, including the Call Return Rate and the Downside Threshold, we use an internal funding rate, which is likely
to be lower than our secondary market credit spreads and therefore advantageous to us. If the issuing, selling, structuring and
hedging costs borne by you were lower or if the internal funding rate were higher, one or more of the economic terms of the Securities
would be more favorable to you.
What is the relationship between
the estimated value on the Trade Date and the secondary market price of the Securities?
The price at which MS & Co.
purchases the Securities in the secondary market, absent changes in market conditions, including those related to the Underlying
Shares, may vary from, and be lower than, the estimated value on the Trade Date, because the secondary market price takes into
account our secondary market credit spread as well as the bid-offer spread that MS & Co. would charge in a secondary market
transaction of this type and other factors. However, because the costs associated with issuing, selling, structuring and hedging
the Securities are not fully deducted upon issuance, for a period of up to 9 months following the Settlement Date, to the extent
that MS & Co. may buy or sell the Securities in the secondary market, absent changes in market conditions, including those
related to the Underlying Shares, and to our secondary market credit spreads, it would do so based on values higher than the estimated
value. We expect that those higher values will also be reflected in your brokerage account statements.
MS & Co. currently intends,
but is not obligated, to make a market in the Securities, and, if it once chooses to make a market, may cease doing so at any
time.
The Securities
may be suitable for you if:
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The Securities
may not be suitable for you if:
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t
You fully understand the risks inherent in an investment in the Securities, including the risk of loss of your
entire initial investment in the Securities.
t
You can tolerate a loss of all or a substantial portion of your investment and are willing to make an investment that
may have the same downside market risk as the Underlying Shares.
t
You
understand the characteristics of the Underlying Shares.
t
You believe the Underlying Shares will close at or above the Initial Price on one of the Observation Dates or will
close at or above the Downside Threshold on the Final Observation Date.
t
You understand and accept that you will not participate in any appreciation in the price of the Underlying Shares
and that your potential return is limited to the applicable Call Return.
t
You can tolerate fluctuations in the price of the Securities prior to maturity that may be similar to or exceed the
downside fluctuations of the Underlying Shares.
t
You are willing to invest in the Securities based on the Downside Threshold specified on the cover hereof.
t
You are willing to invest in the Securities based on the Call Return Rate specified on the cover hereof.
t
You do not seek current income from this investment and are willing to forgo dividends paid on the constituent stocks
of the Underlying Shares.
t
You are willing to invest in securities that may be called early and you are otherwise willing to hold such securities
to maturity, as set forth on the cover page of this pricing supplement.
t
You accept that there may be little or no secondary market for the Securities and that any secondary market will depend
in large part on the price, if any, at which MS & Co. is willing to trade the Securities.
t
You are willing to assume our credit risk for all payments under the Securities, and understand that we default on our obligations
you may not receive any amounts due to you and could lose your entire investment.
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t
You do not fully understand the risks inherent in an investment in the Securities, including the risk of loss
of your entire initial investment in the Securities.
t
You cannot tolerate a loss of all or a substantial portion of your investment, and are unwilling to make an investment
that may have the same downside market risk as the Underlying Shares.
t
You require an investment designed to provide a full return of principal at maturity.
t
You do not understand the characteristics of the Underlying Shares.
t
You believe that the price of the Underlying Shares will decline during the term of the Securities and is likely to
close below the Downside Threshold on the Final Observation Date, exposing you to the full decline in the Underlying Shares.
t
You seek an investment that participates in the full appreciation in the price of the Underlying Shares or that has
unlimited return potential.
t
You cannot tolerate fluctuations in the price of the Securities prior to maturity that may be similar to or exceed
the downside fluctuations of the Underlying Shares.
t
You are unwilling to invest in the Securities based on the Downside Threshold specified on the cover hereof.
t
You are unwilling to invest in the Securities based on the Call Return Rate specified on the cover hereof.
t
You prefer the lower risk, and therefore accept the potentially lower returns, of fixed income investments with comparable
maturities and credit ratings.
t
You seek current income from this investment or prefer to receive the dividends paid on the constituent stocks of
the Underlying Shares, if any.
t
You are unable or unwilling to hold securities that may be called early, or you are otherwise unable or unwilling
to hold such securities to maturity, as set forth on the cover page of this pricing supplement, or you seek an investment
for which there will be an active secondary market.
t
You are not willing to assume our credit risk for all payments under the Securities.
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The investor suitability considerations
identified above are not exhaustive. Whether or not the Securities are a suitable investment for you will depend on your individual
circumstances, and you should reach an investment decision only after you and your investment, legal, tax, accounting and other
advisors have carefully considered the suitability of an investment in the Securities in light of your particular circumstances.
You should also review carefully the sections entitled “Key Risks” beginning on page 7 of this pricing supplement
and “Risk Factors” beginning on page 7 of the accompanying prospectus and page S-38 of the accompanying product supplement
for risks related to an investment in the Securities. For additional information about the Underlying Shares, see the information
set forth under “The VanEck Vectors Oil Services
TM
ETF” on page 16.
Final Terms
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Issuer
|
Morgan
Stanley Finance LLC
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Guarantor
|
Morgan
Stanley
|
Issue
Price
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$10.00
per Security. The Securities are offered at a minimum investment of 100 Securities.
|
Underlying
Shares
|
VanEck Vectors Oil Services
TM
ETF
|
Principal
Amount
|
$10.00
per Security
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Term
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Approximately
5 years, unless called earlier
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Automatic
Call Feature
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The
Securities will be called automatically if the Observation Date Closing Price on any Observation Date, including the Final Observation
Date, is
equal to or greater than
the Initial Price.
If the Securities are called,
MSFL will pay you on the related Call Settlement Date a Call Price per Security calculated as follows (see “Call Returns
and Observation Dates” on page 6):
$10
+ ($10 x Call Return)
After the Securities have
been called, no further payments will be made on the Securities.
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Call
Return and Call Return Rate
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The
Call Return varies depending on the Observation Date and increases the longer the Securities are outstanding. The Call Return
is based on an annual Call Return Rate of 10.00% per annum.
See “Call Returns
and Observation Dates” on page 6.
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Observation
Dates
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Quarterly,
beginning June 21, 2018. See “Call Returns and Observation Dates” on page 6.
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Final
Observation Date
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June
21, 2022
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Call
Settlement Dates
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See
“Call Returns and Observation Dates” on page 6. The Call Settlement Date with respect to the Final Observation
Date will be the Maturity Date.
|
Maturity
Date
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June
24, 2022
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Payment
at Maturity (per Security)
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If
the Securities are not automatically called prior to or on the Maturity Date, MSFL will pay you a cash payment on the Maturity
Date based on the Final Price, as follows:
If the Securities
are not called prior to or on the Maturity Date, and the Final Price is
less than
the Initial Price but
equal to or
greater than
the Downside Threshold, MSFL will pay you the $10 principal amount.
If the Securities
are not called prior to or on the Maturity Date, and the Final Price is
less than
the Downside Threshold, MSFL will pay
you an amount per Security calculated as follows:
$10 × (1 +
Share Return)
In this case, you
will lose a significant portion and could lose all of the principal amount in an amount proportionate to the full decline of the
Underlying Shares from the Trade Date to the Final Observation Date.
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Observation
Date Closing Price
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The
Closing Price of the Underlying Shares on any Observation Date
times
the Adjustment Factor on such day.
|
Share
Return
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Final
Price – Initial Price
Initial Price
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Initial
Price
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$24.17,
which is the Closing Price of the Underlying Shares on the Trade Date.
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Final
Price
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The
Closing Price of the Underlying Shares on the Final Observation Date
times
the Adjustment Factor on such day.
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Downside
Threshold
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$18.13,
which is approximately 75% of the Initial Price
|
Adjustment
Factor
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1.0,
subject to adjustment in the event of certain events affecting the Underlying Shares, as set forth in the accompanying product
supplement.
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Trustee
|
The
Bank of New York Mellon
|
Calculation
Agent
|
MS
& Co.
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Investment
Timeline
|
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Trade Date
|
The Initial
Price and Downside Threshold are determined and the Call Return Rate is set.
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Quarterly, beginning
June 21, 2018 (if not previously called)
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The Securities will be
called automatically if the Observation Date Closing Price on any Observation Date (including the Final Observation Date) is equal
to or greater than the Initial Price.
If the Securities are called,
MSFL will pay you a Call Price per Security calculated as follows:
$10
+ ($10 x Call Return)
After the Securities are
called, no further payments will be made on the Securities.
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Maturity Date (if not previously called)
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The
Final Price is determined as of the Final Observation Date.
If
the Securities are not automatically called prior to or on the Maturity Date and the Final Price is equal to or greater than the
Downside Threshold but below the Initial Price, MSFL will pay you the $10 principal amount.
If
the Securities are not automatically called prior to or on the Maturity Date and the Final Price is less than the Downside Threshold,
MSFL will pay you an amount calculated as follows:
$10
× (1+ Share Return)
This
will be less than the $10 principal amount by an amount proportionate to the full negative Share Return, and you could lose your
entire investment.
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Investing in the Securities
involves significant risks. You may lose YOUR ENTIRE principal amount. Any payment on the Securities is subject to OUR creditworthiness.
If WE were to default on OUR payment obligations, you may not receive any amounts owed to you under the Securities and you could
lose your entire investment.
Call Returns and Observat
i
on Dates
|
Observation
Date
|
Call
Settlement Date / Maturity Date**
|
Call
Return
(Based
on a Call Return Rate of 10.00% per annum). ***
|
Call
Price (per $10 of Securities)
|
6/21/2018
|
6/26/2018
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10.00%
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$11.00
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9/21/2018
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9/26/2018
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12.50%
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$11.25
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12/21/2018
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12/27/2018
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15.00%
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$11.50
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3/21/2019
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3/26/2019
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17.50%
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$11.75
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6/21/2019
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6/26/2019
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20.00%
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$12.00
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9/23/2019
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9/26/2019
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22.50%
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$12.25
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12/23/2019
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12/27/2019
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25.00%
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$12.50
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3/23/2020
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3/26/2020
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27.50%
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$12.750
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6/22/2020
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6/25/2020
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30.00%
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$13.00
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9/21/2020
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9/24/2020
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32.50%
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$13.250
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12/21/2020
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12/24/2020
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35.00%
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$13.50
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3/22/2021
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3/25/2021
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37.50%
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$13.750
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6/21/2021
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6/24/2021
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40.00%
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$14.00
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9/21/2021
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9/24/2021
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42.50%
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$14.250
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12/21/2021
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12/27/2021
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45.00%
|
$14.50
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3/21/2022
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3/24/2022
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47.50%
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$14.750
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6/21/2022
(the Final Observation Date)*
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6/24/2022
(the Maturity Date)*
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50.00%
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$15.00
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* Subject to postponement in the event of a market disruption
event or for non-trading days. See “Postponement of Determination Dates” in the accompanying product supplement.
** If, due to a market disruption event or otherwise, any Observation
Date (including the Final Observation Date) is postponed so that it falls less than two business days prior to the scheduled Call
Settlement Date, the Call Settlement Date or Maturity Date, as applicable, will be postponed to the second business day following
that Observation Date as postponed.
*** If the Securities are called following any Observation Date,
the Call Price will be a fixed amount based on the Call Return with respect to each Observation Date, as specified above, regardless
of the actual number of days during such period.
An investment in the Securities
involves significant risks. Some of the risks that apply to the Securities are summarized here, but we urge you to also read the
“Risk Factors” section of the accompanying prospectus and product supplement. You should also consult your investment,
legal, tax, accounting and other advisers in connection with your investment in the Securities.
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t
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The
Securities do not pay interest or guarantee the return of any principal.
The terms
of the Securities differ from those of ordinary debt securities in that the Securities
do not pay interest or guarantee the return of any of the principal amount at maturity.
In addition, while the Securities will generally offer the possibility of a higher return
if the Securities are automatically called than the potential return payable on our ordinary
debt securities with a similar maturity, this higher return potential reflects the risk
that you may not receive a positive return on the Securities and may lose a significant
portion or all of your investment if the Securities have not been called prior to maturity
and if the Final Price is less than the Downside Threshold. In this case, you will be
exposed to the full negative Share Return, and MSFL will pay you an amount at maturity
that is significantly less than the $10 principal amount, resulting in a loss proportionate
to the full decline of the Underlying Shares over the term of the Securities.
You
could lose your entire principal amount.
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t
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The
appreciation potential of the Securities is limited by the fixed Call Returns specified
for each Observation Date.
The appreciation potential of the Securities is limited
to the fixed Call Returns specified for each Observation Date if the Underlying Shares
closes at or above the Initial Price on any Observation Date, including the Final Observation
Date, and you will not participate in any appreciation of the Underlying Shares, which
could be significant. If the Securities are not previously called and the Final Price
is less than the Downside Threshold, you will be fully exposed to the decline in the
price of the Underlying Shares from the Trade Date to the Final Observation Date, and
you will lose a significant portion or all of your investment.
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t
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You
may incur a loss on your investment if you sell your Securities prior to maturity.
The Downside Threshold is observed only on the Final Observation Date and the contingent
downside market exposure applies at maturity. If you are able to sell your Securities
in the secondary market prior to maturity, you may have to sell them at a loss relative
to your initial investment even if the price of the Underlying Shares is above the Downside
Threshold at that time.
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t
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Early
redemption risk.
The term of your investment in the Securities may be limited to
as short as approximately one year by the automatic call feature of the Securities. If
the Securities are called prior to maturity, you will not receive any further payments
on the Securities and you may be forced to invest in a lower interest rate environment
and may not be able to reinvest at comparable terms or for similar returns. Generally,
the longer the Securities have been outstanding, the less likely it is that they will
be automatically called, because the price of the Underlying Shares will necessarily
have declined from the Initial Price if the Securities were not called following an Observation
Date, and there will be less time remaining until maturity in which the price of the
Underlying Shares can recover.
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t
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No
interest payments.
You will not receive any interest payments during the term of
the Securities.
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t
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The
Securities are subject to our credit risk, and any actual or anticipated changes to our
credit ratings or our credit spreads may adversely affect the market value of the Securities.
You are dependent on our ability to pay all amounts due on the Securities, if any,
and any payments upon an automatic call or at maturity, and therefore you are subject
to our credit risk. If we default on our obligations under the Securities, your investment
would be at risk and you could lose some or all of your investment. As a result, the
market value of the Securities prior to maturity will be affected by changes in the market’s
view of our creditworthiness. Any actual or anticipated decline in our credit ratings
or increase in our credit spreads charged by the market for taking our credit risk is
likely to adversely affect the market value of the Securities.
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t
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As
a finance subsidiary, MSFL has no independent operations and will have no independent
assets
. As a finance subsidiary, MSFL has no independent operations beyond the issuance
and administration of its securities and will have no independent assets available for
distributions to holders of MSFL securities if they make claims in respect of such securities
in a bankruptcy, resolution or similar proceeding. Accordingly, any recoveries by such
holders will be limited to those available under the related guarantee by Morgan Stanley
and that guarantee will rank
pari passu
with all other unsecured, unsubordinated
obligations of Morgan Stanley. Holders will have recourse only to a single claim against
Morgan Stanley and its assets under the guarantee. Holders of securities issued by MSFL
should accordingly assume that in any such proceedings they would not have any priority
over and should be treated
pari passu
with the claims of other unsecured, unsubordinated
creditors of Morgan Stanley, including holders of Morgan Stanley-issued securities.
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t
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The
market price of the Securities may be influenced by many unpredictable factors.
Several
factors, many of which are beyond our control, will influence the value of the Securities
in the secondary market and the price at which MS & Co. may be willing to purchase
or sell the Securities in the secondary market. Although we expect that generally the
price of the Underlying Shares on any day will affect the value of the Securities more
than any other single factor, other factors that may influence the value of the Securities
include:
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|
o
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the volatility (frequency and
magnitude of changes in value) of the Underlying Shares,
|
|
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,
|
|
o
|
geopolitical conditions and economic,
financial, political, regulatory or judicial events that affect the Underlying Shares
or equities markets generally and which may affect the Observation Date Closing Prices
or Final Price,
|
|
o
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the occurrence of certain events
affecting the Underlying Shares 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.
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Some
or all of these factors will influence the terms of the Securities at the time of issuance and the price that you will receive
if you are able to sell your Securities prior to maturity, as the Securities are comprised of both a debt component and a performance-based
component linked to the Underlying Shares, and these are the types of factors that also generally affect the values of debt securities
and derivatives linked to the Underlying Shares. Generally, the longer the time remaining to maturity, the more the market price
of the Securities will be affected by the other factors described above. The price of the Underlying Shares may be, and has recently
been, volatile, and we can give you no assurance that the volatility will lessen. See “The VanEck Vectors Oil Services
TM
ETF” below. You may receive less, and possibly significantly less, than the principal amount per Security if you try
to sell your Securities prior to maturity.
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t
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A
higher Call Return Rate and/or a lower Downside Threshold may reflect greater expected
volatility of the Underlying Shares, and greater expected volatility generally indicates
an increased risk of declines in the price of the Underlying Shares and, potentially,
a significant loss at maturity.
The economic terms for the Securities, including
the Call Return Rate and the Downside Threshold, are based, in part, on the expected
volatility of the Underlying Shares at the time the terms of the Securities are set.
“Volatility” refers to the frequency and magnitude of changes in the price
of the Underlying Shares. Higher expected volatility with respect to the Underlying Shares
as of the Trade Date generally indicates a greater expectation as of that date that the
Final Price of the Underlying Shares could ultimately be less than the Downside Threshold
on the Final Observation Date, which would result in a loss of a significant portion
or all of the Principal Amount. At the time the terms of the Securities are set, higher
expected volatility will generally be reflected in a higher Call Return Rate and/or a
lower Downside Threshold, as compared to otherwise comparable securities. Therefore,
a relatively higher Call Return Rate, which would increase the upside return if the Securities
are automatically called, may indicate an increased risk that the price of the Underlying
Shares will decrease substantially, which would result in a significant loss at maturity.
In addition, and as described above in "The Securities do not pay interest or guarantee
the return of any principal," in general, the higher potential return on the Securities
than the return payable on our ordinary debt securities with a comparable maturity indicates
the risk that you may not receive a positive return on the Securities and may lose a
significant portion or all of your investment. Further, a relatively lower Downside Threshold
may not indicate that the Securities have a greater likelihood of a return of principal
at maturity. You should be willing to accept the downside market risk of the Underlying
Shares and the potential to lose a significant portion or all of your Principal Amount
at maturity.
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t
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The
equity securities included in the Underlying Shares are concentrated in the oil services
industry.
Each of the equity securities held by the Underlying Shares has been issued
by a company whose business is associated with the oil services industry, and so an investment
in the Securities will be concentrated in this industry. Oil services companies
operate in a highly competitive and cyclical industry, with intense price competition.
Recently, oil prices have declined significantly and experienced significant volatility,
which may adversely affect companies operating in the oil services industry. The
prices of the equity securities held by the Underlying Shares and, in turn, the price
of the Underlying Shares will be affected by a number of factors that may either offset
or magnify each other, including: worldwide energy prices, including all sources of energy,
and exploration and production spending, changes in exchange rates and the price of oil
and gas, government regulation, the imposition of import controls, world events, negative
perception, depletion of resources and general economic conditions, development of alternative
energy sources, energy conservation efforts, technological developments, labor relations,
natural disasters and adverse weather conditions, as well as market, economic, social
and political risks of the countries in which oil services companies are located or do
business. As a result, the value of the Securities may be subject to greater volatility
and may be more adversely affected by a single positive or negative economic, political
or regulatory occurrence affecting this industry than a different investment linked to
securities of a more broadly diversified group of issuers.
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t
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The
Securities will not be listed on any securities exchange and secondary trading may be
limited.
The Securities will not be listed on any securities exchange. Therefore,
there may be little or no secondary market for the Securities. MS & Co. currently
intends, but is not obligated, to make a market in the Securities. Even if there is a
secondary market, it may not provide enough liquidity to allow you to trade or sell the
Securities easily. Because we do not expect that other broker-dealers will participate
significantly in the secondary market for the Securities, the price at which you may
be able to trade your Securities is likely to depend on the price, if any, at which MS
& Co. is willing to transact. If, at any time, MS & Co. were to cease making
a market in the Securities, it is likely that there would be no secondary market for
the Securities. Accordingly, you should be willing to hold your Securities to maturity.
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t
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The
rate we are willing to pay for securities of this type, maturity and issuance size is
likely to be lower than the rate implied by our secondary market credit spreads and advantageous
to us. Both the lower rate and the inclusion of costs associated with issuing, selling,
structuring and hedging the Securities in the Issue Price reduce the economic terms of
the Securities, cause the estimated value of the Securities to be less than the Issue
Price and will adversely affect secondary market prices.
Assuming no change in market
conditions or any other relevant factors, the prices, if any, at which dealers, including
MS & Co., may be willing to purchase the Securities in secondary market transactions
will likely be significantly lower than the Issue Price, because secondary market prices
will exclude the issuing, selling, structuring and hedging-related costs that are included
in the Issue Price and borne by you and because the secondary market prices will reflect
our secondary market credit spreads and the bid-offer spread that any dealer would charge
in a secondary market transaction of this type as well as other factors.
|
The
inclusion of the costs of issuing, selling, structuring and hedging the Securities in the Issue Price and the lower rate we are
willing to pay as issuer make the economic terms of the Securities less favorable to you than they otherwise would be.
However,
because the costs associated with issuing, selling, structuring and hedging the Securities are not fully deducted upon issuance,
for a period of up to 9 months following the Settlement Date, to the extent that MS & Co. may buy or sell the Securities in
the secondary market, absent changes in market conditions, including those related to the Underlying, and to our secondary market
credit spreads, it would do so based on values higher than the estimated value, and we expect that those higher values will also
be reflected in your brokerage account statements.
|
t
|
Adjustments
to the VanEck Vectors Oil Services
TM
ETF could adversely affect the value
of the Securities.
The investment adviser to the VanEck Vectors Oil Services
TM
ETF seeks investment results that correspond generally to the price and yield performance,
before fees and expenses, of the MVIS
TM
U.S. Listed Oil Services 25 Index
(the “Share Underlying Index”). Pursuant to its investment strategy or
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otherwise,
the investment adviser may add, delete or substitute the components of the Underlying
Shares. Any of these actions could adversely affect the price of the Underlying Shares
and, consequently, the value of the Securities. In addition, the publisher of the Share
Underlying Index is responsible for calculating and maintaining the Share Underlying
Index. The index publisher may add, delete or substitute the stocks constituting the
Share Underlying Index or make other methodological changes required by certain corporate
events relating to the component stocks, such as stock dividends, stock splits, spin-offs,
rights offerings and extraordinary dividends that could change the value of the share
underlying indices. The index publisher may also discontinue or suspend calculation or
publication of the Share Underlying Index at any time. If this discontinuance or suspension
occurs following the termination of the Underlying Shares, the Calculation Agent will
have the sole discretion to substitute a successor index that is comparable to the discontinued
index, and is permitted to consider indices that are calculated and published by the
Calculation Agent or any of its affiliates. Any of these actions could adversely affect
the values of the Underlying Shares and, consequently, the value of the Securities.
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The
performance and market price of the Underlying Shares, particularly during periods of
market volatility, may not correlate with the performance of the Share Underlying Index,
the performance of the component securities of the Share Underlying Index or the net
asset value per share of the Underlying Shares.
The Underlying Shares do not
fully replicate the Share Underlying Index and may hold securities that are different
than those included in the Share Underlying Index. In addition, the performance
of the Underlying Shares will reflect additional transaction costs and fees that are
not included in the calculation of the Share Underlying Index. All of these factors
may lead to a lack of correlation between the performance of the Underlying Shares and
the Share Underlying Index. In addition, corporate actions (such as mergers and
spin-offs) with respect to the equity securities underlying the Underlying Shares may
impact the variance between the performances of the Underlying Shares and the Share Underlying
Index. Finally, because the Underlying Shares are traded on an exchange and are subject
to market supply and investor demand, the market price of one share of the Underlying
Shares may differ from the net asset value per share of the Underlying Shares.
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In
particular, during periods of market volatility, or unusual trading activity, trading in the securities underlying the Underlying
Shares may be disrupted or limited, or such securities may be unavailable in the secondary market. Under these circumstances,
the liquidity of the Underlying Shares may be adversely affected, market participants may be unable to calculate accurately the
net asset value per share of the Underlying Shares, and their ability to create and redeem shares of the Underlying Shares may
be disrupted. Under these circumstances, the market price of the Underlying Shares may vary substantially from the net asset value
per share of the Underlying Shares or the price of the Share Underlying Index.
For all of the foregoing
reasons, the performance of the Underlying Shares may not correlate with the performance of the Share Underlying Index, the performance
of the component securities of the Share Underlying Index or the net asset value per share of the Underlying Shares. Any
of these events could materially and adversely affect the price of the Underlying Shares and, therefore, the value of the Securities.
Additionally, if market volatility or these events were to occur on the Final Observation Date, the Calculation Agent would
maintain discretion to determine whether such market volatility or events have caused a Market Disruption Event to occur, and
such determination would affect the Payment at Maturity of the Securities. If the Calculation Agent determines that no Market
Disruption Event has taken place, the Payment at Maturity would be based solely on the published Closing Price per share of the
Underlying Shares on the Final Observation Date, even if the Underlying Shares are underperforming the Share Underlying Index
or the component securities of the Share Underlying Index and/or trading below the net asset value per share of the Underlying
Shares.
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The
antidilution adjustments the Calculation Agent is required to make do not cover every
event that could affect the Underlying Shares.
MS & Co., as Calculation Agent,
will adjust the Adjustment Factor for certain events affecting the Underlying Shares,
such as stock splits and reverse stock splits. However, the Calculation Agent will not
make an adjustment for every event that can affect the Underlying Shares. If an event
occurs that does not require the Calculation Agent to adjust the Adjustment Factor, the
market price of the Securities may be materially and adversely affected.
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The
estimated value of the Securities is determined by reference to our pricing and valuation
models, which may differ from those of other dealers and is not a maximum or minimum
secondary market price.
These pricing and valuation models are proprietary and rely
in part on subjective views of certain market inputs and certain assumptions about future
events, which may prove to be incorrect. As a result, because there is no market-standard
way to value these types of securities, our models may yield a higher estimated value
of the Securities than those generated by others, including other dealers in the market,
if they attempted to value the Securities. In addition, the estimated value on the Trade
Date does not represent a minimum or maximum price at which dealers, including MS &
Co., would be willing to purchase your Securities in the secondary market (if any exists)
at any time. The value of your Securities at any time after the date of this pricing
supplement will vary based on many factors that cannot be predicted with accuracy, including
our creditworthiness and changes in market conditions. See also “The market price
of the Securities may be influenced by many unpredictable factors” above.
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Hedging
and trading activity by our affiliates could potentially adversely affect the value of
the Securities.
One or more of our affiliates and/or third-party dealers have carried
out, and will continue to carry out, hedging activities related to the Securities, including
trading in the Underlying Shares or the constituent stocks of the Share Underlying Index,
in futures or options contracts on the Underlying Shares, the Share Underlying Index
or the constituent stocks of the Share Underlying Index, as well as in other instruments
related to the Underlying Shares or the Share Underlying Index. As a result, these entities
may be unwinding or adjusting hedge positions during the term of the Securities, and
the hedging strategy may involve greater and more frequent dynamic adjustments to the
hedge as the Final Observation Date approaches. Some of our affiliates also trade the
Underlying Shares or the constituent stocks of the Share Underlying Index, in futures
or options contracts on the Underlying Shares, the Share Underlying Index or the constituent
stocks of the Share Underlying Index, as well as in other instruments related to the
Underlying Shares or the Share Underlying Index, on a regular basis as part of their
general broker-dealer and other businesses. Any of these hedging or trading activities
on or prior to the Trade Date could have increased the Initial Price, and, as a result,
could have increased the price at or above which the Underlying Shares must close on
any of the Observation Dates for the Securities to be called, or the Downside Threshold,
which, if the Securities are not called, is the price at or above which the Underlying
Shares must close on the Final Observation Date so that you do not suffer a significant
loss on your initial investment in the Securities. Additionally, such hedging or trading
activities during the term of the Securities could potentially affect the price of the
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Underlying Shares on the Observation Dates, and, accordingly, whether the Securities
are automatically called, and, if the Securities are not called, the payout to you at
maturity, if any.
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The
Calculation Agent, which is an affiliate of the Issuer, will make determinations with
respect to the Securities.
As Calculation Agent, MS & Co. has determined the
Initial Price and the Downside Threshold, and will determine the Observation Date Closing
Prices, the Final Price, whether the Securities will be called following any Observation
Date, whether a market disruption event has occurred and the payment that you will receive
upon a call 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 non-occurrence of
market disruption events, any adjustment to the Adjustment Factor and the selection of
a Successor Index or calculation of the Final Price in the event of a discontinuance
of the Share Underlying Index or a Market Disruption Event. These potentially subjective
determinations may affect the payout to you upon a call or at maturity, if any. For further
information regarding these types of determinations, see “Description of Auto-Callable
Securities—Postponement of Determination Dates,” “—Discontinuance
of Any Underlying Shares; Alteration of Method of Calculation” and “—Calculation
Agent and Calculations” in the accompanying product supplement. In addition, MS
& Co. has determined the estimated value of the Securities on the Trade Date.
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Uncertain
tax treatment.
Please note that the discussions in this pricing supplement concerning
the U.S. federal income tax consequences of an investment in the Securities supersede
the discussions contained in the accompanying product supplement for auto-callable securities.
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Subject
to the discussion under “What Are the Tax Consequences of the Securities” in this pricing supplement, although there
is uncertainty regarding the U.S. federal income tax consequences of an investment in the Securities due to the lack of governing
authority, in the opinion of our counsel, Davis Polk & Wardwell LLP (“our counsel”), under current law, and based
on current market conditions, each Security should be treated as a single financial contract that is an “open transaction”
for U.S. federal income tax purposes.
If
the Internal Revenue Service (the “IRS”) were successful in asserting an alternative treatment for the Securities,
the timing and character of income on the Securities might differ significantly from the tax treatment described herein. For example,
under one possible treatment, the IRS could seek to recharacterize the Securities as debt instruments. In that event, U.S. Holders
would be required to accrue into income original issue discount on the Securities every year at a “comparable yield”
determined at the time of issuance and recognize all income and gain in respect of the Securities as ordinary income. The risk
that financial instruments providing for buffers, triggers or similar downside protection features, such as the Securities, would
be recharacterized as debt is greater than the risk of recharacterization for comparable financial instruments that do not have
such features. We do not plan to request a ruling from the IRS regarding the tax treatment of the Securities, and the IRS or a
court may not agree with the tax treatment described in this pricing supplement.
In
2007, the U.S. Treasury Department and the IRS released a notice requesting comments on the U.S. federal income tax treatment
of “prepaid forward contracts” and similar instruments. The notice focuses in particular on whether to require holders
of these instruments to accrue income over the term of their investment. It also asks for comments on a number of related topics,
including the character of income or loss with respect to these instruments; whether short-term instruments should be subject
to any such accrual regime; the relevance of factors such as the exchange-traded status of the instruments and the nature of the
underlying property to which the instruments are linked; the degree, if any, to which income (including any mandated accruals)
realized by non-U.S. investors should be subject to withholding tax; and whether these instruments are or should be subject to
the “constructive ownership” rule, which very generally can operate to recharacterize certain long-term capital gain
as ordinary income and impose an interest charge. While the notice requests comments on appropriate transition rules and effective
dates, any Treasury regulations or other guidance promulgated after consideration of these issues could materially and adversely
affect the tax consequences of an investment in the Securities, possibly with retroactive effect.
Both
U.S. and Non-U.S. Holders should read carefully the discussion under “What Are the Tax Consequences of the Securities”
in this pricing supplement and consult their tax advisers regarding all aspects of the U.S. federal tax consequences of an investment
in the Securities as well as any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction.
Hypothetical Payments on the Securities
at Maturity
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The examples below illustrate the
payment upon a call or at maturity for a $10 Security on a hypothetical offering of the Securities, with the following assumptions
(the actual terms for the Securities are listed on the cover hereof and were determined on the Trade Date; amounts may have been
rounded for ease of reference):
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Term:
Approximately 5 years
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Hypothetical
Initial Price: $25.00
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Call
Return Rate: 10.00% per annum.
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Observation
Date
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Call
Return
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Observation
Date
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Call
Return
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Observation
Date
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Call
Return
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First
Observation Date
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10.00%
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Seventh
Observation Date
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25.00%
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Thirteenth
Observation Date
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40.00%
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Second
Observation Date
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12.50%
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Eighth
Observation Date
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27.50%
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Fourteenth
Observation Date
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42.50%
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Third
Observation Date
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15.00%
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Ninth
Observation Date
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30.00%
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Fifteenth
Observation Date
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45.00%
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Fourth
Observation Date
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17.50%
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Tenth
Observation Date
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32.50%
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Sixteenth
Observation Date
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47.50%
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Fifth
Observation Date
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20.00%
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Eleventh
Observation Date
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35.00%
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Final
Observation Date
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50.00%
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Sixth
Observation Date
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22.50%
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Twelfth
Observation Date
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37.50%
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Observation
Dates: Quarterly, beginning on June 21, 2018
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Hypothetical
Downside Threshold: $18.75, which is 75% of the Hypothetical Initial Price
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Early Call — Securities
are Called following the Second Observation Date
Date
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Closing
Price
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Payment
(per Security)
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First
Observation Date
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$20
(below Initial Price; Securities NOT called))
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--
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Second
Observation Date
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$30
(at or above Initial Price; Securities are called)
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$10
+ ($10 x Call Return) =
$10
+ ($10 x 12.50%) = $11.25
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The Observation Date Closing Price
is below the Initial Price on the first Observation Date but above the Initial Price on the second Observation Date and therefore
the Securities are called on the second Call Settlement Date. MSFL will pay you on the Call Settlement Date the principal amount
of $10.00
plus
a Call Return of 12.50% per Security, reflecting the Call Return Rate of 10.00% on a per-annum basis. No
further amount will be owed to you under the Securities.
Payment at Maturity
Example 1 — The Final
Price is ABOVE the Initial Price; Securities are Called on the Maturity Date
Date
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Closing
Price
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Payment
(per Security)
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First
Observation Date
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$20
(below Initial Price; Securities Not Called)
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--
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Second
Observation Date
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$22
(below Initial Price; Securities Not Called)
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--
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Third
through Sixteenth Observation Dates
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Various
(all below the Initial Price; Securities Not Called)
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--
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Final
Observation Date
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$29
(at or above Initial Price)
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$10
+ ($10 x Call Return) =
$10
+ ($10 x 50.00%) = $15.00 (Payment at Maturity)
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The Observation Date Closing Price
is below the Initial Price on each of the Observation Dates prior to the Final Observation Date and therefore the Securities are
not called prior to maturity. On the Final Observation Date, the Final Price is greater than the Initial Price and therefore MSFL
will call the Securities on the Maturity Date and pay you at maturity the principal amount
plus
the Call Return of 50.00%
per Security, reflecting the Call Return Rate of 10.00% on a per-annum basis.
Example 2 — The Final
Price is BELOW the Initial Price but AT OR ABOVE the Downside Threshold
Date
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Closing
Price
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Payment
(per Security)
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First
Observation Date
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$20
(below Initial Price; Securities Not Called)
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--
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Second
Observation Date
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$22
(below Initial Price; Securities Not Called)
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--
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Third
through Sixteenth Observation Dates
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Various
(all below the Initial Price; Securities Not Called)
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--
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Final
Observation Date
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$23
(below Initial Price, at or above Downside Threshold)
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$10
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Since the Securities are not called
prior to maturity and the Final Price of the Underlying Shares is below the Initial Price but at or above the Downside Threshold,
at maturity MSFL will pay you the $10 principal amount per Security.
Example 3 —The Final Price
is BELOW the Downside Threshold
Date
|
Closing
Price
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Payment
(per Security)
|
First
Observation Date
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$20
(below Initial Price; Securities Not Called)
|
--
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Second
Observation Date
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$22
(below Initial Price; Securities Not Called)
|
--
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Third
through Sixteenth Observation Dates
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Various
(all below the Initial Price; Securities Not Called)
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--
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Final
Observation Date
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$7.50
(below Downside Threshold)
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$10
+ ($10 x Share Return) =
$10 + ($10 x -70%) = $3.00 (Payment at Maturity)
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Since the Securities are not called
prior to maturity and the Final Price of the Underlying Shares is below the Downside Threshold, at maturity MSFL will pay you
$3.00 per Security, reflecting a loss of principal proportionate to the full decline in the Final Price from the Initial Price.
The Securities differ from ordinary
debt securities in that, among other features, MSFL is not necessarily obligated to repay the full amount of your initial investment.
If the Securities are not called, you may lose a significant portion or all of your initial investment. Specifically, if the Securities
are not called and the Final Price is less than the Downside Threshold, you will lose 1% (or a fraction thereof) of your principal
amount for each 1% (or a fraction thereof) that the Share Return is negative. Any payment on the Securities, including any payment
upon an automatic call or the Payment at Maturity, is dependent on our ability to satisfy our obligations when they come due.
If we are unable to meet our obligations, you may not receive any amounts due to you under the Securities.
What Are the Tax Consequences of the Securities?
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Prospective investors
should note that the discussion under the section called “United States Federal Taxation” in the accompanying product
supplement for auto-callable securities does not apply to the Securities issued under this pricing supplement and is superseded
by the following discussion.
The following summary is a general discussion
of the principal U.S. federal income tax consequences and certain estate tax consequences of the ownership and disposition of the
Securities. This discussion applies only to investors in the Securities who:
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purchase the Securities in the original offering;
and
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hold the Securities as capital assets within the meaning
of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”).
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This discussion does not describe all of the
tax consequences that may be relevant to a holder in light of the holder’s particular circumstances or to holders subject
to special rules, such as:
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certain financial institutions;
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certain dealers and traders in securities or commodities;
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investors holding the Securities as part of a “straddle,”
wash sale, conversion transaction, integrated transaction or constructive sale transaction;
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U.S. Holders (as defined below) whose functional currency
is not the U.S. dollar;
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partnerships or other entities classified as partnerships
for U.S. federal income tax purposes;
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regulated investment companies;
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real estate investment trusts; or
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tax-exempt entities, including “individual retirement
accounts” or “Roth IRAs” as defined in Section 408 or 408A of the Code, respectively.
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If an entity that is classified as a partnership
for U.S. federal income tax purposes holds the Securities, the U.S. federal income tax treatment of a partner will generally depend
on the status of the partner and the activities of the partnership. If you are a partnership holding the Securities or a partner
in such a partnership, you should consult your tax adviser as to the particular U.S. federal tax consequences of holding and disposing
of the Securities to you.
As the law applicable to the U.S. federal income
taxation of instruments such as the Securities is technical and complex, the discussion below necessarily represents only a general
summary. Moreover, the effect of any applicable state, local or non-U.S. tax laws is not discussed, nor are any alternative minimum
tax consequences or consequences resulting from the Medicare tax on investment income.
This discussion is based on the Code, administrative
pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date of this pricing supplement,
changes to any of which subsequent to the date hereof may affect the tax consequences described herein. Persons considering the
purchase of the Securities should consult their tax advisers with regard to the application of the U.S. federal income tax laws
to their particular situations as well as any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction.
General
Although there is uncertainty regarding the
U.S. federal income tax consequences of an investment in the Securities due to the lack of governing authority, in the opinion
of our counsel, under current law, and based on current market conditions, each Security should be treated as a single financial
contract that is an “open transaction” for U.S. federal income tax purposes.
Due to the absence of statutory, judicial
or administrative authorities that directly address the treatment of the Securities or instruments that are similar to the Securities
for U.S. federal income tax purposes, no assurance can be given that the Internal Revenue Service (the “IRS”) or a
court will agree with the tax treatment described herein. Accordingly, you should consult your tax adviser regarding all aspects
of the U.S. federal tax consequences of an
investment in the Securities (including possible alternative treatments of the Securities).
Unless otherwise stated, the following discussion is based on the treatment of the Securities as described in the previous paragraph.
Tax Consequences to U.S. Holders
This section applies to you only if you are
a U.S. Holder. As used herein, the term “U.S. Holder” means a beneficial owner of a Security that is, for U.S. federal
income tax purposes:
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a citizen or individual resident of the United States;
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a corporation, or other entity taxable as a corporation,
created or organized in or under the laws of the United States, any state thereof or the District of Columbia; or
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an estate or trust the income of which is subject
to U.S. federal income taxation regardless of its source.
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Tax Treatment of the Securities
Assuming the treatment of the Securities as
set forth above is respected, the following U.S. federal income tax consequences should result.
Tax Treatment Prior to Settlement.
A U.S. Holder should not be required to recognize taxable income over the term of the Securities prior to settlement, other than
pursuant to a sale or exchange as described below.
Tax Basis
. A U.S. Holder’s tax
basis in the Securities should equal the amount paid by the U.S. Holder to acquire the Securities.
Sale, Exchange or Settlement of the Securities
.
Upon a sale, exchange or settlement of the Securities, a U.S. Holder should recognize gain or loss equal to the difference between
the amount realized on the sale, exchange or settlement and the U.S. Holder’s tax basis in the Securities sold, exchanged
or settled. Any gain or loss recognized upon the sale, exchange or settlement of the Securities should be long-term capital gain
or loss if the U.S. Holder has held the Securities for more than one year at such time, and short-term capital gain or loss otherwise.
Possible Alternative Tax Treatments of
an Investment in the Securities
Due to the absence of authorities that directly
address the proper tax treatment of the Securities, no assurance can be given that the IRS will accept, or that a court will uphold,
the treatment described above. In particular, the IRS could seek to analyze the U.S. federal income tax consequences of owning
the Securities under Treasury regulations governing contingent payment debt instruments (the “Contingent Debt Regulations”).
If the IRS were successful in asserting that the Contingent Debt Regulations applied to the Securities, the timing and character
of income thereon would be significantly affected. Among other things, a U.S. Holder would be required to accrue into income original
issue discount on the Securities every year at a “comparable yield” determined at the time of their issuance, adjusted
upward or downward to reflect the difference, if any, between the actual and the projected amount of the contingent payment on
the Securities. Furthermore, any gain realized by a U.S. Holder at maturity or upon a sale, exchange or other disposition of the
Securities would generally be treated as ordinary income, and any loss realized would be treated as ordinary loss to the extent
of the U.S. Holder’s prior accruals of original issue discount and as capital loss thereafter. The risk that financial instruments
providing for buffers, triggers or similar downside protection features, such as the Securities, would be recharacterized as debt
is greater than the risk of recharacterization for comparable financial instruments that do not have such features.
Other alternative federal income tax treatments
of the Securities are also possible, which, if applied, could significantly affect the timing and character of the income or loss
with respect to the Securities. In 2007, the U.S. Treasury Department and the IRS released a notice requesting comments on the
U.S. federal income tax treatment of “prepaid forward contracts” and similar instruments. The notice focuses in particular
on whether to require holders of these instruments to accrue income over the term of their investment. It also asks for comments
on a number of related topics, including the character of income or loss with respect to these instruments; whether short-term
instruments should be subject to any such accrual regime; the relevance of factors such as the exchange-traded status of the instruments
and the nature of the underlying property to which the instruments are linked; and whether these instruments are or should be subject
to the “constructive ownership” rule, which very generally can operate to recharacterize certain long-term capital
gain as ordinary income and impose an interest charge. While the notice requests comments on appropriate transition rules and effective
dates, any Treasury regulations or other guidance promulgated after consideration of these issues could materially and adversely
affect the tax consequences of an investment in the Securities, possibly with retroactive effect. U.S. Holders should consult their
tax advisers regarding the U.S. federal income tax consequences of an investment in the Securities, including possible alternative
treatments and the issues presented by this notice.
Backup Withholding and Information Reporting
Backup withholding may apply in respect of
the payment on the Securities at maturity and the payment of proceeds from a sale, exchange or other disposition of the Securities,
unless a U.S. Holder provides proof of an applicable exemption or a correct taxpayer identification number and otherwise complies
with applicable requirements of the backup withholding rules. The amounts withheld under the backup withholding rules are not an
additional tax and may be refunded, or credited against the U.S. Holder’s U.S. federal income tax liability, provided that
the required information is timely furnished to the IRS. In addition, information returns may be filed with the IRS in connection
with the payment on the Securities and the payment of proceeds from a sale, exchange or other disposition of the Securities, unless
the U.S. Holder provides proof of an applicable exemption from the information reporting rules.
Tax Consequences to Non-U.S. Holders
This section applies to you only if you are
a Non-U.S. Holder. As used herein, the term “Non-U.S. Holder” means a beneficial owner of a Security that is, for U.S.
federal income tax purposes:
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an individual who is classified as a nonresident alien;
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a foreign corporation; or
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a foreign estate or trust.
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The term “Non-U.S. Holder” does
not include any of the following holders:
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a holder who is an individual present in the United
States for 183 days or more in the taxable year of disposition and who is not otherwise a resident of the United States for U.S.
federal income tax purposes;
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certain former citizens or residents of the United
States; or
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a holder for whom income or gain in respect of the
Securities is effectively connected with the conduct of a trade or business in the United States.
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Such holders should consult their tax advisers
regarding the U.S. federal income tax consequences of an investment in the Securities.
Tax Treatment upon Sale, Exchange or
Settlement of the Securities
In
general.
Assuming the treatment of the Securities as set forth above is respected, and subject to the discussions below concerning
backup withholding
and the possible application of Section 871(m) of the Code
, a Non-U.S.
Holder of the Securities generally will not be subject to U.S. federal income or withholding tax in respect of amounts paid to
the Non-U.S. Holder.
Subject to the discussions regarding the possible
application of Section 871(m) and FATCA, if all or any portion of a Security were recharacterized as a debt instrument, any payment
made to a Non-U.S. Holder with respect to the Securities would not be subject to U.S. federal withholding tax, provided that:
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the Non-U.S. Holder does not own, directly or by attribution,
ten percent or more of the total combined voting power of all classes of Morgan Stanley stock entitled to vote;
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the Non-U.S. Holder is not a controlled foreign corporation
related, directly or indirectly, to Morgan Stanley through stock ownership;
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the Non-U.S. Holder is not a bank receiving interest
under Section 881(c)(3)(A) of the Code, and
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the certification requirement described below has
been fulfilled with respect to the beneficial owner.
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Certification Requirement.
The certification
requirement referred to in the preceding paragraph will be fulfilled if the beneficial owner of a Security (or a financial institution
holding a Security on behalf of the beneficial owner) furnishes to the applicable withholding agent an IRS Form W-8BEN (or other
appropriate form) on which the beneficial owner certifies under penalties of perjury that it is not a U.S. person.
In 2007, the U.S. Treasury Department and the
IRS released a notice requesting comments on the U.S. federal income tax treatment of “prepaid forward contracts” and
similar instruments. Among the issues addressed in the notice is the degree, if any, to which any income with respect to instruments
such as the Securities should be subject to U.S. withholding tax. It is possible that any Treasury regulations or other guidance
promulgated after consideration of this issue could materially and adversely affect the withholding tax consequences of ownership
and disposition of the Securities, possibly on a retroactive basis. Non-U.S. Holders should note that we currently do not intend
to withhold on any payment made with respect to the Securities to Non-U.S. Holders (subject to compliance by such holders with
the certification requirement described above and to the discussions below regarding Section 871(m) and FATCA). However, in the
event of a change of law or any formal or informal guidance by the IRS, the U.S. Treasury Department or Congress, we may decide
to withhold on payments made with respect to the Securities to Non-U.S. Holders, and we will not be required to pay any additional
amounts with respect to amounts withheld. Accordingly, Non-U.S. Holders should consult their tax advisers regarding all aspects
of the U.S. federal income tax consequences of an investment in the Securities, including the possible implications of the notice
referred to above.
Section 871(m) Withholding Tax on Dividend
Equivalents
Section 871(m) of the Code and Treasury regulations
promulgated thereunder (“Section 871(m)”) generally impose a 30% (or a lower applicable treaty rate) withholding tax
on dividend equivalents paid or deemed paid to Non-U.S. Holders with respect to certain financial instruments linked to U.S. equities
or indices that include U.S. equities (each, an “Underlying Security”). Subject to certain exceptions, Section 871(m)
generally applies to securities that substantially replicate the economic performance of one or more Underlying Securities, as
determined based on tests set forth in the applicable Treasury regulations (a “Specified Security”). However, the regulations
exempt securities issued before January 1, 2018 that do not have a delta of one with respect to any Underlying Security. Based
on our determination that the Securities do not have a delta of one with respect to any Underlying Security, our counsel is of
the opinion that the Securities should not be Specified Securities and, therefore, should not be subject to Section 871(m).
Our determination is not binding on the IRS,
and the IRS may disagree with this determination. Section 871(m) is complex and its application may depend on your particular circumstances,
including whether you enter into other transactions with respect to an Underlying Security. If Section 871(m) withholding is required,
we will not be required to pay any additional amounts with respect to the amounts so withheld. You should consult your tax adviser
regarding the potential application of Section 871(m) to the Securities.
U.S. Federal Estate Tax
Individual Non-U.S. Holders and entities the
property of which is potentially includible in such an individual’s gross estate for U.S. federal estate tax purposes (for
example, a trust funded by such an individual and with respect to which the individual has retained certain interests or powers),
should note that, absent an applicable treaty exemption, the Securities may be treated as U.S. situs property subject to U.S. federal
estate tax. Prospective investors that are non-U.S. individuals, or are entities of the type described above, should consult their
tax advisers regarding the U.S. federal estate tax consequences of an investment in the Securities.
Backup Withholding and Information Reporting
Information returns may be filed with the IRS
in connection with the payment on the Securities at maturity as well as in connection with the payment of proceeds from a sale,
exchange or other disposition of the Securities. A Non-U.S. Holder may be subject to backup withholding in respect of amounts paid
to the Non-U.S. Holder, unless such Non-U.S. Holder complies with certification procedures to establish that it is not a U.S. person
for U.S. federal income tax purposes or otherwise establishes an exemption. Compliance with the certification procedures described
above under “―Tax Treatment upon Sale, Exchange or Settlement of the Securities – Certification Requirement”
will satisfy the certification requirements necessary to avoid backup withholding as well. The amount of any backup withholding
from a payment to a Non-U.S. Holder will be allowed as a credit against the Non-U.S. Holder’s U.S. federal income tax liability
and may entitle the Non-U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.
FATCA Legislation
Legislation commonly referred to as “FATCA”
generally imposes a withholding tax of 30% on payments to certain non-U.S. entities (including financial intermediaries) with respect
to certain financial instruments, unless various U.S. information reporting and due diligence requirements have been satisfied.
An intergovernmental agreement between the United States and the non-U.S. entity’s jurisdiction may modify these requirements.
This legislation generally applies to certain financial instruments that are treated as paying U.S.-source interest or other U.S.-source
“fixed or determinable annual or periodical” income. If the Securities were recharacterized as debt instruments, this
legislation would apply to any payment of amounts treated as interest and, for
dispositions after December 31, 2018, to payments
of gross proceeds of the disposition (including upon retirement) of the Securities. If withholding applies to the Securities, we
will not be required to pay any additional amounts with respect to amounts withheld. Both U.S. and Non-U.S. Holders should consult
their tax advisers regarding the potential application of FATCA to the Securities.
The discussion in the preceding paragraphs
under “What Are the Tax Consequences of the Securities,” insofar as it purports to describe provisions of U.S. federal
income tax laws or legal conclusions with respect thereto, constitutes the full opinion of Davis Polk & Wardwell LLP regarding
the material U.S. federal income tax consequences of an investment in the Securities.
VanEck Vectors Oil Services
TM
ETF
|
The
VanEck Vectors Oil Services
TM
ETF is an exchange-traded fund that seeks to replicate, as closely as possible, the price
and yield performance, before fees and expenses, of the MVIS
TM
U.S. Listed Oil Services 25 Index. VanEck Vectors
®
ETF Trust (the “Trust”) is a registered investment company that consists of numerous separate investment portfolios,
including the VanEck Vectors Oil Services
TM
ETF. Information provided to or filed with the Securities and Exchange
Commission (the “SEC”) under the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended,
can be located by reference to SEC file numbers 333-123257 and 811-10325, respectively, through the SEC’s website at http://www.sec.gov.
In addition, information may be obtained from other publicly available sources. Neither the issuer nor the agent makes any representation
that such publicly available information regarding the VanEck Vectors Oil Services
TM
ETF is accurate or complete. The
Underlying Shares are listed on The NYSE Arca Exchange under the ticker symbol “OIH.”
We
and/or our affiliates may presently or from time to time engage in business with the Trust. In the course of such business, we
and/or our affiliates may acquire non-public information with respect to the Trust, and neither we nor any of our affiliates undertakes
to disclose any such information to you. In addition, one or more of our affiliates may publish research reports with respect
to the Underlying Shares. The statements in the preceding two sentences are not intended to affect the rights of investors in
the Securities under the securities laws. As a purchaser of the Securities, you should undertake an independent investigation
of the Trust as in your judgment is appropriate to make an informed decision with respect to an investment linked to the Underlying
Shares.
Market Vectors
SM
is a service mark of Van Eck Associates Corporation (“Van Eck”). The Securities are not sponsored, endorsed, sold,
or promoted by VanEck. VanEck makes no representations or warranties to the owners of the Securities or any member of the public
regarding the advisability of investing in the Securities. VanEck has no obligation or liability in connection with the operation,
marketing, trading or sale of the Securities.
The following table sets forth the published high and low Closing
Prices, as well as the end-of-quarter Closing Prices, of the VanEck Vectors Oil Services
TM
ETF for each quarter in the
period from January 1, 2012 through June 21, 2017. The Closing Price of the VanEck Vectors Oil Services
TM
ETF on June
21, 2017 was $24.17. We obtained the information in the table below from Bloomberg Financial Markets, without independent verification.
The historical Closing Prices of the VanEck Vectors Oil Services
TM
ETF should not be taken as an indication of future
performance, and no assurance can be given as to the Closing Price of the VanEck Vectors Oil Services
TM
ETF on any Observation
Date, including the Final Observation Date.
Quarter
Begin
|
Quarter
End
|
Quarterly
High ($)
|
Quarterly
Low ($)
|
Quarterly
Close ($)
|
1/1/2012
|
3/31/2012
|
44.69
|
38.89
|
40.62
|
4/1/2012
|
6/30/2012
|
41.23
|
33.06
|
35.64
|
7/1/2012
|
9/30/2012
|
43.36
|
35.34
|
40.20
|
10/1/2012
|
12/31/2012
|
41.48
|
36.61
|
38.68
|
1/1/2013
|
3/31/2013
|
44.86
|
39.73
|
42.94
|
4/1/2013
|
6/30/2013
|
45.66
|
39.68
|
42.78
|
7/1/2013
|
9/30/2013
|
48.33
|
43.31
|
47.08
|
10/1/2013
|
12/31/2013
|
50.82
|
46.82
|
48.07
|
1/1/2014
|
3/31/2014
|
50.33
|
44.71
|
50.33
|
4/1/2014
|
6/30/2014
|
57.76
|
49.04
|
57.76
|
7/1/2014
|
9/30/2014
|
57.68
|
49.61
|
49.61
|
10/1/2014
|
12/31/2014
|
48.20
|
33.97
|
35.92
|
1/1/2015
|
3/31/2015
|
36.84
|
31.73
|
33.71
|
4/1/2015
|
6/30/2015
|
39.04
|
33.97
|
34.90
|
7/1/2015
|
9/30/2015
|
33.87
|
26.61
|
27.48
|
10/1/2015
|
12/31/2015
|
32.54
|
25.72
|
26.45
|
1/1/2016
|
3/31/2016
|
27.91
|
21.35
|
26.61
|
4/1/2016
|
6/30/2016
|
30.87
|
25.45
|
29.25
|
7/1/2016
|
9/30/2016
|
30.05
|
26.32
|
29.28
|
10/1/2016
|
12/31/2016
|
35.09
|
27.49
|
33.35
|
1/1/2017
|
3/31/2017
|
35.01
|
29.46
|
30.81
|
4/1/2017
|
6/21/2017*
|
31.23
|
24.17
|
24.17
|
* Available information
for the indicated period includes data for less than the entire calendar quarter, and, accordingly, the “Quarterly High,”
“Quarterly Low” and “Quarterly Close” data indicated are for this shortened period only.
The graph below illustrates the performance of the VanEck Vectors
Oil Services
TM
ETF from January 1, 2012 through June 21, 2017, based on information from Bloomberg. Past performance
of the VanEck Vectors Oil Services
TM
ETF is not indicative of the future performance of the VanEck Vectors Oil Services
TM
ETF.
*
The dashed
line indicates the Downside Threshold of $18.13, which is approximately 75% of the Initial Price
.
Past performance is not indicative of future results.
Additional Terms of the Securities
|
The accompanying product
supplement for autocallable securities refers to the Underlying Shares as the “exchange-traded fund,” the Initial
Price as the “initial share price,” the Closing Price as the “closing price,” the Trade Date as the “pricing
date,” the Observation Dates as “determination dates,” the Final Observation Date as the “final determination
date,” the Downside Threshold as the “trigger level” and the Call Settlement Dates as the “Early Redemption
Dates.”
Use
of Proceeds and Hedging
|
The proceeds from the sale
of the Securities will be used by us for general corporate purposes. We will receive, in aggregate, $10 per Security issued, because,
when we enter into hedging transactions in order to meet our obligations under the Securities, our hedging counterparty will reimburse
the cost of the Agent’s commissions. The costs of the Securities borne by you and described on page 2 above comprise the
Agent’s commissions and the cost of issuing, structuring and hedging the Securities. See also “Use of Proceeds”
in the accompanying prospectus.
On or prior to the Trade Date,
we 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 Shares or the constituent
stocks of the Share Underlying Index and in futures or options contracts on the Underlying Shares, the Share Underlying Index
or the constituent stocks of the Share Underlying Index. Such purchase activity could have increased the Initial Price, and, as
a result, could have increased the price at or above which the Underlying Shares must close on any Observation Date for the Securities
to be called, or the Downside Threshold, which, if the Securities are not called, is the price at or above which the Underlying
Shares must close on the Final Observation Date so that you do not suffer a significant loss on your initial investment in the
Securities. In addition, through our affiliates, we are likely to modify our hedge position throughout the term of the Securities,
including on the Final Observation Date, by purchasing and selling the Underlying Shares or the constituent stocks of the Share
Underlying Index, futures or options contracts on the Underlying Shares, the Share Underlying Index or the constituent stocks
of the Share underlying Index, as well as other instruments related to the Underlying Shares or the Share Underlying Index that
we may wish to use in connection with such hedging activities, including by purchasing or selling any such securities or instruments
on the Final Observation Date. As a result, these entities may be unwinding or adjusting hedge positions during the term of the
Securities, and the hedging strategy may involve greater and more frequent dynamic adjustments to the hedge as the Final Observation
Date approaches. We cannot give any assurance that our hedging activities will not affect the value of the Underlying Shares,
and, therefore, affect the value of the Securities, whether the Securities are called, or the payment you will receive at maturity,
if any, if the Securities are not called.
Benefit
Plan Investor Considerations
|
Each fiduciary of a pension,
profit-sharing or other employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)
(a “Plan”), should consider the fiduciary standards of ERISA in the context of the Plan’s particular circumstances
before authorizing an investment in the Securities. Accordingly, among other factors, the fiduciary should consider whether the
investment would satisfy the prudence and diversification requirements of ERISA and would be consistent with the documents and
instruments governing the Plan.
In addition, we and certain of
our affiliates, including MS & Co., may each be considered a “party in interest” within the meaning of ERISA,
or a “disqualified person” within the meaning of the Internal Revenue Code of 1986, as amended (the “Code”),
with respect to many Plans, as well as many individual retirement accounts and Keogh plans (also “Plans”). Prohibited
transactions within the meaning of ERISA or the Code would likely arise, for example, if the Securities are acquired by or with
the assets of a Plan with respect to which MS & Co. or any of its affiliates is a service provider or other party in interest,
unless the Securities are acquired pursuant to an exemption from the “prohibited transaction” rules. A violation of
these “prohibited transaction” rules could result in an excise tax or other liabilities under ERISA and/or Section
4975 of the Code for such persons, unless exemptive relief is available under an applicable statutory or administrative exemption.
The U.S. Department of Labor has
issued five prohibited transaction class exemptions (“PTCEs”) that may provide exemptive relief for direct or indirect
prohibited transactions resulting from the purchase or holding of the Securities. Those class exemptions are PTCE 96-23 (for certain
transactions determined by in-house asset managers), PTCE 95-60 (for certain transactions involving insurance company general
accounts), PTCE 91-38 (for certain transactions involving bank collective investment funds), PTCE 90-1 (for certain transactions
involving insurance company separate accounts) and PTCE 84-14 (for certain transactions determined by independent qualified professional
asset managers). In addition, ERISA Section 408(b)(17) and Section 4975(d)(20) of the Code may provide an exemption for the purchase
and sale of securities and the related lending transactions, provided that neither the issuer of the securities nor any of its
affiliates has or exercises any discretionary authority or control or renders any investment advice with respect to the assets
of the Plan involved in the transaction, and provided further that the Plan pays no more, and receives no less, than “adequate
consideration” in connection with the transaction (the so-called “service provider” exemption). There can be
no assurance that any of these class or statutory exemptions will be available with respect to transactions involving the Securities.
Because we may be considered a
party in interest with respect to many Plans, the Securities may not be purchased, held or disposed of by any Plan, any entity
whose underlying assets include “plan assets” by reason of any Plan’s investment in the entity (a “Plan
Asset Entity”) or any person investing “plan assets” of any Plan, unless such purchase, holding or disposition
is eligible for exemptive relief, including relief available under PTCEs 96-23, 95-60, 91-38, 90-1, 84-14 or the service provider
exemption or such purchase, holding or disposition is otherwise not prohibited. Any purchaser, including any fiduciary purchasing
on behalf of a Plan, transferee or holder of the Securities will be deemed to have represented, in its corporate and its fiduciary
capacity, by its purchase and holding of the Securities that either (a) it is not a Plan or a Plan Asset Entity and is not purchasing
such Securities on behalf of or with “plan assets” of any Plan or with any assets of a governmental, non-U.S. or church
plan that is subject to any federal, state, local or non-U.S. law that is substantially similar to the provisions of Section 406
of ERISA or Section 4975 of the Code (“Similar Law”) or (b) its purchase, holding and disposition are eligible for
exemptive relief or such purchase, holding and disposition are not prohibited by ERISA or Section 4975 of the Code or any Similar
Law.
Due to the complexity of these
rules and the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important
that fiduciaries or other persons considering purchasing the Securities on behalf of or with “plan assets” of any
Plan consult with their counsel regarding the availability of exemptive relief.
The Securities are contractual
financial instruments. The financial exposure provided by the Securities is not a substitute or proxy for, and is not intended
as a substitute or proxy for, individualized investment management or advice for the benefit of any purchaser or holder of the
Securities. The Securities have not been designed and will not be administered in a manner intended to reflect the individualized
needs and objectives of any purchaser or holder of the Securities.
Each purchaser or holder of any
Securities acknowledges and agrees that:
|
(i)
|
the purchaser or holder or
its fiduciary has made and shall make all investment decisions for the purchaser or holder
and the purchaser or holder has not relied and shall not rely in any way upon us or our
affiliates to act as a fiduciary or adviser of the purchaser or holder with respect to
(A) the design and terms of the Securities, (B) the purchaser or holder’s investment
in the Securities, or (C) the exercise of or failure to exercise any rights we have under
or with respect to the Securities;
|
|
(ii)
|
we and our affiliates have
acted and will act solely for our own account in connection with (A) all transactions
relating to the Securities and (B) all hedging transactions in connection with our obligations
under the Securities;
|
|
(iii)
|
any and all assets and positions
relating to hedging transactions by us or our affiliates are assets and positions of
those entities and are not assets and positions held for the benefit of the purchaser
or holder;
|
|
(iv)
|
our interests are adverse
to the interests of the purchaser or holder; and
|
|
(v)
|
neither we nor any of our affiliates
is a fiduciary or adviser of the purchaser or holder in connection with any such assets,
positions or transactions, and any information that we or any of our affiliates may provide
is not intended to be impartial investment advice.
|
Each purchaser and holder of the
Securities has exclusive responsibility for ensuring that its purchase, holding and disposition of the Securities do not violate
the prohibited transaction rules of ERISA or the Code or any Similar Law. The sale of any Securities to any Plan or plan subject
to Similar Law is in no respect a representation by us or any of our affiliates or representatives that such an investment meets
all relevant legal requirements with respect to investments by plans generally or any particular plan, or that such an investment
is appropriate for plans generally or any particular plan.
However, individual retirement
accounts, individual retirement annuities and Keogh plans, as well as employee benefit plans that permit participants to direct
the investment of their accounts, will not be permitted to purchase or hold the Securities if the account, plan or annuity is
for the benefit of an employee of Morgan Stanley, Morgan Stanley Wealth Management or their respective affiliates or a family
member and the employee receives any compensation (such as, for example, an addition to bonus) based on the purchase of the Securities
by the account, plan or annuity.