Free Writing Prospectus No. 1,656
Registration Statement Nos. 333-200365, 333-200365-12
Dated June 27, 2017
Filed Pursuant to Rule 433
These Trigger Autocallable Notes (the “Securities”)
are unsecured and unsubordinated debt obligations of Morgan Stanley Finance LLC (“MSFL”) and are fully and unconditionally
guaranteed by Morgan Stanley. The Securities provide returns based on the performance of the VanEck Vectors Oil Services
TM
ETF (the “Underlying Shares”). If the closing price of the Underlying Shares on any quarterly Observation Date
beginning July 2, 2018 (including the Final Observation Date) is equal to or greater than the Initial Price, MSFL will automatically
call the Securities and pay the principal amount of the Securities
plus
a Call Return that will vary depending on the Observation
Date and will reflect a fixed Call Return Rate on a per-annum basis. If the Securities are not automatically called and the Final
Price is less than the Initial Price but greater than or equal to the Downside Threshold, MSFL will pay you the principal amount
at maturity. However, if the Final Price is less than the Downside Threshold, MSFL will pay you significantly less than the full
principal amount, if anything, at maturity, resulting in a loss on your principal amount that is proportionate to the full decline
in the price of the Underlying Shares from the Trade Date to the Final Observation Date. Investors will not participate in any
appreciation of the Underlying Shares. These long-dated Securities may be appropriate for investors who are willing to risk their
entire principal at maturity and are willing to forego current income in exchange for the possibility of receiving the Call Return
prior to or at maturity, if the closing price of the Underlying Shares is at or above the Initial Price as of one of the quarterly
Observation Dates, and, if the Securities have not been called, in exchange for a contingent repayment of principal, but only
if the Final Price has not declined below the Downside Threshold.
Investing in the Securities involves significant risks. You
may lose a significant portion or all of your principal amount. Generally, the higher the Call Return Rate for the Securities,
the greater the risk of loss on those Securities. 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 the Securities prior to maturity, you may receive
substantially less than the principal amount even if the price of the Underlying Shares is greater than the Downside Threshold
at the time of sale.
* If the Securities are called, the Call Price will be a fixed
amount based on the Call Return with respect to each Observation Date. See “Call Returns and Observation Dates” on
page 6.
The agent for this offering, Morgan Stanley & Co. LLC (“MS
& Co.”), is our affiliate and a wholly owned subsidiary of Morgan Stanley. See “Supplemental Plan of Distribution;
Conflicts of Interest” beginning on page 21 of this free writing prospectus.
Morgan Stanley and MSFL have filed a registration statement (including
a prospectus, as supplemented by a product supplement) with the SEC for the offering to which this communication relates. Before
you invest, you should read the prospectus in that registration statement, the product supplement and any other documents relating
to this offering that Morgan Stanley and MSFL have filed with the SEC for more complete information about Morgan Stanley, MSFL
and this offering. You may get these documents for free by visiting EDGAR on the SEC website at
.
www.sec.gov.
Alternatively, Morgan Stanley, MSFL, any underwriter or any dealer participating in this offering will arrange to send you the
prospectus and the product supplement if you so request by calling toll-free 1-(800)-584-6837.
You may access the accompanying product supplement and prospectus
on the SEC website at
.
www.sec.gov as follows:
You should rely only on the information incorporated by reference
or provided in this free writing prospectus or the accompanying 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 free writing prospectus 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 free writing prospectus are inconsistent
with those described in the accompanying product supplement or prospectus, the terms described in this free writing prospectus
will prevail.
The Issue Price of each Security is $10. This price includes
costs associated with issuing, selling, structuring and hedging the Securities, which are borne by you, and, consequently, the
estimated value of the Securities on the Trade Date will be less than $10. We estimate that the value of each Security on the Trade
Date will be approximately $9.534, or within $0.20 of that estimate. Our estimate of the value of the Securities as determined
on the Trade Date will be set forth in the final pricing supplement.
In valuing the Securities on the Trade Date, we take into account
that the Securities comprise both a debt component and a performance-based component linked to the Underlying 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.
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.
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.
Initial Price
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$24.37, which is the Closing Price of the Underlying Shares on the Strike 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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$18.28, which is equal to approximately 75% of the Initial Price
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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
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The Bank of New York Mellon
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Calculation Agent
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MS & Co.
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Investment Timeline
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Strike
Date
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The Initial Price and Downside Threshold were determined.
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Quarterly,
beginning July 2, 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
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Observation Date
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Call Settlement Date / Maturity Date**
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Call Return
(Based on a Call Return Rate
of 10.14% per annum).***
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Call Price (per $10 of Securities)
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7/02/2018
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7/05/2018
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10.140%
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$11.014
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9/26/2018
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9/28/2018
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12.675%
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$11.2675
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12/27/2018
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12/31/2018
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15.210%
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$11.521
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3/26/2019
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3/28/2019
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17.745%
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$11.7745
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6/26/2019
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6/28/2019
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20.280%
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$12.028
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9/26/2019
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9/30/2019
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22.815%
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$12.2815
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12/27/2019
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12/31/2019
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25.350%
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$12.535
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3/26/2020
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3/30/2020
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27.885%
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$12.7885
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6/26/2020
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6/30/2020
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30.420%
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$13.042
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9/28/2020
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9/30/2020
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32.955%
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$13.2955
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12/29/2020
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12/31/2020
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35.490%
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$13.549
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3/26/2021
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3/30/2021
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38.025%
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$13.8025
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6/28/2021
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6/30/2021
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40.560%
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$14.056
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9/27/2021
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9/29/2021
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43.095%
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$14.3095
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12/29/2021
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12/31/2021
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45.630%
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$14.563
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3/28/2022
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3/30/2022
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48.165%
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$14.8165
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6/27/2022 (the Final Observation Date)*
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7/1/2022 (the Maturity Date)*
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50.700%
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$15.07
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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 before you invest in the Securities.
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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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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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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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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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No interest payments.
You will not receive any interest payments
during the term of the Securities.
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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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As a finance subsidiary, MSFL has no independent operations and
will have no independent assets
. As a finance subsidiary, MSFL has no independent operations beyond the issuance and administration
of its securities and will have no independent assets available for distributions to holders of MSFL securities if they make claims
in respect of such securities in a bankruptcy, resolution or similar proceeding. Accordingly, any recoveries by such holders will
be limited to those available under the related guarantee by Morgan Stanley and that guarantee will rank
pari passu
with
all other unsecured, unsubordinated obligations of Morgan Stanley. Holders will have recourse only to a single claim against Morgan
Stanley and its assets under the guarantee. Holders of securities issued by MSFL should accordingly assume that in any such proceedings
they would not have any priority over and should be treated
pari passu
with the claims of other unsecured, unsubordinated
creditors of Morgan Stanley, including holders of Morgan Stanley-issued securities.
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The market price of the Securities 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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the volatility (frequency and magnitude of changes in value) of the Underlying Shares,
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interest and yield rates in the market,
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time remaining until the Securities mature,
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o
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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,
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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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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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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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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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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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The rate we are willing to pay for securities of this type, maturity
and issuance size is likely to be lower than the rate implied by our secondary market credit spreads and advantageous to us. Both
the lower rate and the inclusion of costs associated with issuing, selling, structuring and hedging the Securities in the Issue
Price reduce the economic terms of the Securities, cause the estimated value of the Securities to be less than the Issue Price
and will adversely affect secondary market prices.
Assuming no change in market conditions or any other relevant factors, the
prices, if any, at which dealers, including MS & Co., may be willing to purchase the Securities in secondary market transactions
will likely be significantly lower than the Issue Price, because secondary market prices will exclude the issuing, selling, structuring
and hedging-related costs that are included in the Issue Price and borne by you and because the secondary market prices will reflect
our secondary market credit spreads and the bid-offer spread that any dealer would charge in a secondary market transaction of
this type as well as other factors.
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The inclusion of the costs of issuing,
selling, structuring and hedging the Securities in the Issue Price and the lower rate we are willing to pay as issuer make the
economic terms of the Securities less favorable to you than they otherwise would be.
However, because the costs associated
with issuing, selling, structuring and hedging the Securities are not fully deducted upon issuance, for a period of up to 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.
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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
free writing prospectus will vary based on many factors that cannot be predicted with accuracy, including our creditworthiness
and changes in market conditions. See also “The market price of the Securities 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 Strike 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 free writing prospectus 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 free writing prospectus, 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 free writing prospectus.
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 free writing prospectus
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 or will be 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: 10.14% per annum.
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Observation Date
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Call Return
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Observation Date
|
Call Return
|
Observation Date
|
Call Return
|
First Observation Date
|
10.140%
|
Seventh Observation Date
|
25.350%
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Thirteenth Observation Date
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40.560%
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Second Observation Date
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12.675%
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Eighth Observation Date
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27.885%
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Fourteenth Observation Date
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43.095%
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Third Observation Date
|
15.210%
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Ninth Observation Date
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30.420%
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Fifteenth Observation Date
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45.630%
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Fourth Observation Date
|
17.745%
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Tenth Observation Date
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32.955%
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Sixteenth Observation Date
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48.165%
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Fifth Observation Date
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20.280%
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Eleventh Observation Date
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35.490%
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Final Observation Date
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50.700%
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Sixth Observation Date
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22.815%
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Twelfth Observation Date
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38.025%
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Observation Dates: Quarterly, beginning on July 2, 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)
|
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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$30 (at or above Initial Price; Securities are called)
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$10 + ($10 x Call Return) =
$10 + ($10 x 12.675%) = $11.2675
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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 12.675% per Security, reflecting the Call Return Rate of 10.14% 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 50.70%) = $15.07 (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 50.70% per Security, reflecting the Call Return Rate of 10.14% 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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Second Observation Date
|
$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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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
|
Payment (per Security)
|
First Observation Date
|
$20 (below Initial Price; Securities Not Called)
|
--
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Second Observation Date
|
$22 (below Initial Price; Securities Not Called)
|
--
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Third through Sixteenth Observation Dates
|
Various (all below the Initial Price; Securities Not Called)
|
--
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Final Observation Date
|
$7.50 (below Downside Threshold)
|
$10 + ($10 x Share Return) =
$10 + ($10 x -70%) = $3.00 (Payment at Maturity)
|
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?
|
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 free writing prospectus 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.
|
If an entity that is classified as a partnership
for U.S. federal income tax purposes holds the Securities, the U.S. federal income tax treatment of a partner will generally depend
on the status of the partner and the activities of the partnership. If you are a partnership holding the Securities or a partner
in such a partnership, you should consult your tax adviser as to the particular U.S. federal tax consequences of holding and disposing
of the Securities to you.
As the law applicable to the U.S. federal income
taxation of instruments such as the Securities is technical and complex, the discussion below necessarily represents only a general
summary. Moreover, the effect of any applicable state, local or non-U.S. tax laws is not discussed, nor are any alternative minimum
tax consequences or consequences resulting from the Medicare tax on investment income.
This discussion is based on the Code, administrative
pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date of this free writing
prospectus, changes to any of which subsequent to the date hereof may affect the tax consequences described herein. Persons considering
the purchase of the Securities should consult their tax advisers with regard to the application of the U.S. federal income tax
laws to their particular situations as well as any tax consequences arising under the laws of any state, local or non-U.S. taxing
jurisdiction.
General
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.
|
The term “Non-U.S. Holder” does
not include any of the following holders:
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a holder who is an individual present in the United States for 183
days or more in the taxable year of disposition and who is not otherwise a resident of the United States for U.S. federal income
tax purposes;
|
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certain former citizens or residents of the United States; or
|
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a holder for whom income or gain in respect of the Securities is effectively
connected with the conduct of a trade or business in the United States.
|
Such holders should consult their tax advisers
regarding the U.S. federal income tax consequences of an investment in the Securities.
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.
|
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 the terms of the Securities and current market conditions, we expect that the Securities will not have a delta of one with respect
to any Underlying Security. Assuming 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).
The determination of delta will be made on the pricing date.
We expect that the Securities will not have a delta of one for the purposes of Section 871(m) on the pricing date. However, we
will provide an updated determination of whether the Securities are subject to Section 871(m) in the final pricing supplement.
A Non-U.S. Holder should acquire a Security only if it is willing to accept the risk that the Security is treated as a Specified
Security subject to Section 871(m) withholding.
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 prospective 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 26, 2017. The Closing Price of the VanEck Vectors Oil Services
TM
ETF on June
26, 2017 was $24.37. We obtained the information in the table below from Bloomberg Financial Markets, without independent verification.
The historical Closing Prices of the VanEck Vectors Oil Services
TM
ETF should not be taken as an indication of future
performance, and no assurance can be given as to the Closing Price of the VanEck Vectors Oil Services
TM
ETF on any Observation
Date, including the Final Observation Date.
Quarter Begin
|
Quarter End
|
Quarterly High ($)
|
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
|
6/26/2017*
|
31.23
|
24.13
|
24.37
|
|
*
|
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 26, 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 $18.28,
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 Strike 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.
Supplemental Plan of Distribution; Conflicts of Interest
|
MS & Co. will act as the agent for this offering. We will
agree to sell to MS & Co., and MS & Co. will agree to purchase, all of the Securities at the issue price less the underwriting
discount indicated on the cover of this document. UBS Financial Services Inc., acting as dealer, will receive from MS & Co.
a fixed sales commission of $0.25 for each Security it sells.
MS & Co. is our affiliate and a wholly owned subsidiary of
Morgan Stanley, and it and other affiliates of ours expect to make a profit by selling, structuring and, when applicable, hedging
the Securities. When MS & Co. prices this offering of Securities, it will determine the economic terms of the Securities such
that for each Security the estimated value on the Trade Date will be no lower than the minimum level described in “Additional
Information about Morgan Stanley, MSFL and the Securities” on page 2.
MS & Co. will conduct this offering in compliance with the
requirements of Rule 5121 of the Financial Industry Regulatory Authority, Inc. (“FINRA”), regarding a FINRA member
firm’s distribution of the securities of an affiliate and related conflicts of interest. MS & Co. or any of our other
affiliates may not make sales in this offering to any discretionary account.
In order to facilitate the offering of the Securities, the agent
may engage in transactions that stabilize, maintain or otherwise affect the price of the Securities. Specifically, the agent may
sell more Securities than it is obligated to purchase in connection with the offering, creating a naked short position in the Securities,
for its own account. The agent must close out any naked short position by purchasing the Securities in the open market. A naked
short position is more likely to be created if the agent is concerned that there may be downward pressure on the price of the Securities
in the open market after pricing that could adversely affect investors who purchase in the offering. As an additional means of
facilitating the offering, the agent may bid for, and purchase, the Securities or the constituent stocks of the Underlying Shares
in the open market to stabilize the price of the Securities. Any of these activities may raise or maintain the market price of
the Securities above independent market levels or prevent or retard a decline in the market price of the Securities. The agent
is not required to engage in these activities, and may end any of these activities at any time. An affiliate of the agent has entered
into a hedging transaction with us in connection with this offering of Securities. See “—Use of Proceeds and Hedging”
above.
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