This pricing supplement, which is not complete and
may be changed, relates to an effective Registration Statement under the Securities Act of 1933. This pricing supplement and the
accompanying product supplement, prospectus supplement and prospectus are not an offer to sell these notes in any country or jurisdiction
where such an offer would not be permitted.
|
Preliminary Pricing Supplement - Subject to Completion
|
Filed Pursuant to Rule 424(b)(2)
|
|
(To Prospectus dated November 4, 2016, Series A
|
Registration Statement No. 333-213265
|
|
Prospectus Supplement dated November 4, 2016 and
|
|
Product Supplement EQUITY-1 dated January 24, 2017)
Dated July 6, 2017
|
|
|
|
BofA Finance LLC
Market-Linked Step Up Notes Linked to the S&P 500
®
Index, due July 29, 2022
Fully and Unconditionally Guaranteed by Bank of America
Corporation
|
|
·
|
The CUSIP number for the notes is
09709TAT8.
|
|
|
·
|
The notes are unsecured senior notes issued by BofA Finance LLC (“BofA
Finance”), a direct, wholly-owned subsidiary of Bank of America Corporation (“BAC” or the “Guarantor”),
which are fully and unconditionally guaranteed by the Guarantor. Any payment due on the notes, including any repayment of principal,
will be subject to the credit risk of BofA Finance, as issuer of the notes, and the credit risk of Bank of America Corporation,
as guarantor of the notes.
|
|
|
·
|
All payments on the notes occur at maturity. The notes do not guarantee
a full return of your principal at maturity, and you could lose up to 85% of the principal amount.
|
|
|
·
|
The notes are expected to price on July 26, 2017 (the “pricing
date”).
|
|
|
·
|
The notes are expected to mature on July 29, 2022.
The notes will not pay interest.
|
|
|
·
|
Payment on the notes will depend on the performance of the S&P
500
®
Index (the “SPX”) (the “Underlying”).
|
|
|
·
|
If the Ending Value of the Underlying is greater than or equal to
the Starting Value, you will receive at maturity the principal amount plus a return equal to the greater of the Digital Return
and the Underlying Return (each as defined below). If the Ending Value is less than the Starting Value, but greater than or equal
to the Threshold Value, you will receive the principal amount. However, if the Ending Value is less than the Threshold Value, you
will lose 1% of the principal amount for each 1% that the Ending Value is less than the Threshold Value. In that case, the Redemption
Amount (each as defined below) will be less than the principal amount.
|
|
|
·
|
The “Threshold Value” will be 85% of the Starting Value.
|
|
|
·
|
The “Digital Return” will be [15% to 25%] of the principal
amount (to be determined on the pricing date).
|
|
|
·
|
The notes will not be listed on any securities exchange.
|
|
|
·
|
The notes will be issued in denominations of $1,000 and whole multiples
of $1,000.
|
|
|
·
|
The initial estimated value of the notes will be less than the
public offering price.
As of the date of this pricing supplement, the initial estimated value of the notes at the time of pricing
is expected to be at least $955 per $1,000 in principal amount. See “Summary” beginning on page PS-3 of this pricing
supplement, “Risk Factors” beginning on page PS-7 of this pricing supplement and “Structuring the Notes”
on page PS-17 of this pricing supplement for additional information. The actual value of your notes at any time will reflect many
factors and cannot be predicted with accuracy.
|
|
|
·
|
The notes and the related guarantee:
|
|
Are Not FDIC Insured
|
Are Not Bank Guaranteed
|
May Lose Value
|
|
|
Per Note
|
|
Total
|
|
|
Public Offering Price
|
$1,000
|
|
$
|
|
|
Underwriting Discount
|
$30
|
|
$
|
|
|
Proceeds (before expenses) to BofA Finance
|
$970
|
|
$
|
|
The notes and the related
guarantee of the notes by the Guarantor are unsecured and are not savings accounts, deposits, or other obligations of a bank. The
notes are not guaranteed by Bank of America, N.A. or any other bank, are not insured by the Federal Deposit Insurance Corporation
or any other governmental agency and involve investment risks. Potential purchasers of the notes should consider the information
in “Risk Factors” beginning on page PS-7 of this pricing supplement, page PS-5 of the accompanying product supplement,
page S-4 of the accompanying prospectus supplement, and page 7 of the accompanying prospectus.
You may lose some or all of your
principal amount in the notes.
None of the Securities
and Exchange Commission (the “SEC”), any state securities commission, or any other regulatory body has approved or
disapproved of these notes or the guarantee, or passed upon the adequacy or accuracy of this pricing supplement, or the accompanying
product supplement, prospectus supplement or prospectus. Any representation to the contrary is a criminal offense.
We will deliver the notes in book-entry form only through
The Depository Trust Company on or about July 31, 2017 against payment in immediately available funds.
BofA Merrill Lynch
Selling Agent
TABLE OF CONTENTS
Page
|
SUMMARY
|
pS-3
|
|
RISK FACTORS
|
pS-7
|
|
DESCRIPTION OF THE NOTES
|
pS-10
|
|
THE UNDERLYING
|
pS-12
|
|
SUPPLEMENT TO THE PLAN OF DISTRIBUTION; ROLE OF MLPF&S and CONFLICTS OF INTEREST
|
pS-16
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STRUCTURING THE NOTES
|
pS-17
|
|
U.S. FEDERAL INCOME TAX SUMMARY
|
pS-18
|
SUMMARY
The Market-Linked Step Up Notes Linked
to the S&P 500
®
Index, due July 29, 2022 (the “notes”) are our senior debt securities. Any payment
on the notes is fully and unconditionally guaranteed by BAC. The notes and the related guarantee are not insured by the Federal
Deposit Insurance Corporation or secured by collateral.
The notes will rank equally with all of our other unsecured senior debt,
and the related guarantee will rank equally with all of BAC’s other unsecured and unsubordinated debt. Any payment due on
the notes, including any repayment of the principal amount, will be subject to the credit risk of BofA Finance, as issuer, and
BAC, as guarantor.
The notes will mature on July 29, 2022.
If the Ending Value of the Underlying
is greater than or equal to the Starting Value, at maturity you will receive the principal amount plus a return equal to the greater
of the Digital Return and the Underlying Return. If the Ending Value is less than the Starting Value, but greater than or equal
to the Threshold Value, you will receive the principal amount. If the Ending Value of the Underlying is less than the Threshold
Value, you will lose 1% of the principal amount for each 1% that the Ending Value is less than the Threshold Value.
Any payment on the notes depends on the
credit risk of BofA Finance and BAC and on the performance of the Underlying. The economic terms of the notes (including the Digital
Return) are based on BAC’s internal funding rate, which is the rate it would pay to borrow funds through the issuance of
market-linked notes and the economic terms of certain related hedging arrangements it enters into. BAC’s internal funding
rate is typically lower than the rate it would pay when it issues conventional fixed or floating rate debt securities. This difference
in funding rate, as well as the underwriting discount and the hedging related charges described below, will reduce the economic
terms of the notes to you and the initial estimated value of the notes. Due to these factors, the public offering price you pay
to purchase the notes will be greater than the initial estimated value of the notes as of the pricing date.
The initial estimated value of the notes
as of the date of this pricing supplement is set forth on the cover page of this pricing supplement. The final pricing supplement
will set forth the initial estimated value of the notes as of the pricing date. For more information about the initial estimated
value and the structuring of the notes, see “Risk Factors” beginning on page PS-7 and “Structuring the Notes”
on page PS-17.
|
Issuer:
|
BofA Finance LLC (“BofA Finance”)
|
|
Guarantor:
|
Bank of America Corporation (“BAC”)
|
|
Term:
|
Approximately five years
|
|
Pricing Date:
|
July 26, 2017
|
|
Issue Date:
|
July 31, 2017
|
|
Calculation Day:
|
July 26, 2022, subject to postponement as set forth in the section “Description of the Notes—Certain Terms of the Notes—Events Relating to Calculation Days” of the accompanying product supplement.
|
|
Maturity Date:
|
July 29, 2022
|
|
Underlying:
|
The S&P 500
®
Index (Bloomberg ticker: “SPX”), a price return index.
|
|
Starting Value:
|
The closing level of the Underlying on the pricing date, as determined by the calculation agent.
|
|
Threshold Value:
|
85% of the Starting Value of the Underlying.
|
|
Ending Value:
|
The closing level of the Underlying on the calculation day, as determined by the calculation agent.
|
|
Digital Return:
|
[15% to 25%] (to be determined on the pricing date), corresponding to [$150–$250] per $1,000 in principal amount.
|
Redemption Amount:
|
|
|
Underlying Return:
|
Ending Value – Starting Value
Starting Value
|
|
Calculation Agent:
|
Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), an affiliate of BofA Finance.
|
|
Selling Agent:
|
MLPF&S
|
The pricing date, issue date and other
dates set forth above are subject to change, and will be set forth in the final pricing supplement relating to the notes.
You should read carefully this entire
pricing supplement, product supplement, prospectus supplement, and prospectus to understand fully the terms of the notes, as well
as the tax and other considerations important to you in making a decision about whether to invest in the notes. In particular,
you should review carefully the section in this pricing supplement entitled “Risk Factors,” which highlights a number
of risks of an investment in the notes, to determine whether an investment in the notes is appropriate for you. If information
in this pricing supplement is inconsistent with the product supplement, prospectus supplement or prospectus, this pricing supplement
will supersede those documents. You are urged to consult with your own attorneys and business and tax advisors before making a
decision to purchase any of the notes.
The information in this “Summary”
section is qualified in its entirety by the more detailed explanation set forth elsewhere in this pricing supplement and the accompanying
product supplement, prospectus supplement and prospectus. You should rely only on the information contained in this pricing supplement
and the accompanying product supplement, prospectus supplement and prospectus. We have not authorized any other person to provide
you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. None
of us, the Guarantor or any selling agent is making an offer to sell these notes in any jurisdiction where the offer or sale is
not permitted. You should assume that the information in this pricing supplement, the accompanying product supplement, prospectus
supplement, and prospectus is accurate only as of the date on their respective front covers.
Capitalized terms used but not defined
in this pricing supplement have the meanings set forth in the accompanying product supplement, prospectus supplement and prospectus.
Unless otherwise
Hypothetical Payments on the Notes
The following table is for purposes of
illustration only. It is based on
hypothetical
values and show
hypothetical
returns on the notes. It illustrates
the calculation of the Redemption Amount and total rate of return based on a hypothetical Starting Value of 100 and a hypothetical
Threshold Value of 85 for the Underlying, a hypothetical Digital Return of 20% (the midpoint of the range set forth above), and
a range of hypothetical Ending Values of the Underlying.
The actual amount you receive and the resulting total rate of return
will depend on the actual Starting Value, Threshold Value and Ending Value of the Underlying, and whether you hold the notes to
maturity.
The numbers appearing in the table below have been rounded for ease of analysis, and do not take into account any
tax consequences from investing in the notes.
For recent actual levels of the Underlying,
see “The Underlying” section below. The Underlying is a price return index and as such the Ending Value will not include
any income generated by dividends paid on the securities included in the Underlying, which you would otherwise be entitled to receive
if you invested in those stocks directly. In addition, all payments on the notes are subject to issuer credit risk.
|
Ending
Value
of the Underlying
|
Underlying
Return
of the Underlying
|
Redemption
Amount per Note
|
Total
Rate of Return on the Notes
|
|
0.00
|
-100.00%
|
$150.00
|
-85.00%
|
|
50.00
|
-50.00%
|
$650.00
|
-35.00%
|
|
60.00
|
-40.00%
|
$750.00
|
-25.00%
|
|
70.00
|
-30.00%
|
$850.00
|
-15.00%
|
|
80.00
|
-20.00%
|
$950.00
|
-5.00%
|
|
85.00
(1)
|
-15.00%
|
$1,000.00
|
0.00%
|
|
90.00
|
-10.00%
|
$1,000.00
|
0.00%
|
|
95.00
|
-5.00%
|
$1,000.00
|
0.00%
|
|
100.00
(2)
|
0.00%
|
$1,200.00
(3)
|
20.00%
|
|
105.00
|
5.00%
|
$1,200.00
|
20.00%
|
|
110.00
|
10.00%
|
$1,200.00
|
20.00%
|
|
115.00
|
15.00%
|
$1,200.00
|
20.00%
|
|
120.00
|
20.00%
|
$1,200.00
|
20.00%
|
|
130.00
|
30.00%
|
$1,300.00
|
30.00%
|
|
140.00
|
40.00%
|
$1,400.00
|
40.00%
|
|
150.00
|
50.00%
|
$1,500.00
|
50.00%
|
|
160.00
|
60.00%
|
$1,600.00
|
60.00%
|
|
170.00
|
70.00%
|
$1,700.00
|
70.00%
|
|
180.00
|
80.00%
|
$1,800.00
|
80.00%
|
|
190.00
|
90.00%
|
$1,900.00
|
90.00%
|
|
200.00
|
100.00%
|
$2,000.00
|
100.00%
|
(1)
This is the
hypothetical
Threshold Value
of the Underlying.
(2) The
hypothetical
Starting Value of 100 used in
the table above has been chosen for illustrative purposes only, and does not represent a likely actual Starting Value for the Underlying.
(3) This amount represents the sum of the principal amount
and the Digital Return.
RISK
FACTORS
Your investment in the notes entails
significant risks, many of which differ from those of a conventional debt security. Your decision to purchase the notes should
be made only after carefully considering the risks of an investment in the notes, including those discussed below, with your advisors
in light of your particular circumstances. The notes are not an appropriate investment for you if you are not knowledgeable about
significant elements of the notes or financial matters in general.
Your investment may result in a loss;
there is no guaranteed return of principal.
There is no fixed principal repayment amount on the notes at maturity. If the Ending
Value of the Underlying is less than the Threshold Value, you will lose 1% of the principal amount for each 1% that the Ending
Value of the Underlying is less than the Threshold Value. In that case, you will lose up to 85% of your principal.
The notes do not bear interest.
Unlike a conventional debt security, no interest payments will be paid over the term of the notes, regardless of the extent
to which the Ending Value of the Underlying exceeds the Threshold Value. Payments on the notes will be limited only to the payment
at maturity.
Your return on the notes may be less
than the yield on a conventional debt security of comparable maturity.
Any return that you receive on the notes, which could
be negative, may be less than the return you would earn if you purchased a conventional debt security with the same maturity date.
As a result, your investment in the notes may not reflect the full opportunity cost to you when you consider factors, such as inflation,
that affect the time value of money.
Any
payment on the notes is subject to our credit risk
and the
credit risk of the Guarantor, and actual or perceived changes in our
or
the Guarantor’s creditworthiness are expected to affect the value of the notes
. The notes are our senior unsecured debt
securities. Any payment on the notes will be fully and unconditionally guaranteed by the Guarantor. The notes are not guaranteed
by any entity other than the Guarantor. As a result, your receipt of the Redemption Amount at maturity will be dependent upon our
ability and the ability of the Guarantor to repay our obligations under the notes on the maturity date, regardless of the Ending
Value of the Underlying as compared to the Threshold Value or Starting Value. No assurance can be given as to what our financial
condition or the financial condition of the Guarantor will be on the maturity date. If we and the Guarantor become unable to meet
our respective financial obligations as they become due, you may not receive the amounts payable under the terms of the notes.
In addition, our credit ratings and the
credit ratings of the Guarantor are assessments by ratings agencies of our respective abilities to pay our obligations. Consequently,
our or the Guarantor’s perceived creditworthiness and actual or anticipated decreases in our or the Guarantor’s credit
ratings or increases in the spread between the yield on our respective securities and the yield on U.S. Treasury securities (the
“credit spread”) prior to the maturity date may adversely affect the market value of the notes. However, because your
return on the notes depends upon factors in addition to our ability and the ability of the Guarantor to pay our respective obligations,
such as the level of the Underlying, an improvement in our or the Guarantor’s credit ratings will not reduce the other investment
risks related to the notes.
We are a finance subsidiary and, as
such, will have limited assets and operations.
We are a finance subsidiary of Bank of America Corporation and will have no
assets, operations or revenues other than those related to the issuance, administration and repayment of our debt securities that
are guaranteed by the Guarantor. As a finance subsidiary, to meet our obligations under the notes, we are dependent upon payment
or contribution of funds and/or repayment of outstanding loans from the Guarantor and/or its other subsidiaries. Therefore, our
ability to make payments on the notes may be limited. In addition, we will have no independent assets available for distributions
to holders of the notes if they make claims in respect of the notes in a bankruptcy, resolution or similar proceeding. Accordingly,
any recoveries by such holders may be limited to those available under the related guarantee by the Guarantor, and that guarantee
will rank equally with all other unsecured senior obligations of the Guarantor.
The
public offering price you pay for the notes will exceed their initial estimated value.
The initial estimated value of the notes
that is provided in this preliminary pricing supplement, and that will be provided in the final pricing supplement, are each an
estimate only, determined as of a particular point in time by reference to our and our affiliates’ pricing models. These
pricing models consider certain assumptions and variables, including our credit spreads
and
those of the Guarantor, the Guarantor’s internal funding rate, mid-market terms on hedging transactions, expectations on
interest rates, dividends and volatility, price-sensitivity analysis, and the expected term of the notes. These pricing models
rely in part on certain forecasts about future events, which may prove to be incorrect.
The initial estimated value does not
represent a minimum or maximum price at which we, the Guarantor, MLPF&S or any of our other affiliates would be willing to
purchase your notes in any secondary market (if any exists) at any time. The value of your notes at any time after the date of
this pricing supplement will vary based on many factors that cannot be predicted with accuracy, including our and the Guarantor’s
creditworthiness and changes in market conditions.
If you attempt to sell the notes prior
to maturity, their market value may be lower than the price you paid for them and lower than their initial estimated value. This
is due to, among other things, changes in the level of the Underlying, the Guarantor’s internal funding rate, and the inclusion
in the public offering price of the underwriting discount and the hedging related charges, all as further described in "Structuring
the Notes" below. These factors, together with various credit, market and economic factors over the term of the notes, are
expected to reduce the price at which you may be able to sell the notes in any secondary market and will affect the value of the
notes in complex and unpredictable ways.
We cannot assure you that a trading
market for your notes will ever develop or be maintained.
We will not list the notes on any securities exchange. We cannot
predict how the notes will trade in any secondary market or whether that market will be liquid or illiquid.
The development of a trading market for
the notes will depend on the Guarantor’s financial performance and other factors, including changes in the level of the Underlying.
The number of potential buyers of your notes in any secondary market may be limited. We anticipate that MLPF&S will act as
a market-maker for the notes, but none of us, the Guarantor or MLPF&S is required to do so. There is no assurance that any
party will be willing to purchase your notes at any price in any secondary market. MLPF&S may discontinue its market-making
activities as to the notes at any time. To the extent that MLPF&S engages in any market-making activities, it may bid for or
offer the notes. Any price at which MLPF&S may bid for, offer, purchase, or sell any notes may differ from the values determined
by pricing models that it may use, whether as a result of dealer discounts, mark-ups, or other transaction costs. These bids, offers,
or completed transactions may affect the prices, if any, at which the notes might otherwise trade in the market.
In addition, if at any time MLPF&S
were to cease acting as a market-maker as to the notes, it is likely that there would be significantly less liquidity in the secondary
market. In such a case, the price at which the notes could be sold likely would be lower than if an active market existed.
The Redemption Amount will not reflect
changes in the level of the Underlying other than on the calculation day.
Changes in the level of the Underlying during the
term of the notes other than on the calculation day will not be reflected in the calculation of the Redemption Amount. To calculate
the Redemption Amount, the calculation agent will compare only the Ending Value of the Underlying to the Starting Value or Threshold
Value, as applicable. No other levels of the Underlying will be taken into account. As a result, even if the level of the Underlying
has increased at certain times during the term of the notes, you will receive a Redemption Amount that is less than the principal
amount if the Ending Value of the Underlying is less than the Threshold Value.
The publisher of the Underlying may
adjust the Underlying in a way that affects its levels, and the publisher has no obligation to consider your interests.
The
publisher of the Underlying can add, delete, or substitute the components included in the Underlying or make other methodological
changes that could change its level. A new security included in the Underlying may perform significantly better or worse than the
replaced security, and the performance will impact the level of the Underlying. Additionally, the publisher of the Underlying may
alter, discontinue, or suspend calculation or dissemination of the Underlying. Any of these actions could adversely affect the
value of your notes. The publisher of the Underlying will have no obligation to consider your interests in calculating or revising
the Underlying.
Our trading, hedging and other business
activities may create conflicts of interest with you.
We, the Guarantor or one or more of our other affiliates, including the
selling agents, may engage in trading activities related to the Underlying or the securities represented by the Underlying that
are not for your account or on your behalf. We, the Guarantor or one or more of our other affiliates, including the selling agents,
also may issue or underwrite other financial instruments with returns based upon the Underlying. These trading and other business
activities may present a conflict of interest between your interest in the notes and the interests we, the Guarantor and our other
affiliates, including the selling agents, may have in our proprietary accounts, in facilitating transactions, including block trades,
for our or their other customers, and in accounts under our or their management. These trading and other business activities, if
they influence the level of the Underlying or secondary trading in your notes, could be adverse to your interests as a beneficial
owner of the notes.
We expect to enter into arrangements
or adjust or close out existing transactions to hedge our obligations under the notes. We, the Guarantor or our other affiliates
also may enter into hedging transactions relating to other notes or instruments, some of which may have returns calculated in a
manner related to that of the notes offered hereby. We may enter into such hedging arrangements with one of our affiliates. Our
affiliates may enter into additional hedging transactions with other parties relating to the notes and the Underlying. This hedging
activity is expected to result in a profit to those engaging in the hedging activity, which could be more or less than initially
expected, or the hedging activity could also result in a loss. We and our affiliates will price these hedging transactions with
the intent to realize a profit, regardless of whether the value of the notes increases or decreases. Any profit in connection with
such hedging activities will be in addition to any other compensation that we, the Guarantor and our other affiliates, including
the selling agents, receive for the sale of the notes, which creates an additional incentive to sell the notes to you.
There may be potential conflicts
of interest involving the calculation agent, which is an affiliate of ours.
We have the right to appoint and remove the calculation
agent. One of our affiliates will be the calculation agent for the notes and, as such, will make a variety of determinations relating
to the notes, including the amounts that will be paid on the notes. Under some circumstances, these duties could result in a conflict
of interest between its status as our affiliate and its responsibilities as calculation agent. These conflicts could occur, for
instance, in connection with the calculation agent’s determination as to whether a Market Disruption Event (as defined below)
has occurred. The calculation agent will be required to carry out its duties in good faith and use its reasonable judgment. However,
because we expect that the Guarantor will control the calculation agent, potential conflicts of interest could arise.
The U.S. federal income tax consequences
of an investment in the notes are uncertain, and may be adverse to a holder of the notes.
No statutory, judicial, or administrative
authority directly addresses the characterization of the notes or securities similar to the notes for U.S. federal income tax purposes.
As a result, significant aspects of the U.S. federal income tax consequences of an investment in the notes are not certain. Under
the terms of the notes, you will have agreed with us to treat the notes as single financial contracts, as described under “U.S.
Federal Income Tax Summary—General.” If the Internal Revenue Service (the “IRS”) were successful in asserting
an alternative characterization for the notes, the timing and character of gain or loss with respect to the notes may differ. No
ruling will be requested from the IRS with respect to the notes and no assurance can be given that the IRS will agree with the
statements made in the section entitled “U.S. Federal Income Tax Summary.”
You are urged to consult with your own
tax advisor regarding all aspects of the U.S. federal income tax consequences of investing in the notes.
* * *
Investors in the notes should review
the additional risk factors set forth beginning on page PS-5 of the product supplement prior to making an investment decision.
DESCRIPTION
OF THE NOTES
General
The notes will be part of a series of
medium-term notes entitled “Medium-Term Notes, Series A” issued under the Senior Indenture, as amended and supplemented
from time to time, among us, the Guarantor and The Bank of New York Mellon Trust Company N.A., as trustee. The Senior Indenture
is more fully described in the prospectus supplement and prospectus. The following description of the notes supplements the description
of the general terms and provisions of the notes and debt securities set forth under the headings “Description of the Notes”
in the prospectus supplement and “Description of Debt Securities” in the prospectus. These documents should be read
in connection with this pricing supplement.
Our payment obligations on the notes
are fully and unconditionally guaranteed by the Guarantor. The notes will rank equally with all of our other unsecured senior debt
from time to time outstanding. The guarantee of the notes will rank equally with all other unsecured senior obligations of the
Guarantor. Any payment due on the notes, including any repayment of principal, is subject to our credit risk, as issuer, and the
credit risk of BAC, as guarantor.
The notes will be issued in denominations
of $1,000 and whole multiples of $1,000. You may transfer the notes only in whole multiples of $1,000.
Prior to maturity, the notes are not
repayable at our option or at your option.
If the scheduled maturity date is not
a business day, the payment will be postponed to the next business day, and no interest will be payable as a result of that postponement.
Redemption Amount
At
maturity, subject to our credit risk as issuer of the notes
and
the credit risk of the Guarantor as guarantor of the notes, you will receive the Redemption Amount per note that you hold, denominated
in U.S. dollars. The Redemption Amount will be calculated as follows:
|
|
·
|
If the Ending Value of the Underlying is greater than or equal to the
Starting Value, the Redemption Amount per note will equal the greater of:
|
$1,000 + the Digital Return
or
$1,000 + ($1,000 x Underlying
Return)
|
|
·
|
If the Ending Value of the Underlying is greater than or equal to the
Threshold Value but less than the Starting Value, the Redemption Amount per note will equal:
|
$1,000
|
|
·
|
If the Ending Value of the Underlying is less than the Threshold Value,
the Redemption Amount per note will equal:
|
In this case, the Redemption Amount will be less than
the principal amount of the notes, and you will lose up to 85% of your principal.
The “Underlying Return”
will equal:
Ending Value – Starting Value
Starting
Value
The Threshold Value is 85% of the Starting Value.
Determining the Starting Value and the Ending Value of the
Underlying
The “Starting Value” will
be the closing level on the pricing date.
The “Ending Value” will be
the closing level on the calculation day.
The calculation day is subject to postponement
as set forth in the product supplement, in the section “Description of the Notes—Certain Terms of the Notes—Events
Relating to Calculation Days.”
Events of Default and Acceleration
If
an Event of Default, as defined in the Senior Indenture
and in the
section entitled “Events of Default and Rights of Acceleration” beginning on page 35 of the accompanying prospectus,
with respect to the notes occurs and is continuing, the amount payable to a holder of the notes upon any acceleration permitted
under the Senior Indenture will be equal to the amount described under the caption “—Redemption Amount,” calculated
as though the date of acceleration were the maturity date of the notes and as though the calculation day were the fifth trading
day prior to the date of acceleration. In case of a default in the payment of the notes, the notes will not bear a default interest
rate.
THE UNDERLYING
All
disclosures contained in this pricing supplement regarding the Underlying, including, without limitation, its make-up, method of
calculation, and changes in its components, have been derived from publicly available sources. The information reflects the policies
of, and is subject to change by S&P Dow Jones Indices LLC (“SPDJI”), the sponsor of the SPX. We refer to SPDJI
as the “Underlying Sponsor.” The Underlying Sponsor, which licenses the copyright and all other rights to the Underlying,
has no obligation to continue to publish, and may discontinue publication of, the Underlying. The consequences of the Underlying
Sponsor discontinuing publication of the Underlying are discussed in “Description of the Notes—Discontinuance of an
Index”
in the accompanying product supplement. None of
us, the Guarantor, the calculation agent, or MLPF&S accepts any responsibility for the calculation, maintenance or publication
of the Underlying or any successor index.
None of us, the Guarantor, MLPF&S or
any of our other affiliates makes any representation to you as to the future performance of the Underlying.
You should make your own investigation
into the Underlying.
The S&P 500
®
Index
The SPX is intended to provide an indication
of the pattern of common stock price movement. The calculation of the level of the SPX is based on the relative value of the aggregate
market value of the common stocks of 500 companies as of a particular time compared to the aggregate average market value of the
common stocks of 500 similar companies during the base period of the years 1941 through 1943.
The Underlying Sponsor chooses companies
for inclusion in the SPX with the aim of achieving a distribution by broad industry groupings that approximates the distribution
of these groupings in the common stock population of its Stock Guide Database of over 10,000 companies, which the Underlying Sponsor
uses as an assumed model for the composition of the total market. Relevant criteria employed by the Underlying Sponsor include
the viability of the particular company, the extent to which that company represents the industry group to which it is assigned,
the extent to which the market price of that company’s common stock generally is responsive to changes in the affairs of
the respective industry and the market value and trading activity of the common stock of that company. Ten main groups of companies
constitute the SPX, with the approximate percentage of the market capitalization of the SPX included in each group as of June 30,
2017 indicated in parentheses: Consumer Discretionary (12.3%); Consumer Staples (9.0%); Energy (6.0%); Financials (14.5%); Health
Care (14.5%); Industrials (10.3%); Information Technology (22.2%); Materials (2.8%); Real Estate (2.9%); Telecommunication Services
(2.1%); and Utilities (3.2%). The Underlying Sponsor may from time to time, in its sole discretion, add companies to, or delete
companies from, the SPX to achieve the objectives stated above.
The Underlying Sponsor calculates the
SPX by reference to the prices of the constituent stocks of the SPX without taking account of the value of dividends paid on those
stocks. As a result, the return on the notes will not reflect the return you would realize if you actually owned the SPX constituent
stocks and received the dividends paid on those stocks.
Computation of the SPX
While the Underlying Sponsor currently
employs the following methodology to calculate the SPX, no assurance can be given that the Underlying Sponsor will not modify or
change this methodology in a manner that may affect the Redemption Amount.
Historically, the market value of any
component stock of the SPX was calculated as the product of the market price per share and the number of then outstanding shares
of such component stock. In March 2005, the Underlying Sponsor began shifting the SPX halfway from a market capitalization weighted
formula to a float-adjusted formula, before moving the SPX to full float adjustment on September 16, 2005. The Underlying Sponsor’s
criteria for selecting stocks for the SPX did not change with the shift to float adjustment. However, the adjustment affects each
company’s weight in the SPX.
Under float adjustment, the share counts
used in calculating the SPX reflect only those shares that are available to investors, not all of a company’s outstanding
shares. Float adjustment excludes shares that are closely held by control groups, other publicly traded companies or government
agencies.
In September 2012, all shareholdings
representing more than 5% of a stock’s outstanding shares, other than holdings by “block owners,” were removed
from the float for purposes of calculating the SPX. Generally, these “control holders” will include officers and directors,
private equity, venture capital and special equity firms, other publicly traded companies that hold shares for control, strategic
partners, holders of restricted shares, ESOPs, employee and family trusts, foundations associated with the company, holders of
unlisted share classes of stock, government entities at all levels (other than government retirement/pension funds) and any individual
person who controls a 5% or greater stake in a company as reported in regulatory filings. However, holdings by block owners, such
as depositary banks, pension funds, mutual funds and ETF providers, 401(k) plans of the company, government
retirement/pension funds, investment funds of insurance companies,
asset managers and investment funds, independent foundations and savings and investment plans, will ordinarily be considered part
of the float.
Treasury stock, stock options, equity
participation units, warrants, preferred stock, convertible stock, and rights are not part of the float. Shares held in a trust
to allow investors in countries outside the country of domicile, such as depositary shares and Canadian exchangeable shares are
normally part of the float unless those shares form a control block. If a company has multiple classes of stock outstanding, shares
in an unlisted or non-traded class are treated as a control block.
For each stock, an investable weight
factor (“IWF”) is calculated by dividing the available float shares by the total shares outstanding. As of September
21, 2012, available float shares are defined as the total shares outstanding less shares held by control holders. This calculation
is subject to a 5% minimum threshold for control blocks. For example, if a company’s officers and directors hold 3% of the
company’s shares, and no other control group holds 5% of the company’s shares, the Underlying Sponsor would assign
that company an IWF of 1.00, as no control group meets the 5% threshold. However, if a company’s officers and directors hold
3% of the company’s shares and another control group holds 20% of the company’s shares, the Underlying Sponsor would
assign an IWF of 0.77, reflecting the fact that 23% of the company’s outstanding shares are considered to be held for control.
For companies with multiple classes of stock, the Underlying Sponsor calculates the weighted average IWF for each stock using the
proportion of the total company market capitalization of each share class as weights.
The SPX is calculated using a base-weighted
aggregate methodology. The level of the SPX reflects the total market value of all component stocks relative to the base period
of the years 1941 through 1943. An indexed number is used to represent the results of this calculation in order to make the level
easier to work with and track over time. The actual total market value of the component stocks during the base period of the years
1941 through 1943 has been set to an indexed level of 10. This is often indicated by the notation 1941- 43 = 10. In practice, the
daily calculation of the SPX is computed by dividing the total market value of the component stocks by the “index divisor.”
By itself, the index divisor is an arbitrary number. However, in the context of the calculation of the SPX, it serves as a link
to the original base period level of the SPX. The index divisor keeps the SPX comparable over time and is the manipulation point
for all adjustments to the SPX, which is index maintenance.
Index Maintenance
Index maintenance includes monitoring
and completing the adjustments for company additions and deletions, share changes, stock splits, stock dividends, and stock price
adjustments due to company restructuring or spinoffs. Some corporate actions, such as stock splits and stock dividends, require
changes in the common shares outstanding and the stock prices of the companies in the SPX, and do not require index divisor adjustments.
To prevent the level of the SPX from
changing due to corporate actions, corporate actions which affect the total market value of the SPX require an index divisor adjustment.
By adjusting the index divisor for the change in market value, the level of the SPX remains constant and does not reflect the corporate
actions of individual companies in the SPX. Index divisor adjustments are made after the close of trading and after the calculation
of the SPX closing level.
Changes in a company’s shares outstanding
of 5.00% or more due to mergers, acquisitions, public offerings, tender offers, Dutch auctions, or exchange offers are made as
soon as reasonably possible. Share changes due to mergers or acquisitions of publicly held companies that trade on a major exchange
are implemented when the transaction occurs, even if both of the companies are not in the same headline index, and regardless of
the size of the change. All other changes of 5.00% or more (due to, for example, company stock repurchases, private placements,
redemptions, exercise of options, warrants, conversion of preferred stock, notes, debt, equity participation units, at-the-market
offerings, or other recapitalizations) are made weekly and are announced on Fridays for implementation after the close of trading
on the following Friday. Changes of less than 5.00% are accumulated and made quarterly on the third Friday of March, June, September,
and December, and are usually announced two to five days prior.
If a change in a company’s shares
outstanding of 5.00% or more causes a company’s IWF to change by five percentage points or more, the IWF is updated at the
same time as the share change. IWF changes resulting from partial tender offers are considered on a case-by-case basis.
The following graph sets forth
the daily historical performance of the SPX in the period from January 1, 2008 through June 30, 2017. This historical data on the
SPX is not necessarily indicative of its future performance or what the value of the notes may be. Any historical upward or downward
trend in the level of the SPX during any period set forth below is not an indication that the level of the SPX is more or less
likely to increase or decrease at any time over the term of the notes. The horizontal line in the graph represents the hypothetical
Threshold Value of 2,059.90 assuming a Starting Value of 2,423.41, which was the closing level of the SPX on June 30, 2017 (the
actual Starting Value and Threshold Value of the SPX, which will be 85% of its Starting Value, will be determined on the pricing
date).
Before investing in the notes, you should
consult publicly available sources for the levels of the SPX.
License Agreement
S&P
®
is a registered
trademark of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones
®
is a registered
trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). These trademarks have been licensed for use by S&P
Dow Jones Indices LLC. “Standard & Poor’s
®
,” “S&P 500
®
” and
“S&P
®
” are trademarks of S&P. These trademarks have been sublicensed for certain purposes by
our affiliate, MLPF&S. The SPX is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed
for use by MLPF&S.
The notes are not sponsored, endorsed,
sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P or any of their respective affiliates (collectively, “S&P
Dow Jones Indices”). S&P Dow Jones Indices make no representation or warranty, express or implied, to the holders
of the notes or any member of the public regarding the advisability of investing in securities generally or in the notes particularly
or the ability of the SPX to track general market performance. S&P Dow Jones Indices’ only relationship to MLPF&S
with respect to the SPX is the licensing of the SPX and certain trademarks, service marks and/or trade names of S&P Dow Jones
Indices and/or its third party licensors. The SPX is determined, composed and calculated by S&P Dow Jones Indices without
regard to us, MLPF&S, or the notes. S&P Dow Jones Indices have no obligation to take our needs, BAC’s needs
or the needs of MLPF&S or holders of the notes into consideration in determining, composing or calculating the SPX. S&P
Dow Jones Indices are not responsible for and have not participated in the determination of the prices, and amount of the notes
or the timing of the issuance or sale of the notes or in the determination or calculation of the equation by which the notes are
to be converted into cash. S&P Dow Jones Indices have no obligation or liability in connection with the administration,
marketing or trading of the notes. There is no assurance that investment products based on the SPX will accurately track
index performance or provide positive investment returns. S&P Dow Jones Indices LLC and its subsidiaries are not investment
advisors. Inclusion of a security or futures contract within an index is not a recommendation by S&P Dow Jones Indices
to buy, sell, or hold such security or futures contract, nor is it considered to be investment advice. Notwithstanding
the foregoing, CME Group Inc. and its affiliates may independently issue and/or sponsor financial products unrelated to the notes
currently being issued by us, but which may be similar to and competitive with the notes. In addition, CME Group Inc. and
its affiliates may trade financial products which are linked to the performance of the SPX. It is possible that this trading
activity will affect the value of the notes.
S&P DOW JONES INDICES DO NOT GUARANTEE
THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE SPX OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING
BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW
JONES INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW
JONES INDICES MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY US, BAC, MLPF&S, HOLDERS OF THE NOTES, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE SPX OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO
EVENT WHATSOEVER SHALL S&P DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES
INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY
AGREEMENTS OR ARRANGEMENTS BETWEEN S&P DOW JONES INDICES AND MLPF&S, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES.
SUPPLEMENT TO THE PLAN OF DISTRIBUTION;
ROLE OF MLPF&S AND CONFLICTS OF INTEREST
MLPF&S, a broker-dealer affiliate
of ours, is a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”) and will participate as selling
agent in the distribution of the notes. Accordingly, the offering of the notes will conform to the requirements of FINRA Rule 5121.
MLPF&S may not make sales in this offering to any of its discretionary accounts without the prior written approval of the account
holder.
Under our distribution agreement with
MLPF&S, MLPF&S will purchase the notes from us as principal at the public offering price indicated on the cover of this
term sheet, less the indicated underwriting discount. MLPF&S will sell the notes to other broker-dealers that will participate
in the offering and that are not affiliated with us, at an agreed discount to the principal amount. Each of those broker-dealers
may sell the notes to one or more additional broker-dealers. MLPF&S has informed us that these discounts may vary from dealer
to dealer and that not all dealers will purchase or repurchase the notes at the same discount.
MLPF&S and any of our other broker-dealer
affiliates, may use this pricing supplement, and the accompanying product supplement, prospectus supplement and prospectus for
offers and sales in secondary market transactions and market-making transactions in the notes. However, they are not obligated
to engage in such secondary market transactions and/or market-making transactions. The selling agent may act as principal or agent
in these transactions, and any such sales will be made at prices related to prevailing market conditions at the time of the sale.
At MLPF&S’s discretion, for
a short, undetermined initial period after the issuance of the notes, MLPF&S may offer to buy the notes in the secondary market
at a price that may exceed the initial estimated value of the notes. Any price offered by MLPF&S for the notes will be based
on then-prevailing market conditions and other considerations, including the performance of the Underlying and the remaining term
of the notes. However, none of us, the Guarantor, MLPF&S or any of our other affiliates is obligated to purchase your notes
at any price or at any time, and we cannot assure you that any party will purchase your notes at a price that equals or exceeds
the initial estimated value of the notes.
Any price that MLPF&S may pay to
repurchase the notes will depend upon then prevailing market conditions, the creditworthiness of us and the Guarantor, and transaction
costs. At certain times, this price may be higher than or lower than the initial estimated value of the notes.
STRUCTURING THE NOTES
The notes are our debt securities, the
return on which is linked to the performance of the Underlying. The related guarantees are BAC’s obligations. As is the case
for all of our and BAC’s respective debt securities, including our market-linked notes, the economic terms of the notes reflect
our and BAC’s actual or perceived creditworthiness at the time of pricing. In addition, because market-linked notes result
in increased operational, funding and liability management costs to us and BAC, BAC typically borrows the funds under these types
of notes at a rate, which we refer to in this pricing supplement as BAC’s internal funding rate, that is more favorable to
BAC than the rate that it might pay for a conventional fixed or floating rate debt security. This generally relatively lower internal
funding rate, which is reflected in the economic terms of the notes, along with the fees and charges associated with market-linked
notes, typically results in the initial estimated value of the notes on the pricing date being less than their public offering
price.
In order to meet our payment obligations
on the notes, at the time we issue the notes, we may choose to enter into certain hedging arrangements (which may include call
options, put options or other derivatives) with MLPF&S or one of our other affiliates. The terms of these hedging arrangements
are determined based upon terms provided by MLP&S and its affiliates, and take into account a number of factors, including
our and BAC’s creditworthiness, interest rate movements, the volatility of the Underlying, the tenor of the notes and the
hedging arrangements. The economic terms of the notes and their initial estimated value depend in part on the terms of these hedging
arrangements.
MLPF&S has advised us that the hedging
arrangements will include hedging related charges, reflecting the costs associated with, and our affiliates’ profit earned
from, these hedging arrangements. Since hedging entails risk and may be influenced by unpredictable market forces, actual profits
or losses from these hedging transactions may be more or less than any expected amounts.
For further information, see “Risk
Factors” beginning on page PS-7 above and “Supplemental Use of Proceeds” on page PS-16 of product supplement
EQUITY-1.
U.S. FEDERAL
INCOME TAX SUMMARY
The following summary of the material U.S.
federal income tax considerations of the acquisition, ownership, and disposition of the notes supplements, and to the extent inconsistent
supersedes, the discussions under “U.S. Federal Income Tax Considerations” in the accompanying prospectus and under
“U.S. Federal Income Tax Considerations” in the accompanying prospectus supplement and is not exhaustive of all possible
tax considerations. This summary is based upon the Internal Revenue Code of 1986, as amended (the “Code”), regulations
promulgated under the Code by the U.S. Treasury Department (“Treasury”) (including proposed and temporary regulations),
rulings, current administrative interpretations and official pronouncements of the IRS, and judicial decisions, all as currently
in effect and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance
can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences
described below. This summary does not include any description of the tax laws of any state or local governments, or of any foreign
government, that may be applicable to a particular holder.
Although the notes are issued by us, they will
be treated as if they were issued by Bank of America Corporation for U.S. federal income tax purposes. Accordingly throughout this
discussion, references to “we,” “our” or “us” are generally to Bank of America Corporation
unless the context requires otherwise.
This summary is directed solely to U.S. Holders
and Non-U.S. Holders that, except as otherwise specifically noted, will purchase the notes upon original issuance and will hold
the notes as capital assets within the meaning of Section 1221 of the Code, which generally means property held for investment,
and that are not excluded from the discussion under “U.S. Federal Income Tax Considerations” in the accompanying prospectus.
You should consult your own tax advisor
concerning the U.S. federal income tax consequences to you of acquiring, owning, and disposing of the notes, as well as any tax
consequences arising under the laws of any state, local, foreign, or other tax jurisdiction and the possible effects of changes
in U.S. federal or other tax laws.
General
Although there is no statutory, judicial, or
administrative authority directly addressing the characterization of the notes, in the opinion of our counsel, Morrison & Foerster
LLP, and based on certain factual representations received from us, the notes should be treated as single financial contracts with
respect to the Underlying and under the terms of the notes, we and every investor in the notes agree, in the absence of an administrative
determination or judicial ruling to the contrary, to treat the notes in accordance with such characterization. This discussion
assumes that the notes constitute single financial contracts with respect to the Underlying for U.S. federal income tax purposes.
If the notes did not constitute single financial contracts, the tax consequences described below would be materially different.
This characterization of the notes is not
binding on the IRS or the courts. No statutory, judicial, or administrative authority directly addresses the characterization of
the notes or any similar instruments for U.S. federal income tax purposes, and no ruling is being requested from the IRS with respect
to their proper characterization and treatment. Due to the absence of authorities on point, significant aspects of the U.S. federal
income tax consequences of an investment in the notes are not certain, and no assurance can be given that the IRS or any court
will agree with the characterization and tax treatment described in this supplement. Accordingly, you are urged to consult your
tax advisor regarding all aspects of the U.S. federal income tax consequences of an investment in the notes, including possible
alternative characterizations.
Unless otherwise stated, the following discussion
is based on the characterization described above. The discussion in this section assumes that there is a significant possibility
of a significant loss of principal on an investment in the notes.
We will not attempt to ascertain whether the
issuer of any component stocks included in the Underlying would be treated as a “passive foreign investment company”
(“PFIC”), within the meaning of Section 1297 of the Code, or a United States real property holding corporation, within
the meaning of Section 897(c) of the Code. If the issuer of one or more stocks included in the Underlying were so treated, certain
adverse U.S. federal income tax consequences could possibly apply to a holder of the notes. You should refer to information filed
with the SEC by the issuers of the component stocks included in the Underlying and consult your tax advisor regarding the possible
consequences to you, if any, if any issuer of the component stocks included in the Underlying is or becomes a PFIC or is or becomes
a United States real property holding corporation.
U.S. Holders
Upon receipt of a cash payment at maturity
or upon a sale, exchange, or redemption of the notes prior to maturity, a U.S. Holder generally will recognize capital gain or
loss equal to the difference between the amount realized and the U.S. Holder’s tax basis in the notes. A U.S. Holder’s
tax basis in the notes will equal the amount paid by that holder to acquire them. This capital gain or loss generally will be long-term
capital gain or loss if the U.S. Holder held the notes for more than one year. The deductibility of capital losses is subject to
limitations.
Alternative Tax Treatments
. Due to the
absence of authorities that directly address the proper tax treatment of the notes, prospective investors are urged to consult
their tax advisors regarding all possible alternative tax treatments of an investment in the notes. In particular, the IRS could
seek to subject the notes to the Treasury regulations governing contingent payment debt instruments. If the IRS were successful
in that regard, the timing and character of income on the notes would be affected significantly. Among other things, a U.S. Holder
would be required to accrue original issue discount every year at a “comparable yield” determined at the time of issuance.
In addition, any gain realized by a U.S. Holder at maturity or upon a sale, exchange, or redemption of the notes generally would
be treated as ordinary income, and any loss realized at maturity 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 IRS released Notice 2008-2 (the “Notice”),
which sought comments from the public on the taxation of financial instruments currently taxed as “prepaid forward contracts.”
This Notice addresses instruments such as the notes. According to the Notice, the IRS and Treasury are considering whether a holder
of an instrument such as the notes should be required to accrue ordinary income on a current basis, regardless of whether any payments
are made prior to maturity. It is not possible to determine what guidance the IRS and Treasury will ultimately issue, if any. Any
such future guidance may affect the amount, timing and character of income, gain, or loss in respect of the notes, possibly with
retroactive effect.
The IRS and Treasury are also considering additional
issues, including whether additional gain or loss from such instruments should be treated as ordinary or capital, whether foreign
holders of such instruments should be subject to withholding tax on any deemed income accruals, whether Section 1260 of the Code,
concerning certain “constructive ownership transactions,” generally applies or should generally apply to such instruments,
and whether any of these determinations depend on the nature of the underlying asset.
In addition, proposed Treasury regulations
require the accrual of income on a current basis for contingent payments made under certain notional principal contracts. The preamble
to the regulations states that the “wait and see” method of accounting does not properly reflect the economic accrual
of income on those contracts, and requires current accrual of income for some contracts already in existence. While the proposed
regulations do not apply to prepaid forward contracts, the preamble to the proposed regulations expresses the view that similar
timing issues exist in the case of prepaid forward contracts. If the IRS or Treasury publishes future guidance requiring current
economic accrual for contingent payments on prepaid forward contracts, it is possible that you could be required to accrue income
over the term of the notes.
Because of the absence of authority regarding
the appropriate tax characterization of the notes, it is also possible that the IRS could seek to characterize the notes in a manner
that results in tax consequences that are different from those described above. For example, the IRS could possibly assert that
any gain or loss that a holder may recognize at maturity or upon the sale, exchange or redemption of the notes should be treated
as ordinary gain or loss.
Because the Underlying is an index that periodically
rebalances, it is possible that the notes could be treated as a series of single financial contracts, each of which matures on
the next rebalancing date. If the notes were properly characterized in such a manner, a U.S. Holder would be treated as disposing
of the notes on each rebalancing date in return for new notes that mature on the next rebalancing date, and a U.S. Holder would
accordingly likely recognize capital gain or loss on each rebalancing date equal to the difference between the holder’s tax
basis in the notes (which would be adjusted to take into account any prior recognition of gain or loss) and the fair market value
of the notes on such date.
Non-U.S. Holders
Except as discussed below, a Non-U.S. Holder
generally will not be subject to U.S. federal income or withholding tax for amounts paid in respect of the notes provided that
the Non-U.S. Holder complies
with applicable certification requirements and that the payment
is not effectively connected with the conduct by the Non-U.S. Holder of a U.S. trade or business. Notwithstanding the foregoing,
gain from the sale, exchange, or redemption of the notes or their settlement at maturity may be subject to U.S. federal income
tax if that Non-U.S. Holder is a non-resident alien individual and is present in the U.S. for 183 days or more during the taxable
year of the settlement at maturity, sale, exchange, or redemption and certain other conditions are satisfied.
If a Non-U.S. Holder of the notes is engaged
in the conduct of a trade or business within the U.S. and if gain realized on the settlement at maturity, or upon sale, exchange,
or redemption of the notes, is effectively connected with the conduct of such trade or business (and, if certain tax treaties apply,
is attributable to a permanent establishment maintained by the Non-U.S. Holder in the U.S.), the Non-U.S. Holder generally will
be subject to U.S. federal income tax on such gain on a net income basis in the same manner as if it were a U.S. Holder. Such Non-U.S.
Holders should read the material under the heading “—U.S. Holders,” for a description of the U.S. federal income
tax consequences of acquiring, owning, and disposing of the notes. In addition, if such Non-U.S. Holder is a foreign corporation,
it may also be subject to a branch profits tax equal to 30% (or such lower rate provided by any applicable tax treaty) of a portion
of its earnings and profits for the taxable year that are effectively connected with its conduct of a trade or business in the
U.S., subject to certain adjustments.
A “dividend equivalent” payment
is treated as a dividend from sources within the United States and such payments generally would be subject to a 30% U.S. withholding
tax if paid to a Non-U.S. Holder. Under U.S. Treasury Department regulations, payments (including deemed payments) with respect
to equity-linked instruments (“ELIs”) that are “specified ELIs” may be treated as dividend equivalents
if such specified ELIs reference an interest in an “underlying security,” which is generally any interest in an entity
taxable as a corporation for U.S. federal income tax purposes if a payment with respect to such interest could give rise to a U.S.
source dividend. However, U.S. Treasury Department regulations provide that withholding on dividend equivalent payments will not
apply to specified ELIs that are not delta-one instruments and that are issued before January 1, 2018. Based on our determination
that the notes are not delta one instruments, Non-U.S. Holders should not be subject to withholding on dividend equivalent payments,
if any, under the notes. However, it is possible that the notes could be treated as deemed reissued for U.S. federal income tax
purposes upon the occurrence of certain events affecting the Underlying Stock or the notes, and following such occurrence the notes
could be treated as subject to withholding on dividend equivalent payments. Non-U.S. Holders that enter, or have entered, into
other transactions in respect of the Underlying Stock or the notes should consult their tax advisors as to the application of the
dividend equivalent withholding tax in the context of the notes and their other transactions. If any payments are treated as dividend
equivalents subject to withholding, we (or the applicable paying agent) would be entitled to withhold taxes without being required
to pay any additional amounts with respect to amounts so withheld.
As discussed above, alternative characterizations
of the notes for U.S. federal income tax purposes are possible. Should an alternative characterization, by reason of change or
clarification of the law, by regulation or otherwise, cause payments as to the notes to become subject to withholding tax, will
be withheld at the applicable statutory rate. As discussed above, the IRS has indicated in the Notice that it is considering whether
income in respect of instruments such as the notes should be subject to withholding tax. Prospective Non-U.S. Holders of the notes
should consult their own tax advisors in this regard.
U.S. Federal Estate Tax.
Under current
law, while the matter is not entirely clear, individual Non-U.S. Holders, and entities whose property is potentially includible
in those individuals’ gross estates 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
benefit, a note is likely to be treated as U.S. situs property, subject to U.S. federal estate tax. These individuals and entities
should consult their own tax advisors regarding the U.S. federal estate tax consequences of investing in a note.
Backup Withholding and Information Reporting
Please see the discussion under “U.S.
Federal Income Tax Considerations — Taxation of Debt Securities — Backup Withholding and Information Reporting”
in the accompanying prospectus for a description of the applicability of the backup withholding and information reporting rules
to payments made on the notes.
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