Free Writing Prospectus No. 2,173
Registration Statement Nos. 333-221595;
333-221595-01
Dated June 24, 2019
Filed Pursuant to Rule 433
|
Morgan Stanley Finance LLC Capped GEARS
Linked to the SPDR
®
S&P
®
Regional
Banking ETF due August 31, 2020
Fully and Unconditionally Guaranteed by Morgan Stanley
Principal at Risk Securities
Investment Description
|
These Capped GEARS (the “Securities”) are unsecured
and unsubordinated debt securities issued by Morgan Stanley Finance LLC (“MSFL”) and are fully and unconditionally
guaranteed by Morgan Stanley. The return on the Securities is linked to the performance of the SPDR
®
S&P
®
Regional Banking ETF (the “Underlying Shares”). If the Underlying Return is greater than zero, MSFL will repay the
Principal Amount at maturity plus pay a return equal to 3.0 times the Underlying Return, up to the Maximum Gain, which will be
set on the Trade Date and is expected to be between 20.50% and 22.00%. If the Underlying Return is zero, MSFL will repay the full
Principal Amount at maturity. However, if the Underlying Return is negative, MSFL will pay less than the full Principal Amount
at maturity, resulting in a loss of principal to investors that is proportionate to the negative Underlying Return. The Securities
are designed for investors who seek exposure to the Underlying Shares with the features described herein and who are willing to
incur a loss on their Principal Amount, forgo current income and forgo returns above the Maximum Gain.
Investing in the Securities
involves significant risks. You will not receive interest or dividend payments during the term of the Securities. You may lose
some or all of your Principal Amount. The contingent repayment of principal applies only if you hold the Securities to maturity.
All payments are subject to our credit risk. If we default
on our obligations, you could lose some or all of your investment. These Securities are not secured obligations and you will not
have any security interest in, or otherwise have any access to, any underlying reference asset or assets.
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Features
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Key Dates
*
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q
Enhanced
Growth Potential up to the Maximum Gain:
At maturity, the Upside Gearing feature will provide leveraged exposure to any positive
performance of the Underlying Shares, up to the Maximum Gain. If the Underlying Return is negative, investors will be fully exposed
to the negative Underlying Return at maturity.
q
Full
Downside Market Exposure:
If the Underlying Return is negative, investors will be exposed to the full downside performance
of the Underlying, and MSFL will pay less than the full Principal Amount at maturity, resulting in a loss of principal to investors
that is proportionate to the negative Underlying Return. Accordingly, you may lose some or all of your Principal Amount. Any payment
on the Securities, including any repayment of principal, is subject to our creditworthiness.
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Trade Date
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June 25, 2019
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Settlement Date
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June 28, 2019
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Final Valuation Date**
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August 26, 2020
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Maturity Date**
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August 31, 2020
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* Expected.
** Subject to postponement
in the event of a Market Disruption Event or for non-Trading Days. See “Postponement of Final Valuation Date and Maturity
Date” under “Additional Terms of the Securities.”
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The Securities are
significantly riskier than conventional debt INSTRUMENTS. the terms of the securities may not obligate US TO REPAY THE FULL PRINCIPAL
AMOUNT OF THE SECURITIES. the Securities CAN have downside MARKET risk SIMILAR TO the UNDERLYING SHARES, WHICH CAN RESULT IN A
LOSS OF SOME OR ALL OF YOUR INVESTMENT at maturity. This MARKET risk is in addition to the CREDIT risk INHERENT IN PURCHASING OUR
DEBT OBLIGATIONS. You should not PURCHASE the Securities if you do not understand or are not comfortable with the significant
risks INVOLVED in INVESTING IN the Securities. THE SECURITIES WILL NOT BE LISTED ON ANY SECURITIES EXCHANGE.
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED
UNDER ‘‘KEY RISKS’’ BEGINNING ON PAGE 5 OF THIS FREE WRITING PROSPECTUS BEFORE PURCHASING ANY SECURITIES.
EVENTS RELATING TO ANY OF THOSE RISKS, OR OTHER RISKS AND UNCERTAINTIES, COULD ADVERSELY AFFECT THE MARKET VALUE OF, AND THE RETURN
ON, YOUR SECURITIES.
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Security Offering
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We are offering Capped GEARS linked to the SPDR
®
S&P
®
Regional Banking ETF. The Securities are offered at a minimum investment of 100 Securities at the Price to Public listed below. The indicative Maximum Gain range for the Securities is listed below. The actual Maximum Gain and Initial Price will be determined on the Trade Date.
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Underlying
Shares
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Initial
Price
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Upside
Gearing
|
Maximum
Gain
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CUSIP
|
ISIN
|
SPDR
®
S&P
®
Regional Banking ETF
|
$
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3.0
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20.50% to 22.00%, which corresponds to a maximum Payment at Maturity of $12.05 to $12.20 per Security
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61769Q162
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US61769Q1629
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See
“Additional Information about Morgan Stanley, MSFL and the Securities” on page 2. The Securities will have the terms
set forth in the accompanying prospectus, prospectus supplement and this free writing prospectus.
Neither
the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these Securities or passed
upon the adequacy or accuracy of this free writing prospectus or the accompanying prospectus supplement and prospectus. Any representation
to the contrary is a criminal offense. The Securities are not deposits or savings accounts and are not insured by the Federal
Deposit Insurance Corporation or any other governmental agency or instrumentality, nor are they obligations of, or guaranteed
by, a bank.
Estimated value on the Trade Date
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Approximately $9.681 per Security, or within $0.10 of that estimate. See “Additional Information about Morgan Stanley, MSFL and the Securities” on page 2.
|
|
Price
to Public
|
Underwriting
Discount
(1)
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Proceeds
to Us
(2)
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Per Security
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$10.00
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$0.20
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$9.80
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Total
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$
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$
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$
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(1)
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UBS
Financial Services Inc., acting as dealer, will receive from Morgan Stanley & Co.
LLC, the agent, a fixed sales commission of $0.20 for each Security it sells. For more
information, please see “Supplemental Plan of Distribution; Conflicts of Interest”
on page 25 of this free writing prospectus.
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(2)
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See “Use
of Proceeds and Hedging” on page 24.
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The agent for this offering, Morgan
Stanley & Co. LLC, is our affiliate and a wholly owned subsidiary of Morgan Stanley. See “Supplemental Plan of Distribution;
Conflicts of Interest” on page 25 of this free writing prospectus.
Morgan Stanley
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UBS Financial Services Inc.
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Additional Information about Morgan Stanley, MSFL and the Securities
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Morgan Stanley and MSFL have filed a registration
statement (including a prospectus, as supplemented by a prospectus supplement) with the SEC for the offering to which this communication
relates. Before you invest, you should read the prospectus in that registration statement, the prospectus 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 prospectus supplement if you so request by calling toll-free 1-(800)-584-6837.
You may access the accompanying prospectus supplement and prospectus
on the SEC website at www.sec.gov as follows:
References to “MSFL” refer only to MSFL, references
to “Morgan Stanley” refer only to Morgan Stanley and references to “we,” “our” and “us”
refer to MSFL and Morgan Stanley collectively. In this document, the “Securities” refers to the Capped GEARS that are
offered hereby. Also, references to the accompanying “prospectus” and “prospectus supplement” mean the
prospectus filed by MSFL and Morgan Stanley dated November 16, 2017 and the prospectus supplement filed by MSFL and Morgan Stanley
dated November 16, 2017, respectively.
You should rely only on the information incorporated by reference
or provided in this free writing prospectus or the accompanying prospectus 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 prospectus supplement and prospectus
is accurate as of any date other than the date on the front of the applicable document.
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 $9.681, or within $0.10 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.
What goes into the estimated value on
the Trade Date?
In valuing the Securities on the Trade Date,
we take into account that the Securities comprise both a debt component and a performance-based component linked to the Underlying
Shares. The estimated value of the Securities is determined using our own pricing and valuation models, market inputs and assumptions
relating to the Underlying Shares, instruments based on the Underlying Shares, volatility and other factors including current and
expected interest rates, as well as an interest rate related to our secondary market credit spread, which is the implied interest
rate at which our conventional fixed rate debt trades in the secondary market.
What determines the economic terms of
the Securities?
In determining the economic terms of the
Securities, including the Upside Gearing and the Maximum Gain, we use an internal funding rate, which is likely to be lower than
our secondary market credit spreads and therefore advantageous to us. If the issuing, selling, structuring and hedging costs borne
by you were lower or if the internal funding rate were higher, one or more of the economic terms of the Securities would be more
favorable to you.
What is the relationship between the
estimated value on the Trade Date and the secondary market price of the Securities?
The price at which MS & Co. purchases
the Securities in the secondary market, absent changes in market conditions, including those related to the Underlying Shares,
may vary from, and be lower than, the estimated value on the Trade Date, because the secondary market price takes into account
our secondary market credit spread as well as the bid-offer spread that MS & Co. would charge in a secondary market transaction
of this type and other factors. However, because the costs associated with issuing, selling, structuring and hedging the Securities
are not fully deducted upon issuance, for a period of up to 7 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.
Investor Suitability
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The Securities may be suitable for you if:
¨
You
fully understand the risks inherent in an investment in the Securities, including the risk of loss of your entire initial investment.
¨
You
can tolerate a loss of all or a substantial portion of your Principal Amount and are willing to make an investment that may have
the same downside market risk as an investment in the Underlying Shares.
¨
You
understand the characteristics of the Underlying Shares.
¨
You
are willing to hold the Securities to maturity, as set forth on the cover of this free writing prospectus, and accept that there
may be little or no secondary market for the Securities.
¨
You
believe the Underlying Shares will appreciate over the term of the Securities and that the appreciation is unlikely to exceed the
Maximum Gain (the actual Maximum Gain for the Securities will be determined on the Trade Date).
¨
You
understand and accept that your potential return is limited by the Maximum Gain and you would be willing to invest in the Securities
if the Maximum Gain were set to the bottom of the range indicated on the cover hereof.
¨
You
can tolerate fluctuations of the price of the Securities prior to maturity that may be similar to or exceed the downside fluctuations
in the price of the Underlying Shares.
¨
You
do not seek current income from your investment and are willing to forgo dividends paid on the Underlying Shares.
¨
You
are willing to assume our credit risk and understand that if we default on our obligations you may not receive any amounts due
to you including any repayment of principal.
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The Securities may not be suitable for you if:
¨
You
do not fully understand the risks inherent in an investment in the Securities, including the risk of loss of your entire initial
investment.
¨
You
cannot tolerate a loss of all or a substantial portion of your Principal Amount, and you are not willing to make an investment
that may have the same downside market risk as an investment in the Underlying Shares.
¨
You
require an investment designed to provide a full return of principal at maturity.
¨
You
do not understand the characteristics of the Underlying Shares.
¨
You
are unable or unwilling to hold the Securities to maturity, as set forth on the cover of this free writing prospectus, or you seek
an investment for which there will be an active secondary market.
¨
You
believe that the price of the Underlying Shares will decline during the term of the Securities, or you believe the Underlying Shares
will appreciate over the term of the Securities by a percentage that exceeds the Maximum Gain.
¨
You
seek an investment that has unlimited return potential without a cap on appreciation.
¨
You
would not be willing to invest in the Securities if the Maximum Gain were set equal to the bottom of the range indicated on the
cover hereof (the actual Maximum Gain will be determined on the Trade Date).
¨
You
prefer the lower risk, and, therefore, accept the potentially lower returns, of conventional debt securities with comparable maturities
issued by us or another issuer with a similar credit rating.
¨
You
seek current income from your investment or prefer to receive the dividends paid on the Underlying Shares.
¨
You
are not willing or are unable to assume the credit risk associated with us for any payment on the Securities, including any repayment
of principal.
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The investor suitability considerations identified
above are not exhaustive. Whether or not the Securities are a suitable investment for you will depend on your individual circumstances,
and you should reach an investment decision only after you and your investment, legal, tax, accounting and other advisors have
carefully considered the suitability of an investment in the Securities in light of your particular circumstances. You should also
review “Key Risks” on page 5 of this free writing prospectus and “Risk Factors” beginning on page 7 of
the accompanying prospectus for risks related to an investment in the Securities. For additional information about the Underlying
Shares, see the information set forth under “The SPDR
®
S&P
®
Regional Banking ETF”
on page 17.
Terms
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Investment Timeline
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Issuer
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Morgan Stanley Finance LLC
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The Closing Price of the Underlying Shares (Initial Price) is
observed and the Maximum Gain is set.
The Final Price and Underlying Return are determined on the Final
Valuation Date.
If the Underlying Return is greater than zero
, MSFL will
pay you a cash payment per Security equal to the lesser of:
$10 + [$10 × (Underlying Return × Upside Gearing)];
and
$10 + ($10 × Maximum Gain)
If the Underlying Return is zero
, MSFL will pay you a
cash payment of $10 per $10 Security.
If the Underlying Return is less than zero on the Final Valuation
Date
, MSFL will pay you a cash payment at maturity equal to:
$10 + ($10 × Underlying Return)
Under these circumstances, you will lose some, and could lose
all, of your Principal Amount.
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Guarantor
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Morgan Stanley
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Issue Price (per Security)
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$10.00 per Security
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Principal Amount
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$10.00 per Security
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Term
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1 year and 2 months
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Underlying Shares
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Shares of the SPDR
®
S&P
®
Regional Banking ETF (the “Fund”)
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Upside Gearing
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3.0
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Maximum Gain
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Between 20.50% and 22.00%, which corresponds to a maximum Payment at Maturity of $12.05 to $12.20 per Security. The actual Maximum Gain will be determined on the Trade Date.
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Payment at Maturity (per Security)
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If the Underlying Return is greater than zero
,
MSFL will pay you an amount equal to the lesser of:
$10 + [$10 × (Underlying Return × Upside
Gearing)]; and
$10 + ($10
× Maximum Gain)
If the Underlying Return is zero,
MSFL will
pay you the $10 Principal Amount.
If the Underlying Return is less than zero,
MSFL
will pay you an amount calculated as follows:
$10 + ($10 × Underlying Return)
In this scenario, you will lose some or all of the
Principal Amount of the Securities in an amount proportionate to the negative Underlying Return.
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Underlying Return
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Final Price –
Initial Price
Initial Price
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Initial Price
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The Closing Price of one share of the Underlying Shares on the Trade Date.
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Final Price
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The Closing Price of one share of the Underlying Shares on the Final Valuation Date
times
the Adjustment Factor on such date.
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Trade Date
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June 25, 2019
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Settlement Date
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June 28, 2019
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Final Valuation Date
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August 26, 2020*
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Maturity Date
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August 31, 2020*
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Adjustment Factor
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1.0, subject to adjustment in the event of certain corporate events affecting the Underlying Shares.
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CUSIP / ISIN
|
61769Q162 / US61769Q1629
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Calculation Agent
|
Morgan Stanley & Co. LLC
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* Subject to postponement in the event of a Market
Disruption Event or for
non-Trading Days. See “Postponement of Final Valuation
Date and Maturity
Date” under “Additional Terms of the Securities.”
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.
An investment in the Securities
involves significant risks. Some of the risks that apply to the Securities are summarized here, but we urge you to also read the
“Risk Factors” section of the accompanying prospectus. You should also consult your investment, legal, tax, accounting
and other advisers before you invest in the Securities.
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¨
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Your
investment in the Securities may result in a loss of up to your entire initial investment in the Securities
–
T
he terms of the Securities differ from those of ordinary debt securities in that we will
not pay interest or guarantee the payment of any of the Principal Amount at maturity. If the Underlying Return is negative, you
will be fully exposed to the negative Underlying Return and MSFL will pay you less than your Principal Amount at maturity, resulting
in a loss of principal that is proportionate to the decline in the Underlying Shares from the Initial Price to the Final Price.
Accordingly, you could lose the entire Principal Amount of the Securities
.
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|
¨
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The
Upside Gearing applies only if you hold the Securities to maturity –
You should be willing to hold your Securities to
maturity. If you are able to sell your Securities prior to maturity in the secondary market, the price you receive will likely
not reflect the full economic value of the Upside Gearing or the Securities themselves, and the return you realize may be less
than 3.0 times the Underlying Shares' return even if such return is positive and does not exceed the Maximum Gain. You can receive
the full benefit of the Upside Gearing and potentially earn up to the Maximum Gain only if you hold your Securities to maturity.
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|
¨
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The
appreciation potential is limited.
The appreciation potential of the Securities is limited by the Maximum Gain of 20.50% to
22.00% (which corresponds to a maximum Payment at Maturity of $12.05 to $12.20 per Security). Therefore, although the Upside Gearing
enhances positive Underlying Returns, you will not benefit from any positive Underlying Return that, when multiplied by the Upside
Gearing, exceeds the Maximum Gain. As a result, any increase in the Final Price over the Initial Price by more than approximately
6.833% to approximately 7.333% (to be determined on the Trade Date) of the Initial Price will not further increase the return
on the Securities.
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¨
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The
Securities are subject to our credit risk, and any actual or anticipated changes to our credit ratings or our credit spreads may
adversely affect the market value of the Securities
– You are dependent on our ability to pay all amounts due on the
Securities at maturity, if any, and therefore you are subject to our credit risk. If we default on our obligations under the Securities,
your investment would be at risk and you could lose some or all of your investment. As a result, the market value of the Securities
prior to maturity will be affected by changes in the market’s view of our creditworthiness. Any actual or anticipated decline
in our credit ratings or increase in our credit spreads charged by the market for taking our credit risk is likely to adversely
affect the market value of the Securities.
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|
¨
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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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|
¨
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The
Securities do not pay interest
– MSFL will not pay any interest with respect to the Securities over the term of the
Securities.
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¨
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The
market price of the Securities may be influenced by many unpredictable factors
–
Several
factors, many of which are beyond our control, will influence the value of the Securities in the secondary market and the price
at which MS & Co. may be willing to purchase or sell the Securities in the secondary market (if at all), including:
|
|
o
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the price of the Underlying Shares at any time,
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|
o
|
the volatility (frequency and magnitude of changes in price) of the Underlying Shares,
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|
o
|
interest and yield rates in the market,
|
|
o
|
geopolitical conditions and economic, financial, political, regulatory or judicial events that affect
the Underlying Shares or stock markets generally and which may affect the Final Price,
|
|
o
|
the time remaining until the Securities mature, and
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|
o
|
any actual or anticipated changes in our credit ratings
or credit spreads.
|
Some or all of these factors will
influence the terms of the Securities at the time of issuance and the price that you will receive if you are able to sell your
Securities prior to maturity, as the Securities are comprised of both a debt component and a performance-based component linked
to the Underlying Shares, and these are the types of factors that also generally affect the values of debt securities and derivatives
linked to the Underlying Shares. For example, you may have to sell your Securities at a substantial discount from the principal
amount of $10 per Security if the price of the Underlying Shares at the time of
sale is at or below or moderately
above its Initial Price, or if market interest rates rise. You cannot predict the future performance of the Underlying Shares based
on their historical performance.
|
¨
|
The
probability that the Final Price will be less than the Initial Price will depend on the volatility of the Underlying Shares
–
“Volatility” refers to the frequency and magnitude of changes in the price of the Underlying Shares. Higher
expected volatility with respect to the Underlying Shares as of the Trade Date generally indicates a greater chance as of that
date that the Final Price will be less than the Initial Price, which would result in a loss of some or all of your investment
at maturity. However, the Underlying Share’s volatility can change significantly over the term of the Securities.
The price of the Underlying Shares could fall sharply, resulting in a significant loss of principal. You should be
willing to accept the downside market risk of the Underlying Shares and the potential loss of some or all of your investment at
maturity.
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|
¨
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The
equity securities included in the Share Underlying Index are concentrated in the regional banking sector –
The Underlying
Shares track the performance of the S&P
®
Regional Banks Select Industry Index (the “Share Underlying
Index”). Each of the equity securities included in the Share Underlying Index has been issued by a company whose business
is associated with the regional banking sector. Because the value of the Securities is determined based on the performance of
the Underlying Shares, an investment in the Securities will be concentrated in this sector. As a result, the value of the Securities
may be subject to greater volatility and may be more adversely affected by a single economic, political or regulatory occurrence
affecting this sector than a different investment linked to securities of a more broadly diversified group of issuers.
|
The stocks represented in the Share
Underlying Index are issued by companies whose primary lines of business are directly associated with the regional banking sector.
The performance of bank stocks may be affected by governmental regulation that may limit the amount and types of loans and other
financial commitments that banks can make, the interest rates and fees they can charge and the amount of capital they must maintain.
Profitability is largely dependent on the availability and cost of capital funds, and can fluctuate significantly when interest
rates change. Credit losses resulting from financial difficulties of borrowers can negatively impact the banking sector. Banks
may also be subject to severe price competition. The regional banking industry is highly competitive, and thus, failure to maintain
or increase market share may adversely affect profitability.
|
¨
|
The
performance and market price of the Fund, particularly during periods of market volatility, may not correlate with the performance
of the Share Underlying Index, the performance of the component securities of the Share Underlying Index or the net asset value
per share of the Fund –
The Fund does not fully replicate the Share Underlying Index and may hold securities that
are different than those included in the Share Underlying Index. In addition, the performance of the Fund will reflect additional
transaction costs and fees that are not included in the calculation of the Share Underlying Index. All of these factors
may lead to a lack of correlation between the performance of the Fund and the Share Underlying Index. In addition, corporate
actions (such as mergers and spin-offs) with respect to the equity securities underlying the Fund may impact the variance between
the performances of the Fund and the Share Underlying Index. Finally, because the shares of the Fund are traded on an
exchange and are subject to market supply and investor demand, the market price of one share of the Fund may differ from the net
asset value per share of the Fund.
|
In particular, during periods of
market volatility, or unusual trading activity, trading in the securities underlying the Fund may be disrupted or limited, or such
securities may be unavailable in the secondary market. Under these circumstances, the liquidity of the Fund may be adversely
affected, market participants may be unable to calculate accurately the net asset value per share of the Fund, and their ability
to create and redeem shares of the Fund may be disrupted. Under these circumstances, the market price of shares of the Fund may
vary substantially from the net asset value per share of the Fund or the level of the Share Underlying Index.
For all of the foregoing reasons,
the performance of the Fund may not correlate with the performance of the Share Underlying Index, the performance of the component
securities of the Share Underlying Index or the net asset value per share of the Fund. Any of these events could materially
and adversely affect the price of the shares of the Fund and, therefore, the value of the Securities. Additionally, if market
volatility or these events were to occur on the Final Valuation Date, the Calculation Agent would maintain discretion to determine
whether such market volatility or events have caused a Market Disruption Event to occur, and such determination would affect the
Payment at Maturity of the Securities. If the Calculation Agent determines that no Market Disruption Event has taken place,
the payment at maturity would be based solely on the published closing price per share of the Fund on the Final Valuation Date,
even if the Fund’s shares are underperforming the Share Underlying Index or the component securities of the Share Underlying
Index and/or trading below the net asset value per share of the Fund.
|
¨
|
No
dividend payments or voting rights
– Owning the Securities is not the same as owning the Underlying Shares or the stocks
comprising the Share Underlying Index. As a holder of the Securities, you will not have voting rights or rights to receive dividends
or other distributions or other rights that holders of shares of the Underlying Shares or stocks held by the Fund would have.
|
|
¨
|
The
amount payable on the Securities is not linked to the price of the Underlying Shares at any time other than the Final Valuation
Date
– The Final Price will be based on the Closing Price of the Underlying Shares on the Final Valuation Date, subject
to postponement for non-Trading Days and certain Market Disruption Events. Even if the price of the Underlying Shares appreciates
prior to the Final Valuation Date but then drops by the Final Valuation Date, the Payment at
|
Maturity
may be significantly less than it would have been had the Payment at Maturity been linked to the price of the Underlying Shares
prior to such drop. Although the actual price of the Underlying Shares on the stated Maturity Date or at other times during the
term of the Securities may be higher than the Final Price, the Payment at Maturity will be based solely on the Closing Price of
the Underlying Shares on the Final Valuation Date as compared to the Initial Price.
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¨
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Investing in the Securities is not equivalent
to investing in the Underlying Shares or the stocks composing the Share Underlying Index
– Investing in the Securities
is not equivalent to investing in the Underlying Shares, the Share Underlying Index or the stocks that constitute the Share Underlying
Index. Investors in the Securities will not have voting rights or rights to receive dividends or other distributions or any other
rights with respect to the Underlying Shares or the stocks that constitute the Share Underlying Index.
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The
rate we are willing to pay for securities of this type, maturity and issuance size is likely to be lower than the rate implied
by our secondary market credit spreads and advantageous to us. Both the lower rate and the inclusion of costs associated with
issuing, selling, structuring and hedging the Securities in the Issue Price reduce the economic terms of the Securities, cause
the estimated value of the Securities to be less than the Issue Price and will adversely affect secondary market prices
–
Assuming no change in market conditions or any other relevant factors,
the prices, if any, at which dealers, including MS & Co., may be willing to purchase the Securities in secondary market transactions
will likely be significantly lower than the Issue Price, because secondary market prices will exclude the issuing, selling, structuring
and hedging-related costs that are included in the Issue Price and borne by you and because the secondary market prices will reflect
our secondary market credit spreads and the bid-offer spread that any dealer would charge in a secondary market transaction of
this type as well as other factors.
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The inclusion of the costs of issuing,
selling, structuring and hedging the Securities in the Issue Price and the lower rate we are willing to pay as issuer make the
economic terms of the Securities less favorable to you than they otherwise would be.
However, because the costs associated
with issuing, selling, structuring and hedging the Securities are not fully deducted upon issuance, for a period of up to 7 months
following the Settlement Date, to the extent that MS & Co. may buy or sell the Securities in the secondary market, absent changes
in market conditions, including those related to the Underlying Shares, and to our secondary market credit spreads, it would do
so based on values higher than the estimated value, and we expect that those higher values will also be reflected in your brokerage
account statements.
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The estimated value of the Securities is
determined by reference to our pricing and valuation models, which may differ from those of other dealers and is not a maximum
or minimum secondary market price
–
These pricing and
valuation models are proprietary and rely in part on subjective views of certain market inputs and certain assumptions about future
events, which may prove to be incorrect. As a result, because there is no market-standard way to value these types of securities,
our models may yield a higher estimated value of the Securities than those generated by others, including other dealers in the
market, if they attempted to value the Securities. In addition, the estimated value on the Trade Date does not represent a minimum
or maximum price at which dealers, including MS & Co., would be willing to purchase your Securities in the secondary market
(if any exists) at any time. The value of your Securities at any time after the date of this 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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Adjustments to the Underlying Shares
or to the Share Underlying Index could adversely affect the value of the Securities
– The investment adviser to the Fund,
SSgA Funds Management, Inc. (the “Investment Adviser”), seeks investment results that correspond generally to the price
and yield performance, before fees and expenses, of the Share Underlying Index. Pursuant to its investment strategy or otherwise,
the Investment Adviser may add, delete or substitute the stocks composing the Fund. Any of these actions could adversely affect
the price of the Underlying Shares and, consequently, the value of the Securities. S&P Dow Jones Indices LLC (“S&P”),
a subsidiary of The McGraw-Hill Companies, Inc., is responsible for calculating and maintaining the Share Underlying Index. S&P
may add, delete or substitute the stocks constituting the Share Underlying Index or make other methodological changes that could
change the value of the Share Underlying Index. S&P may discontinue or suspend calculation or publication of the Share Underlying
Index at any time. If trading in the Underlying Shares is permanently discontinued and/or the Fund is liquidated or otherwise terminated,
and S&P subsequently discontinues publication of the Share Underlying Index, the Calculation Agent will have the sole discretion
to substitute a successor index that is comparable to the discontinued Share Underlying Index and is permitted to consider indices
that are calculated and published by the Calculation Agent or any of its affiliates. Any of these actions could adversely affect
the price of the Underlying Shares, and consequently, the value of the Securities.
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The adjustments to the Adjustment Factor
the Calculation Agent is required to make do not cover every corporate event that can affect the shares of the Underlying Shares
– MS & Co., as Calculation Agent, will adjust the Adjustment Factor for certain events affecting the Underlying Shares,
including stock splits and reverse stock splits. However, the Calculation Agent will not make an adjustment for every event that
can affect the Underlying Shares. If an event occurs that does not require the Calculation Agent to adjust the Adjustment Factor,
the market price of the Securities may be materially and adversely affected. The determination by the Calculation Agent to adjust,
or not to adjust, an Adjustment Factor may materially and adversely affect the market price of the Securities.
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The
Securities will not be listed on any securities exchange and secondary trading may be limited
– The Securities will
not be listed on any securities exchange. Therefore, there may be little or no secondary market for the Securities. MS & Co.
currently intends, but is not obligated, to make a market in the Securities and, if it once chooses to make a market, may
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cease
doing so at any time. When it does make a market, it will generally do so for transactions of routine secondary market size at
prices based on its estimate of the current value of the Securities, taking into account its bid/offer spread, our credit spreads,
market volatility, the notional size of the proposed sale, the cost of unwinding any related hedging positions, the time remaining
to maturity and the likelihood that it will be able to resell the Securities. Even if there is a secondary market, it may not
provide enough liquidity to allow you to trade or sell the Securities easily. Since other broker-dealers may not participate significantly
in the secondary market for the Securities, the price at which you may be able to trade your Securities is likely to depend on
the price, if any, at which MS & Co. is willing to transact. If, at any time, MS & Co. were to cease making a market in
the Securities, it is likely that there would be no secondary market for the Securities. Accordingly, you should be willing to
hold your Securities to maturity.
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Hedging
and trading activity by our affiliates could potentially adversely affect the value of the Securities
– One or more
of our affiliates and/or third-party dealers expect to carry out hedging activities related to the Securities, including trading
in the Underlying Shares or the constituent stocks of the Share Underlying Index, in futures or options contracts on the Underlying
Shares, the Share Underlying Index or the constituent stocks of the Share Underlying Index, as well as in other instruments related
to the Underlying Shares or the Share Underlying Index. As a result, these entities may be unwinding or adjusting hedge positions
during the term of the Securities, and the hedging strategy may involve greater and more frequent dynamic adjustments to the hedge
as the Final Valuation Date approaches. MS & Co. and some of our other affiliates also trade the Underlying Shares or the
constituent stocks of the Share Underlying Index, in futures or options contracts on the Underlying Shares, the Share Underlying
Index or the constituent stocks of the Share Underlying Index, as well as in other instruments related to the Underlying Shares
or the Share Underlying Index, on a regular basis as part of their general broker-dealer and other businesses. Any of these hedging
or trading activities on or prior to the Trade Date could potentially increase the Initial Price of the Underlying Shares, and,
therefore, could increase the price at or above which the Underlying Shares must close on the Final Valuation Date so that investors
do not suffer a loss on their initial investment in the Securities. Additionally, such hedging or trading activities during the
term of the Securities, including on the Final Valuation Date, could adversely affect the Closing Price of the Underlying Shares
on the Final Valuation Date, and, accordingly, the amount of cash payable at maturity, if any.
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Potential
conflict of interest
– As Calculation Agent, MS & Co. will determine the Initial Price, the Maximum Gain, the Final
Price and whether any Market Disruption Event has occurred, and will calculate the amount payable at maturity, if any. Moreover,
certain determinations made by MS & Co., in its capacity as Calculation Agent, may require it to exercise discretion and make
subjective judgments, such as with respect to the occurrence or non-occurrence of Market Disruption Events, any adjustment to
the Adjustment Factor and the selection of a Successor Index or calculation of the Final Price in the event of a discontinuance
of the Share Underlying Index or a Market Disruption Event. These potentially subjective determinations may adversely affect the
payout to you at maturity, if any. For further information regarding these types of determinations, see “Additional Terms
of the Securities—Postponement of Final Valuation Date and Maturity Date,” “—Discontinuance of the Underlying
Shares and/or Share Underlying Index; Alteration of Method of Calculation,” “—Calculation Agent and Calculations
” and related definitions below. In addition, MS & Co. has determined the estimated value of the Securities on the Trade
Date.
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Potentially
inconsistent research, opinions or recommendations by Morgan Stanley, UBS or our or their respective affiliates
– Morgan
Stanley, UBS and our or their respective affiliates may publish research from time to time on financial markets and other matters
that may influence the value of the Securities, or express opinions or provide recommendations that are inconsistent with purchasing
or holding the Securities. Any research, opinions or recommendations expressed by Morgan Stanley, UBS or our or their respective
affiliates may not be consistent with each other and may be modified from time to time without notice. Investors should make their
own independent investigation of the merits of investing in the Securities and the Underlying Shares to which the Securities are
linked.
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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 prospectus supplement.
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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. However, because our counsel’s opinion is based in part on market conditions as of the date of this document,
it is subject to confirmation on the Trade Date.
Because the Securities are linked
to shares of an exchange-traded fund, although the matter is not clear, there is a substantial risk that an investment in the Securities
will be treated as a “constructive ownership transaction.” If this treatment applies, all or a portion of any long-term
capital gain of a U.S. Holder (as defined below) in respect of the Securities could be recharacterized as ordinary income (in which
case an interest charge would be imposed). U.S. Holders should read the section entitled “What Are the Tax Consequences of
the Securities? — Tax Consequences to U.S. Holders — Tax Treatment of the Securities — Potential Application
of the Constructive Ownership Rule” in this free writing prospectus.
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. 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. Holders (as defined below)
should be subject to withholding tax; and whether these instruments are or should be subject to the “constructive ownership”
rule, as discussed above. 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.
Scenario Analysis and Examples at Maturity
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These examples are based
on hypothetical terms. The actual terms will be determined on the Trade Date
.
The below scenario analysis
and examples are provided for illustrative purposes only and are hypothetical. They do not purport to be representative of every
possible scenario concerning increases or decreases in the price of the Underlying Shares relative to the Initial Price. We cannot
predict the Final Price on the Final Valuation Date. You should not take the scenario analysis and these examples as an indication
or assurance of the expected performance of the Underlying Shares. The numbers appearing in the examples below have been rounded
for ease of analysis. The following scenario analysis and examples illustrate the payment at maturity for a $10.00 security on
a hypothetical offering of the Securities, based on the following terms*:
Investment term:
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1 year and 2 months
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Hypothetical Initial Price:
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$52.00
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Hypothetical Maximum Gain:
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20.50%
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Upside Gearing:
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3.0
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*
The actual Initial
Price and Maximum Gain for the Securities will be determined on the Trade Date.
Example 1
—
The price of the Underlying
Shares
increases
from an Initial Price of $52.00 to a Final Price of $53.04.
The
Underlying Return is calculated as follows:
($53.04
– $52.00) / $52.00 = 2%
Because
the Underlying Return is greater than zero, the Payment at Maturity for each $10.00 Principal Amount of Securities is calculated
as the lesser of:
(A)
$10.00 + ($10.00 × Underlying Return × Upside Gearing), and
(B)
$10.00 + ($10.00 × Maximum Gain)
=
the lesser of (A) $10.00 + ($10.00 × 2% × 3) and (B) $10.00 + ($10.00 × 20.50%)
=
the lesser of (A) $10.00 + ($10.00 × 6%) and (B) $10.00 + ($10.00 × 20.50%)
=
$10.00 + ($10.00 × 6%)
=
$10.00 + $0.60
=
$10.60
Because
the Underlying Return of 2% multiplied by the Upside Gearing is less than the hypothetical Maximum Gain of 20.50%, for each $10.00
Principal Amount of Securities, MSFL will pay you $10.60.
Example 2
—
The price of the Underlying
Shares
increases
from an Initial Price of $52.00 to a Final Price of $67.60.
The
Underlying Return is calculated as follows:
($67.60
– $52.00) / $52.00 = 30%
Because
the Underlying Return is greater than zero, the Payment at Maturity for each $10.00 Principal Amount of Securities is calculated
as the lesser of:
(A)
$10.00 + ($10.00 × Underlying Return × Upside Gearing), and
(B)
$10.00 + ($10.00 × Maximum Gain)
=
the lesser of (A) $10.00 + ($10.00 × 30% × 3) and (B) $10.00 + ($10.00 × 20.50%)
=
the lesser of (A) $10.00 + ($10.00 × 90%) and (B) $10.00 + ($10.00 × 20.50%)
=
$10.00 + ($10.00 × 20.50%)
=
$10.00 + $2.05
=
$12.05
Because
the Underlying Return of 30% multiplied by the Upside Gearing is greater than the hypothetical Maximum Gain of 20.50%, for each
$10.00 Principal Amount of Securities, MSFL will pay you $12.05, the hypothetical maximum payment on the Securities.
Example 3
—
The price of the Underlying
Shares
decreases
from an Initial Price of $52.00 to a Final Price of $31.20.
The
Underlying Return is calculated as follows:
($31.20
– $52.00) / $52.00 = -40%
Because
the Underlying Return is negative, at maturity, for each $10.00 Principal Amount of Securities MSFL will pay less than the Principal
Amount, resulting in a loss of principal that is proportionate to the negative Underlying Return, and the Payment at Maturity is
calculated as follows:
$10.00 + ($10.00 × Underlying Return)
=
$10.00 + ($10.00 × -40%)
=
$10.00 - $4.00
=
$6.00
If the Final Price is below the Initial
Price on the Final Valuation Date, the Securities will be fully exposed to any decline in the Underlying Shares, and you will lose
some or all of your Principal Amount at maturity.
Scenario Analysis – Hypothetical
Payment at Maturity for each $10.00 Principal Amount of Securities.
Performance
of the Underlying Shares
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Final
Price
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Underlying
Return
|
Payment
at Maturity
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Return
on Securities Purchased at $10.00
(1)
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$104.00
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100%
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$12.05
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20.50%
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$98.80
|
90%
|
$12.05
|
20.50%
|
$93.60
|
80%
|
$12.05
|
20.50%
|
$88.40
|
70%
|
$12.05
|
20.50%
|
$83.20
|
60%
|
$12.05
|
20.50%
|
$78.00
|
50%
|
$12.05
|
20.50%
|
$72.80
|
40%
|
$12.05
|
20.50%
|
$67.60
|
30%
|
$12.05
|
20.50%
|
$62.40
|
20%
|
$12.05
|
20.50%
|
$57.20
|
10%
|
$12.05
|
20.50%
|
$55.55
|
6.833%
|
$12.05
|
20.50%
|
$55.12
|
6%
|
$11.80
|
18.00%
|
$54.60
|
5%
|
$11.50
|
15.00%
|
$52.00
|
0%
|
$10.00
|
0.00%
|
$49.40
|
-5%
|
$9.50
|
-5.00%
|
$46.80
|
-10%
|
$9.00
|
-10.00%
|
$41.60
|
-20%
|
$8.00
|
-20.00%
|
$36.40
|
-30%
|
$7.00
|
-30.00%
|
$31.20
|
-40%
|
$6.00
|
-40.00%
|
$26.00
|
-50%
|
$5.00
|
-50.00%
|
$20.80
|
-60%
|
$4.00
|
-60.00%
|
$15.60
|
-70%
|
$3.00
|
-70.00%
|
$10.40
|
-80%
|
$2.00
|
-80.00%
|
$5.20
|
-90%
|
$1.00
|
-90.00%
|
$0.00
|
-100%
|
$0.00
|
-100.00%
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(1) This “Return on Securities”
is the number, expressed as a percentage, that results from comparing the Payment at Maturity per $10 Principal Amount Security
to the purchase price of $10 per Security.
What are the tax consequences of the Securities?
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Prospective investors
should note that the discussion under the section called “United States Federal Taxation” in the accompanying prospectus
supplement does not apply to the Securities issued under this 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.
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In addition, we will not attempt to ascertain
whether the SPDR S&P Regional Banking ETF is treated as a “U.S. real property holding corporation” (“USRPHC”)
within the meaning of Section 897 of the Code. If the SPDR S&P Regional Banking ETF were so treated, certain adverse U.S. federal
income tax consequences might apply to a Non-U.S. Holder (as defined below) upon the sale, exchange or settlement of the Securities.
You should refer to information filed with the Securities and Exchange Commission or other governmental authorities by the SPDR
S&P Regional Banking ETF and consult your tax adviser regarding the possible consequences to you if the SPDR S&P Regional
Banking ETF is or becomes a USRPHC.
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. However, because our counsel’s opinion
is based in part on market conditions as of the date of this free writing prospectus, it is subject to confirmation on the Trade
Date.
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. Subject to the discussion below concerning the potential application of the “constructive ownership” rule
under Section 1260 of the Code, 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.
Potential Application of the Constructive
Ownership Rule.
Because the Securities are linked to shares of an exchange-traded fund, although the matter is not clear,
there is a substantial risk that an investment in the Securities will be treated as a “constructive ownership transaction”
under Section 1260 of the Code. If this treatment applies, all or a portion of any long-term capital gain of the U.S. Holder in
respect of the Securities could be recharacterized as ordinary income (the “Recharacterized Gain”), in which case an
interest charge will be imposed. The amount of Recharacterized Gain (if any) that would be treated as ordinary income in respect
of a Security will equal the excess of (i) any long-term capital gain recognized by the U.S. Holder in respect of a Security over
(ii) the “net underlying long-term capital gain” (as defined in Section 1260 of the Code). Under Section 1260 of the
Code, the amount of net underlying long-term capital gain will be treated as zero unless otherwise “established by clear
and convincing evidence.” As a result of the terms of the Securities, such as the leveraged upside payment, it is unclear
how to calculate the amount of Recharacterized Gain if an investment in the Securities were treated as a constructive ownership
transaction. Due to the lack of governing authority, our counsel is unable to opine as to whether or how Section 1260 of the Code
applies to the Securities. U.S. Holders should consult their tax advisers regarding the potential application of the “constructive
ownership” rule.
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.
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, as discussed above. 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 and the discussion above concerning the possible
application of Section 897 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 Sections 871(m) and 897 of the Code 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 regarding Sections 871(m) and 897 of the Code 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, pursuant
to an IRS notice, Section 871(m) will not apply to securities issued before January 1, 2021 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 on the Trade Date. However, we will provide an updated determination
in the final pricing supplement. 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).
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 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 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.
FATCA 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, FATCA would apply
to any payment of amounts treated as interest and to payments of gross proceeds of the disposition (including upon retirement)
of the Securities. However, under recently proposed regulations (the
preamble to which specifies that taxpayers
are permitted to rely on them pending finalization), no withholding will apply on payments of gross proceeds. If withholding were
to apply to the Securities, we would not be required to pay any additional amounts with respect to amounts withheld. Both U.S.
and Non-U.S. Holders should consult their tax advisers regarding the potential application of FATCA to the Securities.
The discussion in the preceding paragraphs
under “What Are the Tax Consequences of the Securities,” insofar as it purports to describe provisions of U.S. federal
income tax laws or legal conclusions with respect thereto, constitutes the full opinion of Davis Polk & Wardwell LLP regarding
the material U.S. federal income tax consequences of an investment in the Securities.
The SPDR
®
S&P
®
Regional Banking ETF
|
The SPDR
®
S&P
®
Regional Banking
ETF is an exchange-traded fund managed by SSgA Funds Management, Inc., which seeks to provide investment results that generally
correspond to the price and yield performance, before fees and expenses, of the S&P
®
Regional Banks Select Industry
Index. SPDR
®
Series Trust (the “Trust”) is a registered investment company that consists of numerous
separate investment portfolios, including the SPDR
®
S&P
®
Regional Banking ETF. Information provided
to or filed with the Securities and Exchange Commission (the “Commission”) by KRE pursuant to the Securities Act of
1933 and the Investment Company Act of 1940 can be located by reference to Commission file numbers 333-57793 and 811-08839, respectively,
through the Commission’s website at www.sec.gov. In addition, information may be obtained from other publicly available sources.
Neither the issuer nor the agent makes any representation that any such publicly available information regarding the SPDR
®
S&P
®
Regional Banking ETF is accurate or complete. The Underlying Shares are listed on The NYSE Arca Exchange
under the ticker symbol “KRE.”
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 Fund. The statements in the preceding two sentences are
not intended to affect the rights of investors in the Securities under the securities laws. As a 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 in the Securities.
“Standard & Poor’s
®
”,
“S&P
®
”, “S&P 500
®
”, “SPDR
®
” and “SPDR
®
Series Trust” are trademarks of Standard & Poor’s Financial Services LLC (“S&P”), an affiliate
of The McGraw-Hill Companies, Inc. (“MGH”). The Securities are not sponsored, endorsed, sold, or promoted by S&P,
MGH or the Trust. S&P, MGH and the Trust make no representations or warranties to the owners of the Securities or any member
of the public regarding the advisability of investing in the Securities. S&P, MGH and the Trust have no obligation or liability
in connection with the operation, marketing, trading or sale of the Securities.
SPDR
®
S&P
®
Regional Banking ETF Historical Information
|
The following table sets forth the published high and low Closing
Prices, as well as the end-of-quarter Closing Prices, of the SPDR
®
S&P
®
Regional Banking ETF
for each quarter in the period from January 1, 2014 through June 20, 2019. The Closing Price of the SPDR
®
S&P
®
Regional Banking ETF on June 20, 2019 was $52.49. We obtained the information in the table below from Bloomberg Financial Markets,
without independent verification. The historical Closing Prices of the SPDR
®
S&P
®
Regional Banking
ETF should not be taken as an indication of future performance, and no assurance can be given as to the Closing Price of the SPDR
®
S&P
®
Regional Banking ETF on the Final Valuation Date.
Quarter Begin
|
Quarter End
|
Quarterly High ($)
|
Quarterly Low ($)
|
Quarterly Close ($)
|
1/1/2014
|
3/31/2014
|
42.47
|
36.84
|
41.38
|
4/1/2014
|
6/30/2014
|
42.16
|
37.30
|
40.32
|
7/1/2014
|
9/30/2014
|
41.14
|
37.61
|
37.86
|
10/1/2014
|
12/31/2014
|
41.18
|
36.05
|
40.70
|
1/1/2015
|
3/31/2015
|
41.58
|
36.54
|
40.83
|
4/1/2015
|
6/30/2015
|
45.37
|
40.78
|
44.16
|
7/1/2015
|
9/30/2015
|
45.03
|
38.56
|
41.18
|
10/1/2015
|
12/31/2015
|
45.93
|
40.47
|
41.92
|
1/1/2016
|
3/31/2016
|
40.89
|
32.89
|
37.64
|
4/1/2016
|
6/30/2016
|
41.98
|
35.51
|
38.35
|
7/1/2016
|
9/30/2016
|
43.09
|
36.85
|
42.27
|
10/1/2016
|
12/31/2016
|
56.46
|
41.71
|
55.57
|
1/1/2017
|
3/31/2017
|
59.36
|
52.59
|
54.61
|
4/1/2017
|
6/30/2017
|
55.75
|
51.71
|
54.95
|
7/1/2017
|
9/30/2017
|
56.76
|
49.59
|
56.76
|
10/1/2017
|
12/31/2017
|
60.35
|
54.35
|
58.85
|
1/1/2018
|
3/31/2018
|
65.03
|
58.91
|
60.39
|
4/1/2018
|
6/30/2018
|
65.74
|
59.21
|
61.00
|
7/1/2018
|
9/30/2018
|
64.28
|
59.42
|
59.42
|
10/1/2018
|
12/31/2018
|
60.15
|
44.22
|
46.79
|
1/1/2019
|
3/31/2019
|
57.21
|
47.38
|
51.34
|
4/1/2019
|
6/20/2019*
|
56.64
|
50.22
|
52.49
|
* 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 SPDR
®
S&P
®
Regional Banking ETF from January 1, 2008 through June 20, 2019, based on information from Bloomberg.
Past
performance of the SPDR
®
S&P
®
Regional Banking ETF is not indicative of the future performance
of the SPDR
®
S&P
®
Regional Banking ETF.
The S&P
®
Regional Banks Select Industry
Index
. The S&P
®
Regional Banks Select Industry Index is a modified equal-weighted index designed
to measure the performance of the regional banks sub-industry group of the S&P
®
Total Market Index, a benchmark
that measures the performance of the U.S. equity market.
Additional Terms of the Securities
|
If the terms discussed in this free writing
prospectus differ from those discussed in the prospectus supplement or prospectus, the terms contained in this free writing prospectus
will control.
Some Definitions
We have defined some of the terms that we use
frequently in this free writing prospectus below:
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“Share Underlying Index” means
the S&P
®
Regional Banks Select Industry Index, which is the index that the Underlying Shares generally seek
to track.
|
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“Share Underlying Index Publisher”
means S&P Dow Jones Indices LLC or any successor thereto.
|
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“Closing Price” means, subject
to the provisions set out under “Discontinuance of the Underlying Shares and/or Share Underlying Index; Alteration of Method
of Calculation” below, for one Underlying Share (or one unit of any other security for which a Closing Price must be determined)
on any Trading Day means:
|
|
o
|
if the Underlying Shares (or any such other security) are listed on a national securities exchange
(other than The Nasdaq Stock Market LLC (“Nasdaq”)), the last reported sale price, regular way, of the principal trading
session on such day on the principal national securities exchange registered under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), on which the Underlying Shares (or any such other security) are listed,
|
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o
|
if the Underlying Shares (or any such other security) are securities of Nasdaq, the official closing
price published by Nasdaq on such day, or
|
|
o
|
if the Underlying Shares (or any such other security) are not listed on any national securities exchange
but are included in the OTC Bulletin Board Service (the “OTC Bulletin Board”) operated by the Financial Industry Regulatory
Authority, Inc. (“FINRA”), the last reported sale price of the principal trading session on the OTC Bulletin Board
on such day.
|
If the Underlying Shares (or
any such other security) are listed on any national securities exchange but the last reported sale price or the official closing
price published by such exchange, or by Nasdaq, as applicable, is not available pursuant to the preceding sentence, then the Closing
Price for one Underlying Share (or one unit of any such other security) on any Trading Day will mean the last reported sale price
of the principal trading session on the over-the-counter market as reported on Nasdaq or the OTC Bulletin Board on such day. If
a Market Disruption Event (as defined below) occurs with respect to the Underlying Shares (or any such other security) or the last
reported sale price or the official closing price published by Nasdaq, as applicable, for the Underlying Shares (or any such other
security) is not available pursuant to either of the two preceding sentences, then the Closing Price for any Trading Day will be
the mean, as determined by the Calculation Agent, of the bid prices for the Underlying Shares (or any such other security) for
such Trading Day obtained from as many recognized dealers in such security, but not exceeding three, as will make such bid prices
available to the Calculation Agent. Bids of Morgan Stanley & Co. LLC (“MS & Co.”) and its successors or any
of its affiliates may be included in the calculation of such mean, but only to the extent that any such bid is the highest of the
bids obtained. If no bid prices are provided from any third-party dealers, the Closing Price will be determined by the Calculation
Agent in its sole and absolute discretion (acting in good faith) taking into account any information that it deems relevant. The
term “OTC Bulletin Board Service” will include any successor service thereto, or, if applicable, the OTC Reporting
Facility operated by FINRA. This definition of “Closing Price” is subject to the provisions under “—Discontinuance
of the Underlying Shares and/or Share Underlying Index; Alteration of Method of Calculation” below.
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“Trading Day” means a day,
as determined by the Calculation Agent, on which trading is generally conducted on the New York Stock Exchange LLC, Nasdaq, the
Chicago Mercantile Exchange and the Chicago Board of Options Exchange and in the over-the-counter market for equity securities
in the United States.
|
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|
“Market Disruption Event” means:
|
|
(i)
|
the occurrence or existence of any of:
|
(a) a suspension, absence or
material limitation of trading of the Underlying Shares on the primary market for the Underlying Shares for more than two hours
of trading or during the one-half hour period preceding the close of the principal trading session in such market; or a breakdown
or failure in the price and trade reporting systems of the primary market for the Underlying Shares as a result of which the reported
trading prices for the Underlying Shares during the last one-half hour preceding the close of the principal trading session in
such market are materially inaccurate; or the suspension, absence or material limitation of trading on the primary market for trading
in futures or options contracts related to the Underlying Shares, if available, during the one-half hour period preceding the close
of the principal trading session in the applicable market, or
(b) the occurrence or existence
of a suspension, absence or material limitation of trading of securities then constituting 20 percent or more of the value of the
Share Underlying Index on the Relevant Exchanges for such securities for more than two hours of trading or during the one-half
hour period preceding the close of the principal trading session on such Relevant Exchanges, or
(c) the suspension, material
limitation or absence of trading on any major U.S. securities market for trading in futures or options contracts related to the
Share Underlying Index or the Underlying Shares for more than two hours of trading or during the one-half hour period preceding
the close of the principal trading session on such market,
In each case, as determined
by the Calculation Agent in its sole discretion; and
|
(ii)
|
a determination by the Calculation Agent in its sole discretion that any event described in clause
(i) above materially interfered with our ability or the ability of any of our affiliates to unwind or adjust all or a material
portion of the hedge position with respect to the Securities.
|
For the purpose of determining
whether a Market Disruption Event exists at any time, if trading in a security included in the Share Underlying Index is materially
suspended or materially limited at that time, then the relevant percentage contribution of that security to the level of the Share
Underlying Index shall be based on a comparison of (x) the portion of the level of the Share Underlying Index attributable to that
security relative to (y) the overall level of the Share Underlying Index, in each case immediately before that suspension or limitation.
For the purpose of determining
whether a Market Disruption Event has occurred: (1) a limitation on the hours or number of days of trading will not constitute
a Market Disruption Event if it results from an announced change in the regular business hours of the Relevant Exchange or market,
(2) a decision to permanently discontinue trading in the Underlying Shares or in the futures or options contract related to the
Share Underlying Index or the Underlying Shares will not constitute a Market Disruption Event, (3) a suspension of trading in futures
or options contracts on the Share Underlying Index or the Underlying Shares by the primary securities market trading in such contracts
by reason of (a) a price change exceeding limits set by such securities exchange or market, (b) an imbalance of orders relating
to such contracts or (c) a disparity in bid and ask quotes relating to such contracts will constitute a suspension, absence or
material limitation of trading in futures or options contracts related to the Share Underlying Index or the Underlying Shares and
(4) a “suspension, absence or material limitation of trading” on any Relevant Exchange or on the primary market on
which futures or options contracts related to the Share Underlying Index or the Underlying Shares are traded will not include any
time when such securities market is itself closed for trading under ordinary circumstances.
|
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“Relevant Exchange” means the
primary exchange(s) or market(s) of trading for any security (or any combination thereof) then included in the Share Underlying
Index or any Successor Index.
|
Postponement of Final Valuation Date
and Maturity Date
If the scheduled Final Valuation Date is
not a Trading Day or if a Market Disruption Event with respect to the Underlying Shares occurs on the scheduled Final Valuation
Date, the Final Price will be determined on the immediately succeeding Trading Day on which no Market Disruption Event shall have
occurred; provided that the Final Price will not be determined on a date later than the fifth scheduled Trading Day after the scheduled
Final Valuation Date, and if such date is not a Trading Day or if there is a Market Disruption Event on such date, the Calculation
Agent will determine the Closing Price of an Underlying Share on such date as the mean of the bid prices for an Underlying Share
for such date obtained from as many recognized dealers in such security, but not exceeding three, as will make such bid prices
available to the Calculation Agent. Bids of MS & Co. or any of its affiliates may be included in the calculation of such mean,
but only to the extent that any such bid is the highest of the bids obtained. If no bid prices are provided from any third-party
dealers, the Closing Price will be determined by the Calculation Agent in its sole and absolute discretion (acting in good faith)
taking into account any information that it deems relevant.
If the Final Valuation Date is postponed
so that it falls less than two business days prior to the scheduled Maturity Date, the Maturity Date will be the second business
day following the Final Valuation Date, as postponed.
Antidilution Adjustments for Securities
linked to Exchange-Traded Funds
If the Underlying Shares are subject to
a stock split or reverse stock split, then once such split has become effective, the Adjustment Factor will be adjusted to equal
the product of the prior Adjustment Factor and the number of shares issued in such stock split or reverse stock split with respect
to one Underlying Share. No such adjustment to the Adjustment Factor will be required unless such adjustment would require a change
of at least 0.1% in the amount being adjusted as then in effect. Any number so adjusted will be rounded to the nearest one hundred-thousandth
with five one-millionths being rounded upward.
Alternate Exchange Calculation in case
of an Event of Default
If an event of default with respect to the
Securities shall have occurred and be continuing, the amount declared due and payable upon any acceleration of the Securities (the
“Acceleration Amount”) will be an amount, determined by the Calculation Agent in its sole discretion, that is equal
to the cost of having a Qualified Financial Institution, of the kind and selected as described below, expressly assume all our
payment and other obligations with respect to the Securities as of that day and as if no default or acceleration had occurred,
or to undertake other obligations providing substantially equivalent economic value to you with respect to the Securities. That
cost will equal:
|
o
|
the lowest amount that a Qualified Financial Institution would charge to effect this assumption or
undertaking, plus
|
|
o
|
the reasonable expenses, including reasonable attorneys’ fees, incurred by the holders of the
Securities in preparing any documentation necessary for this assumption or undertaking.
|
During the Default Quotation Period for
the Securities, which we describe below, the holders of the Securities and/or we may request a Qualified Financial Institution
to provide a quotation of the amount it would charge to effect this assumption or undertaking. If either party obtains a quotation,
it must notify the other party in writing of the quotation. The amount referred to in the first bullet point above will equal the
lowest—or, if there is only one, the only—quotation obtained, and as to which notice is so given, during the Default
Quotation Period. With respect to any quotation, however, the party not obtaining the quotation may object, on reasonable and significant
grounds, to the assumption or undertaking by the Qualified Financial Institution providing the quotation and notify the other party
in writing of those grounds within two business days after the last day of the Default Quotation Period, in which case that quotation
will be disregarded in determining the Acceleration Amount.
Notwithstanding the foregoing, if a voluntary
or involuntary liquidation, bankruptcy or insolvency of, or any analogous proceeding is filed with respect to MSFL or Morgan Stanley,
then depending on applicable bankruptcy law, your claim may be limited to an amount that could be less than the Acceleration Amount.
If the maturity of the Securities is accelerated
because of an event of default as described above, we shall, or shall cause the Calculation Agent to, provide written notice to
the Trustee at its New York office, on which notice the Trustee may conclusively rely, and to the Depositary of the Acceleration
Amount and the aggregate cash amount due, if any, with respect to the Securities as promptly as possible and in no event later
than two business days after the date of such acceleration.
Default Quotation Period
The Default Quotation Period is the period
beginning on the day the Acceleration Amount first becomes due and ending on the third business day after that day, unless:
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no quotation of the kind referred to above is obtained, or
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every quotation of that kind obtained is objected to within five business days after the due date
as described above.
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If either of these two events occurs, the
Default Quotation Period will continue until the third business day after the first business day on which prompt notice of a quotation
is given as described above. If that quotation is objected to as described above within five business days after that first business
day, however, the Default Quotation Period will continue as described in the prior sentence and this sentence.
In any event, if the Default Quotation Period
and the subsequent two business day objection period have not ended before the Final Valuation Date, then the Acceleration Amount
will equal the principal amount of the Securities.
Qualified Financial Institutions
For the purpose of determining the Acceleration
Amount at any time, a Qualified Financial Institution must be a financial institution organized under the laws of any jurisdiction
in the United States or Europe, which at that time has outstanding debt obligations with a stated maturity of one year or less
from the date of issue and rated either:
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A-2 or higher by Standard & Poor’s Ratings Services or any successor, or any other comparable
rating then used by that rating agency, or
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P-2 or higher by Moody’s Investors Service or any successor, or any other comparable rating
then used by that rating agency.
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Discontinuance of the Underlying Shares
and/or Share Underlying Index; Alteration of Method of Calculation
If trading in the Underlying Shares on every
applicable national securities exchange, on the OTC Bulletin Board and in the over-the-counter market is permanently discontinued
or the Fund is liquidated or otherwise terminated (a “Discontinuance or Liquidation Event”), the Closing Price of the
Underlying Shares on the Final Valuation Date or the date of acceleration following the Discontinuance or Liquidation Event will
be determined by the Calculation Agent and will be deemed to equal the product of (i) the closing value of the Share Underlying
Index (or any Successor Index, as described below) on such date (taking into account any material changes in the method of calculating
the Share Underlying Index following such Discontinuance or Liquidation Event) and (ii) a fraction, the numerator of which is the
Closing Price of the Underlying Shares and the denominator of which is the closing value of the Share Underlying Index (or any
Successor Index, as described below), each determined as of the last day prior to the occurrence of the Discontinuance or Liquidation
Event on which a Closing Price of the Underlying Shares was available.
If, subsequent to a Discontinuance or Liquidation
Event, the Share Underlying Index Publisher discontinues publication of the Share Underlying Index and the Share Underlying Index
Publisher or another entity (including MS & Co.) publishes a successor or substitute index that MS & Co., as the Calculation
Agent, determines, in its sole discretion, to be comparable to the discontinued
Share Underlying Index (such index being
referred to herein as a “Successor Index”), then any subsequent Closing Price of the Underlying Shares on any Trading
Day following a Discontinuance or Liquidation Event will be determined by reference to the published value of such Successor Index
at the regular weekday close of trading on such Trading Day, and, to the extent the value of the Successor Index differs from the
value of the Share Underlying Index at the time of such substitution, proportionate adjustments shall be made by the Calculation
Agent for purposes of calculating payments on the Securities.
Upon any selection by the Calculation Agent
of a Successor Index, the Calculation Agent will cause written notice thereof to be furnished to the Trustee, to us and to the
Depositary, as holder of the Securities, within three business days of such selection. We expect that such notice will be made
available to you, as a beneficial owner of such Securities, in accordance with the standard rules and procedures of the Depositary
and its direct and indirect participants.
If, subsequent to a Discontinuance or Liquidation
Event, the Share Underlying Index Publisher discontinues publication of the Share Underlying Index prior to, and such discontinuance
is continuing on the Final Valuation Date and MS & Co., as the Calculation Agent, determines, in its sole discretion, that
no Successor Index is available at such time, then the Calculation Agent will determine the Closing Price of the Underlying Shares
for such date. The Closing Price of the Underlying Shares will be computed by the Calculation Agent in accordance with the formula
for calculating the Share Underlying Index last in effect prior to such discontinuance, using the Closing Price (or, if trading
in the relevant securities has been materially suspended or materially limited, its good faith estimate of the closing price that
would have prevailed but for such suspension or limitation) at the close of the principal trading session of the Relevant Exchange
on such date of each security most recently composing the Share Underlying Index without any rebalancing or substitution of such
securities following such discontinuance. Notwithstanding these alternative arrangements, discontinuance of the publication of
the Share Underlying Index may adversely affect the value of the Securities.
Trustee
The “Trustee” for each offering
of notes issued under our Senior Debt Indenture, including the Securities, will be The Bank of New York Mellon, a New York banking
corporation.
Agent
The “agent” is MS & Co.
Calculation Agent and Calculations
The “Calculation Agent” for
the Securities will be MS & Co. As Calculation Agent, MS & Co. will determine, among other things, the Initial Price, the
Final Price, the Underlying Return and the Payment at Maturity.
All determinations made by the Calculation
Agent will be at the sole discretion of the Calculation Agent and will, in the absence of manifest error, be conclusive for all
purposes and binding on you, the Trustee and us.
All calculations with respect to the Payment
at Maturity, if any, will be rounded to the nearest one hundred-thousandth, with five one-millionths rounded upward (e.g., .876545
would be rounded to .87655); all dollar amounts related to determination of the amount of cash payable per Security will be rounded
to the nearest ten-thousandth, with five one hundred-thousandths rounded upward (e.g., .76545 would be rounded up to .7655); and
all dollar amounts paid on the aggregate number of Securities will be rounded to the nearest cent, with one-half cent rounded upward.
Because the Calculation Agent is our affiliate,
the economic interests of the Calculation Agent and its affiliates may be adverse to your interests, as an owner of the Securities,
including with respect to certain determinations and judgments that the Calculation Agent must make in determining the Final Price
or whether a Market Disruption Event has occurred. See “—Discontinuance of the Underlying Shares and/or Share Underlying
Index; Alteration of Method of Calculation,” and the definition of Market Disruption Event. MS & Co. is obligated to
carry out its duties and functions as Calculation Agent in good faith and using its reasonable judgment.
Issuer Notice to Registered Security
Holders, the Trustee and the Depositary
In the event that the Maturity Date of the Securities is postponed
due to a postponement of the Final Valuation Date, the Issuer shall give notice of such postponement and, once it has been determined,
of the date to which the Maturity Date has been rescheduled (i) to each registered holder of the Securities by mailing notice of
such postponement by first class mail, postage prepaid, to such registered holder’s last address as it shall appear upon
the registry books, (ii) to the Trustee by facsimile confirmed by mailing such notice to the Trustee by first class mail, postage
prepaid, at its New York office and (iii) to The Depository Trust Company (the “Depositary”) by telephone or facsimile
confirmed by mailing such notice to the Depositary by first class mail, postage prepaid. Any notice that is mailed to a registered
holder of the Securities in the manner herein provided shall be conclusively presumed to have been duly given to such registered
holder, whether or not such registered holder receives the notice. The Issuer shall give such notice as promptly as possible, and
in no case later than (i) with respect to notice of postponement of the Maturity Date, the Business Day immediately preceding the
scheduled Maturity Date and (ii) with respect to
notice of the date to which the Maturity Date has been rescheduled,
the Business Day immediately following the Final Valuation Date as postponed.
The Issuer shall, or shall cause the Calculation Agent to, (i)
provide written notice to the Trustee and to the Depositary of the amount of cash, if any, to be delivered with respect to each
stated principal amount of the Securities, on or prior to 10:30 a.m. (New York City time) on the Business Day preceding the Maturity
Date, and (ii) deliver the aggregate cash amount due with respect to the Securities, if any, to the Trustee for delivery to the
Depositary, as holder of the Securities, on the Maturity Date.
Additional Information About the Securities
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Use of Proceeds and Hedging
The proceeds from the sale of the Securities
will be used by us for general corporate purposes. We will receive, in aggregate, $10 per Security issued, because, when we enter
into hedging transactions in order to meet our obligations under the Securities, our hedging counterparty will reimburse the cost
of the Agent’s commissions. The costs of the Securities borne by you and described on page 2 above comprise the Agent’s
commissions and the cost of issuing, structuring and hedging the Securities. See also “Use of Proceeds” in the accompanying
prospectus.
On or prior to the Trade Date, we will hedge
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 take positions 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 that
they may wish to use in connection with such hedging. Such purchase activity could increase the Initial Price of the Underlying
Shares, and, therefore, could increase the price at or above which the Underlying Shares must close on the Final Valuation Date
so that you do not suffer a 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 Valuation 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 Valuation 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 Valuation Date approaches. We cannot give any assurance that our hedging activities
will not affect the price of the Underlying Shares, and, therefore, adversely affect the value of the Securities or the amount
payable at maturity, if any.
Benefit Plan Investor Considerations
Each fiduciary of a pension, profit-sharing or other employee
benefit plan subject to Title I of 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 (such accounts and plans, together with other plans, accounts and arrangements
subject to Section 4975 of the Code, also “Plans”). ERISA Section 406 and Code Section 4975 generally prohibit transactions
between Plans and parties in interest or disqualified persons. Prohibited transactions within the meaning of 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 those persons, unless exemptive
relief is available under an applicable statutory or administrative exemption.
The U.S. Department of Labor has issued five prohibited transaction
class exemptions (“PTCEs”) that may provide exemptive relief for direct or indirect prohibited transactions resulting
from the purchase or holding of the Securities. Those class exemptions are PTCE 96-23 (for certain transactions determined by in-house
asset managers), PTCE 95-60 (for certain transactions involving insurance company general accounts), PTCE 91-38 (for certain transactions
involving bank collective investment funds), PTCE 90-1 (for certain transactions involving insurance company separate accounts)
and PTCE 84-14 (for certain transactions determined by independent qualified professional asset managers). In addition, ERISA Section
408(b)(17) and Code Section 4975(d)(20) 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 of these Securities will not constitute or result in a non-exempt prohibited transaction under Section 406 of ERISA
or Section 4975 of the Code or violate 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:
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(i)
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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;
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(ii)
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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;
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(iii)
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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;
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(iv)
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our interests are adverse to the interests of the purchaser or holder; and
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(v)
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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.
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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. In this regard, neither this discussion nor anything provided in this document is or is intended to be investment advice
directed at any potential Plan purchaser or at Plan purchasers generally and such purchasers of these Securities should consult
and rely on their own counsel and advisers as to whether an investment in these Securities is suitable.
However, individual retirement accounts, individual retirement
annuities and Keogh plans, as well as employee benefit plans that permit participants to direct the investment of their accounts,
will not be permitted to purchase or hold the Securities if the account, plan or annuity is for the benefit of an employee of Morgan
Stanley or Morgan Stanley Wealth Management or a family member and the employee receives any compensation (such as, for example,
an addition to bonus) based on the purchase of the Securities by the account, plan or annuity.
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 $0.20 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, including the Maximum Gain, 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, the Underlying
Shares or the constituent stocks of the Share Underlying Index 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.
Form of Securities
The Securities will be issued in the form
of one or more fully registered global securities which will be deposited with, or on behalf of, the Depositary and will be registered
in the name of a nominee of the Depositary. The Depositary’s nominee will be the only registered holder of the Securities.
Your beneficial interest in the Securities will be evidenced solely by entries on the books of the securities intermediary acting
on your behalf as a direct or indirect participant in the Depositary. In this free writing prospectus, all references to payments
or notices to you will mean payments or notices to the Depositary, as the registered holder of the Securities, for distribution
to participants in accordance with the Depositary’s procedures. For more information regarding the Depositary and book entry
notes, please read “Form of Securities—The Depositary” in the accompanying prospectus supplement and “Securities
Offered on a Global Basis Through the Depositary” in the accompanying prospectus.
Morgan Stanley Depository Shares Representing 1/1000TH Preferred Series 1 Fixed TO Floating Non (Cum) (NYSE:MSPI)
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Morgan Stanley Depository Shares Representing 1/1000TH Preferred Series 1 Fixed TO Floating Non (Cum) (NYSE:MSPI)
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