These Capped Trigger 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 iShares
®
MSCI Emerging
Markets ETF (the “Underlying Shares”). If the Underlying Return is greater than zero, MSFL will pay the Principal
Amount at maturity plus a return equal to 2 times the Underlying Return, up to the Maximum Gain, which will be set on the Trade
Date and is expected to be between 32.85% and 36.85%. If the Underlying Return is less than or equal to zero, MSFL will either
pay the full Principal Amount at maturity, or, if the Final Price is less than the Downside Threshold, MSFL will pay significantly
less than the full Principal Amount at maturity, if anything, resulting in a loss of principal that is proportionate to the negative
Underlying Return. The Securities are for investors who seek an equity fund-based return and who are willing to risk a loss on
their principal, forgo current income and forgo returns above the Maximum Gain in exchange for the Upside Gearing feature, which
applies to a limited range of performance of the Underlying Shares, and the contingent repayment of principal, which applies only
if the Final Price is not less than the Downside Threshold, each as applicable at maturity.
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.
Morgan Stanley and MSFL have filed a registration
statement (including a prospectus, as supplemented by a prospectus supplement and an index 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, the index 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, the prospectus supplement and the index supplement
if you so request by calling toll-free 1-(800)-584-6837.
You may access the accompanying prospectus supplement, index
supplement and prospectus on the SEC website at
.
www.sec.gov as follows:
You should rely only on the information incorporated by reference
or provided in this free writing prospectus or the accompanying prospectus supplement, index 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, index 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 $9.547, or within $0.225 of that estimate. Our estimate of the value of the Securities
as determined on the Trade Date will be set forth in the final pricing supplement.
In valuing the Securities on the Trade Date,
we take into account that the Securities comprise both a debt component and a performance-based component linked to the Underlying
Shares. The estimated value of the Securities is determined using our own pricing and valuation models, market inputs and assumptions
relating to the Underlying Shares, instruments based on the Underlying Shares, volatility and other factors including current and
expected interest rates, as well as an interest rate related to our secondary market credit spread, which is the implied interest
rate at which our conventional fixed rate debt trades in the secondary market.
In determining the economic terms of the
Securities, including the Upside Gearing, the Maximum Gain and the Downside Threshold, we use an internal funding rate, which is
likely to be lower than our secondary market credit spreads and therefore advantageous to us. If the issuing, selling, structuring
and hedging costs borne by you were lower or if the internal funding rate were higher, one or more of the economic terms of the
Securities would be more favorable to you.
The price at which MS & Co. purchases
the Securities in the secondary market, absent changes in market conditions, including those related to the Underlying Shares,
may vary from, and be lower than, the estimated value on the Trade Date, because the secondary market price takes into account
our secondary market credit spread as well as the bid-offer spread that MS & Co. would charge in a secondary market transaction
of this type and other factors. However, because the costs associated with issuing, selling, structuring and hedging the Securities
are not fully deducted upon issuance, for a period of up to 9 months following the Settlement Date, to the extent that MS &
Co. may buy or sell the Securities in the secondary market, absent changes in market conditions, including those related to the
Underlying Shares, and to our secondary market credit spreads, it would do so based on values higher than the estimated value.
We expect that those higher values will also be reflected in your brokerage account statements.
MS & Co. currently intends, but is not
obligated, to make a market in the Securities, and, if it once chooses to make a market, may cease doing so at any time.
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 will be set 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.
|
|
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 be unwilling 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.
|
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 iShares
®
MSCI Emerging Markets ETF” on page 18.
Terms
|
|
Investment Timeline
|
Issuer
|
Morgan Stanley Finance LLC
|
Guarantor
|
Morgan Stanley
|
Issue Price (per Security)
|
$10.00 per Security
|
Principal Amount
|
$10.00 per Security
|
Term
|
Approximately 3 years
|
Underlying Shares
|
Shares of the iShares
®
MSCI Emerging Markets ETF (the “Fund”)
|
Downside Threshold
|
75% of the Initial Price
|
Upside Gearing
|
2
|
Maximum Gain
|
32.85% to 36.85%, which corresponds to a maximum Payment at Maturity of $13.285 to $13.685 per Security. The actual Maximum Gain will be determined on the Trade Date.
|
Payment at Maturity (per Security)
|
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 less than or
equal to zero and the Final Price is greater than or equal to the Downside Threshold,
MSFL will pay you a cash payment of:
$10 per Security
If the Final Price is less than the Downside
Threshold,
MSFL will pay you an amount calculated as follows:
$10 + ($10
×
Underlying Return)
In this case, you could lose up to all
of your Principal Amount in an amount proportionate to the negative Underlying Return.
|
Underlying Return
|
Final Price –
Initial Price
Initial Price
|
Initial Price
|
The Closing Price of one share of the Underlying Shares on the Trade Date.
|
Final Price
|
The Closing Price of one share of the Underlying Shares on the Final Valuation Date
times
the Adjustment Factor on such date.
|
Trade Date
|
August 27, 2019
|
Settlement Date
|
August 30, 2019
|
Final Valuation Date
|
August 26, 2022*
|
Maturity Date
|
August 31, 2022*
|
Adjustment Factor
|
1.0, subject to adjustment in the event of certain corporate events affecting the Underlying Shares.
|
CUSIP / ISIN
|
61769Q618 / US61769Q6180
|
Calculation Agent
|
Morgan Stanley & Co. LLC
|
Trade
Date
|
The Closing Price of the Underlying Shares (Initial
Price) is observed, the Downside Threshold is determined and the Maximum Gain is set.
|
|
|
|
The Final Price and Underlying Return are determined on the Final
Valuation Date.
|
|
|
Maturity
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 less than or equal to zero and
the Final Price is greater than or equal to the Downside Threshold on the Final Valuation Date
, MSFL will pay you a cash payment
of $10 per $10 Security.
If the Final Price is less than the Downside Threshold 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 a significant portion,
and could lose all, of your Principal Amount.
|
*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.
|
¨
|
The Securities do not guarantee any return of principal
– The terms of the Securities
differ from those of ordinary debt securities in that MSFL is not necessarily obligated to repay any of the Principal Amount at
maturity. If the Final Price is less than the Downside Threshold (which is 75% of the Initial Price), you will be exposed to the
full negative Underlying Return and the payout owed at maturity by MSFL will be an amount in cash that is at least 25% less than
the $10 Principal Amount of each Security, resulting in a loss proportionate to the decrease in the value of the Underlying Shares
from the Initial Price to the Final Price. There is no minimum payment at maturity on the Securities, and, accordingly, you could
lose all of your Principal Amount in the Securities.
|
|
¨
|
You may incur a loss on your investment if you sell your Securities prior to maturity
–
The Downside Threshold is observed on the Final Valuation Date and the contingent repayment of principal applies only at maturity.
If you are able to sell your Securities in the secondary market prior to maturity, you may have to sell them at a loss relative
to your initial investment even if the Closing Price of the Underlying Shares is above the Downside Threshold at that time.
|
|
¨
|
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 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 from MSFL and potentially earn up to the Maximum Gain only if you
hold your Securities to maturity.
|
|
¨
|
The appreciation potential is limited –
The appreciation potential of the Securities
is limited by the Maximum Gain of 32.85% to 36.85% (which corresponds to a maximum Payment at Maturity of $13.285 to $13.685 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 16.425% to 18.425% (to be determined on the Trade Date) of the Initial Price will not
further increase the return on the Securities.
|
|
¨
|
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.
|
|
¨
|
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.
|
|
¨
|
The Securities do not pay interest
– MSFL will not pay any interest with respect to the Securities over the term of the Securities.
|
|
¨
|
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
|
the price of the Underlying Shares at any time,
|
|
o
|
the volatility (frequency and magnitude of changes
in price) of the Underlying Shares,
|
|
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 Initial Price
and/or the Final Price,
|
|
o
|
the time remaining until the Securities mature, and
|
|
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, and especially if it is near or below the Downside Threshold, 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 Downside Threshold 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 Downside Threshold, which would result in a loss of a significant portion 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 a significant portion or all of your investment at maturity.
|
|
¨
|
There are risks associated with investments
in securities linked to the value of foreign (and especially emerging markets) equity securities
– The Fund tracks
the performance of the MSCI Emerging Markets Index
SM
(the “Share Underlying Index”), which is linked
to the value of foreign (and especially emerging markets) equity securities. Investments in securities linked to the value of foreign
equity securities involve risks associated with the securities markets in those countries, including risks of volatility in those
markets, governmental intervention in those markets and cross-shareholdings in companies in certain countries. Also, there is generally
less publicly available information about foreign companies than about U.S. companies that are subject to the reporting requirements
of the Securities and Exchange Commission, and foreign companies are subject to accounting, auditing and financial reporting standards
and requirements different from those applicable to U.S. reporting companies. The prices of securities issued in foreign markets
may be affected by political, economic, financial and social factors in those countries, or global regions, including changes in
government, economic and fiscal policies and currency exchange laws. In addition, the stocks included in the MSCI Emerging Markets
Index
SM
and that are generally tracked by the Underlying Shares have been issued by companies in various emerging
markets countries, which pose further risks in addition to the risks associated with investing in foreign equity markets generally.
Countries with emerging markets may have relatively unstable governments, may present the risks of nationalization of businesses,
restrictions on foreign ownership and prohibitions on the repatriation of assets, and may have less protection of property rights
than more developed countries. The economies of countries with emerging markets may be based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of holdings difficult or impossible at times. Moreover, the economies in such countries
may differ unfavorably from the economy in the United States in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payment positions.
|
|
¨
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The price of the Fund is subject to currency exchange rate risk
– Because the price
of the Fund is related to the U.S. dollar value of stocks underlying the Fund and the MSCI Emerging Markets IndexSM, holders of
the Securities will be exposed to currency exchange rate risk with respect the currencies in which the component securities of
the Fund trade. Exchange rate movements for a particular currency are volatile and are the result of numerous factors specific
to that country including the supply of, and the demand for, those currencies, as well as government policy, intervention or actions,
but are also influenced significantly from time to time by political or economic developments, and by macroeconomic factors and
speculative actions related to each region. Further, currencies of emerging economies are often subject to more frequent and larger
central bank interventions than the currencies of developed countries and are also more likely to be affected by drastic changes
in monetary or exchange rate policies of the relevant country. The net exposure will depend on the extent to which the currencies
of the component countries strengthen or weaken against the U.S. dollar and the relative weight of each currency. If, taking into
account such weighting, the dollar strengthens against the currencies of the component securities represented in the Fund, the
price of the Underlying Shares will be adversely affected and the Payment at Maturity on the Securities may be reduced.
|
Of particular importance to potential
currency exchange risk are:
|
o
|
existing and expected rates of inflation;
|
|
o
|
existing and expected interest rate levels;
|
|
o
|
the balance of payments; and
|
|
o
|
the extent of governmental surpluses or deficits in
the countries represented in the MSCI Emerging Markets Index
SM
and the United States.
|
All of these factors are, in
turn, sensitive to the monetary, fiscal and trade policies pursued by the governments of the countries represented in the MSCI
Emerging Markets Index
SM
, the United States and other countries important to international trade and finance.
|
¨
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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.
|
¨
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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.
|
|
¨
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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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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. Investors in the Securities
also will not participate in any appreciation of the Underlying Shares that, when multiplied by the Upside Gearing, exceeds the
Maximum Gain, which could be significant.
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|
¨
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The rate we are willing to pay for securities
of this type, maturity and issuance size is likely to be lower than the rate implied by our secondary market credit spreads and
advantageous to us. Both the lower rate and the inclusion of costs associated with issuing, selling, structuring and hedging the
Securities in the Issue Price reduce the economic terms of the Securities, cause the estimated value of the Securities to be less
than the Issue Price and will adversely affect secondary market prices
–
Assuming
no change in market conditions or any other relevant factors, the prices, if any, at which dealers, including MS & Co., may
be willing to purchase the Securities in secondary market transactions will likely be significantly lower than the Issue Price,
because secondary market prices will exclude the issuing, selling, structuring and hedging-related costs that are included in the
Issue Price and borne by you and because the secondary market prices will reflect our secondary market credit spreads and the bid-offer
spread that any dealer would charge in a secondary market transaction of this type as well as other factors.
|
The inclusion of the costs of issuing,
selling, structuring and hedging the Securities in the Issue Price and the lower rate we are willing to pay as issuer make the
economic terms of the Securities less favorable to you than they otherwise would be.
However, because the costs associated
with issuing, selling, structuring and hedging the Securities are not fully deducted upon issuance, for a period of up to 9 months
following the Settlement Date, to the extent that MS & Co. may buy or sell the Securities in the secondary market, absent changes
in market conditions, including those related to the Underlying
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.
|
¨
|
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.
|
|
¨
|
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, BlackRock Fund Advisors (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 Advisor 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.
MSCI Inc. (“MSCI”) is responsible for calculating and maintaining the Share Underlying Index. MSCI may add, delete
or substitute the stocks constituting the Share Underlying Index , and, consequently, the price of the Underlying Shares and the
value of the Securities. MSCI or make other methodological changes that could change the value of the Share Underlying Index. MSCI
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 MSCI 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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|
¨
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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 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 Downside Threshold,
which is the price at or above which the Underlying Shares must close on the Final Valuation Date so that investors do not suffer
a significant 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 Downside Threshold, the Upside Gearing, 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.
|
|
¨
|
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.
|
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 free writing
prospectus, 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. The risk that financial instruments
providing for buffers, triggers or similar downside protection features, such as the Securities, would be recharacterized as debt
is greater than the risk of recharacterization for comparable financial instruments that do not have such features. We do not plan
to request a ruling from the IRS regarding the tax treatment of the Securities, and the IRS or a court may not agree with the tax
treatment described in this free writing prospectus.
In 2007, the U.S. Treasury Department
and the IRS released a notice requesting comments on the U.S. federal income tax treatment of “prepaid forward contracts”
and similar instruments. The notice focuses in particular on whether to require holders of these instruments to accrue income over
the term of their investment. It also asks for comments on a number of related topics, including the character of income or loss
with respect to these instruments; whether short-term instruments should be subject to any such accrual regime; the relevance of
factors such as the exchange-traded status of the instruments and the nature of the underlying property to which the instruments
are linked; the degree, if any, to which income (including any mandated accruals) realized by Non-U.S. 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
|
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 and reflect the Upside Gearing of 2 and the following terms*:
Investment term:
|
Approximately 3 years
|
Hypothetical Initial Price:
|
$50.00
|
Hypothetical Downside Threshold:
|
$37.50 (75% of the hypothetical Initial Price)
|
Hypothetical Maximum Gain:
|
32.85%
|
Upside Gearing:
|
2
|
*
The actual Initial
Price, Downside Threshold 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 $50 to a Final Price of $52.50.
The Underlying Return is calculated as follows:
($52.50 - $50) / $50 = 5%
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
×
(5%
×
2)] and (B) $10.00 + (10.00 × 32.85%)
=
the lesser of (A) $10.00 + ($10.00 × 10%) and (B) $10.00 + ($10.00 × 32.85%)
=
$10.00 + ($10.00 × 10%)
=
$10.00 + $1.00
=
$11.00
Because the Underlying Return of
5.00% multiplied by the Upside Gearing is less than the hypothetical Maximum Gain of 32.85%, the Payment at Maturity is equal to
$11.00 per $10.00 Principal Amount of Securities,
resulting in a total return on the Securities of 10.00%.
Example
2
—
The price of the Underlying Shares
increases
from an Initial Price of $50 to a Final Price of $70.
The
Underlying Return is calculated as follows:
($70
- $50) / $50 = 40.00%
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
×
(40.00%
×
2)] and (B) $10.00 + ($10.00 × 32.85%)
=
the lesser of (A) $10.00 + ($10.00 × 80%) and (B) $10.00 + ($10.00 × 32.85%)
=
$10.00 + ($10.00 × 32.85%)
=
$10.00 + $3.285
=
$13.285
Because
the Underlying Return of 40.00% multiplied by the Upside Gearing is greater than the hypothetical Maximum Gain of 32.85%, the Payment
at Maturity is equal to $13.285 per $10.00 Principal Amount of Securities, resulting in a total return on the Securities of 32.85%.
Example 3
—
The Final Price is
equal to the Initial Price of $50.
The Underlying Return is zero and expressed as a formula:
Underlying Return = ($50
– $50) / $50 = 0%
Payment at Maturity = $10.00
Because the Underlying Return is zero, the Payment
at Maturity per Security is equal to the original $10.00 Principal Amount per Security, resulting in a zero percent return on the
Securities.
Example 4
—
The price of the Underlying
Shares
decreases
from an Initial Price of $50 to a Final Price of $45.
The Underlying Return is negative and expressed
as a formula:
Underlying Return = ($45
- $50) / $50 = -10%
Payment at Maturity = $10.00
Because the Underlying Return is less than zero,
but the Final Price is greater than or equal to the Downside Threshold on the Final Valuation Date, MSFL will pay you a Payment
at Maturity equal to $10.00 per $10.00 Principal Amount of Securities, resulting in a zero percent return on the Securities.
Example 5
—
The price of the Underlying
Shares
decreases
from an Initial Price of $50 to a Final Price of $20.
The Underlying Return is negative and expressed
as a formula:
Underlying Return = ($20
- $50) / $50 = -60%
Payment at Maturity = $10
+ ($10
×
-60%) = $4.00
Because the Underlying Return is less than zero
and the Final Price is below the Downside Threshold on the Final Valuation Date, the Securities will be fully exposed to any decline
in the price of the Underlying Shares over the term of the Securities. Therefore, the Payment at Maturity is equal to $4.00 per
$10.00 Principal Amount of Securities, resulting in a total loss on the Securities of 60.00%.
If the Final Price is below the Downside
Threshold on the Final Valuation Date, the Securities will be fully exposed to any decline in the Underlying Shares, and you will
lose a significant portion 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
|
Performance
of the Securities
|
Final
Price
|
Underlying
Return
|
Upside
Gearing
|
Payment
at Maturity
|
Return
on Securities Purchased at $10.00
(1)
|
$100.00
|
100%
|
2
|
$13.285
|
32.85%
|
$95.00
|
90%
|
2
|
$13.285
|
32.85%
|
$90.00
|
80%
|
2
|
$13.285
|
32.85%
|
$85.00
|
70%
|
2
|
$13.285
|
32.85%
|
$80.00
|
60%
|
2
|
$13.285
|
32.85%
|
$75.00
|
50%
|
2
|
$13.285
|
32.85%
|
$70.00
|
40%
|
2
|
$13.285
|
32.85%
|
$65.00
|
30%
|
2
|
$13.285
|
32.85%
|
$60.00
|
20%
|
2
|
$13.285
|
32.85%
|
$58.21
|
16.425%
|
2
|
$13.285
|
32.85%
|
$55.00
|
10%
|
2
|
$12.00
|
20.00%
|
$52.50
|
5%
|
2
|
$11.00
|
10.00%
|
$50.00
|
0%
|
N/A
|
$10.00
|
0.00%
|
$47.50
|
-5%
|
N/A
|
$10.00
|
0.00%
|
$45.00
|
-10%
|
N/A
|
$10.00
|
0.00%
|
$40.00
|
-20%
|
N/A
|
$10.00
|
0.00%
|
$37.50
|
-25%
|
N/A
|
$10.00
|
0.00%
|
$37.00
|
-26%
|
N/A
|
$7.40
|
-26.00%
|
$35.00
|
-30%
|
N/A
|
$7.00
|
-30.00%
|
$30.00
|
-40%
|
N/A
|
$6.00
|
-40.00%
|
$25.00
|
-50%
|
N/A
|
$5.00
|
-50.00%
|
$20.00
|
-60%
|
N/A
|
$4.00
|
-60.00%
|
$15.00
|
-70%
|
N/A
|
$3.00
|
-70.00%
|
$10.00
|
-80%
|
N/A
|
$2.00
|
-80.00%
|
$5.00
|
-90%
|
N/A
|
$1.00
|
-90.00%
|
$0.00
|
-100%
|
N/A
|
$0.00
|
-100.00%
|
(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?
|
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:
|
t
|
purchase the Securities in the original offering; and
|
|
t
|
hold the Securities as capital assets within the meaning of Section
1221 of the Internal Revenue Code of 1986, as amended (the “Code”).
|
This discussion does not describe all of the
tax consequences that may be relevant to a holder in light of the holder’s particular circumstances or to holders subject
to special rules, such as:
|
t
|
certain financial institutions;
|
|
t
|
certain dealers and traders in securities or commodities;
|
|
t
|
investors holding the Securities as part of a “straddle,”
wash sale, conversion transaction, integrated transaction or constructive sale transaction;
|
|
t
|
U.S. Holders (as defined below) whose functional currency is not the
U.S. dollar;
|
|
t
|
partnerships or other entities classified as partnerships for U.S.
federal income tax purposes;
|
|
t
|
regulated investment companies;
|
|
t
|
real estate investment trusts; or
|
|
t
|
tax-exempt entities, including “individual retirement accounts”
or “Roth IRAs” as defined in Section 408 or 408A of the Code, respectively.
|
If an entity that is classified as a partnership
for U.S. federal income tax purposes holds the Securities, the U.S. federal income tax treatment of a partner will generally depend
on the status of the partner and the activities of the partnership. If you are a partnership holding the Securities or a partner
in such a partnership, you should consult your tax adviser as to the particular U.S. federal tax consequences of holding and disposing
of the Securities to you.
As the law applicable to the U.S. federal income
taxation of instruments such as the Securities is technical and complex, the discussion below necessarily represents only a general
summary. Moreover, the effect of any applicable state, local or non-U.S. tax laws is not discussed, nor are any alternative minimum
tax consequences or consequences resulting from the Medicare tax on investment income.
This discussion is based on the Code, administrative
pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date of this free writing
prospectus, changes to any of which subsequent to the date hereof may affect the tax consequences described herein. Persons considering
the purchase of the Securities should consult their tax advisers with regard to the application of the U.S. federal income tax
laws to their particular situations as well as any tax consequences arising under the laws of any state, local or non-U.S. taxing
jurisdiction.
General
Although there is uncertainty regarding the
U.S. federal income tax consequences of an investment in the Securities due to the lack of governing authority, in the opinion
of our counsel, under current law, and based on current market conditions, each Security should be treated as a single financial
contract that is an “open transaction” for U.S. federal income tax purposes. 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:
|
t
|
a citizen or individual resident of the United States;
|
|
t
|
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
|
|
t
|
an estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source.
|
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. The risk that financial instruments
providing for buffers, triggers or similar downside protection features, such as the Securities, would be recharacterized as debt
is greater than the risk of recharacterization for comparable financial instruments that do not have such features.
Other alternative federal income tax treatments
of the Securities are also possible, which, if applied, could significantly affect the timing and character of the income or loss
with respect to the Securities. In 2007, the U.S. Treasury Department and the IRS released a notice requesting comments on the
U.S. federal income tax treatment of “prepaid forward contracts” and similar instruments. The notice focuses in particular
on whether to require holders of these instruments to accrue income over the term of their investment. It also asks for comments
on a number of related topics, including the character of income or loss with respect to these instruments; whether short-term
instruments should be subject to any such accrual regime; the relevance of factors such as the exchange-traded status of the instruments
and the nature of the underlying property to which the instruments are linked; and whether these instruments are or should be subject
to the “constructive ownership” rule, 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.
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The term “Non-U.S. Holder” does
not include any of the following holders:
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a holder who is an individual present in the United States for 183
days or more in the taxable year of disposition and who is not otherwise a resident of the United States for U.S. federal income
tax purposes;
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certain former citizens or residents of the United States; or
|
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a holder for whom income or gain in respect of the Securities is effectively
connected with the conduct of a trade or business in the United States.
|
Such holders should consult their tax advisers
regarding the U.S. federal income tax consequences of an investment in the Securities.
Tax Treatment upon Sale, Exchange or
Settlement of the Securities
In
general.
Assuming the treatment of the Securities as set forth above is respected, and subject to the discussions below concerning
backup withholding
and the possible application of Section 871(m) of the Code
, a Non-U.S.
Holder of the Securities generally will not be subject to U.S. federal income or withholding tax in respect of amounts paid to
the Non-U.S. Holder.
Subject to the discussions regarding the possible
application of Section 871(m) and FATCA, if all or any portion of a Security were recharacterized as a debt instrument, any payment
made to a Non-U.S. Holder with respect to the Securities would not be subject to U.S. federal withholding tax, provided that:
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the Non-U.S. Holder does not own, directly or by attribution, ten percent
or more of the total combined voting power of all classes of Morgan Stanley stock entitled to vote;
|
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the Non-U.S. Holder is not a controlled foreign corporation related,
directly or indirectly, to Morgan Stanley through stock ownership;
|
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the Non-U.S. Holder is not a bank receiving interest under Section
881(c)(3)(A) of the Code, and
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the certification requirement described below has been fulfilled with
respect to the beneficial owner.
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Certification Requirement.
The certification
requirement referred to in the preceding paragraph will be fulfilled if the beneficial owner of a Security (or a financial institution
holding a Security on behalf of the beneficial owner) furnishes to the applicable withholding agent an IRS Form W-8BEN (or other
appropriate form) on which the beneficial owner certifies under penalties of perjury that it is not a U.S. person.
In 2007, the U.S. Treasury Department and the
IRS released a notice requesting comments on the U.S. federal income tax treatment of “prepaid forward contracts” and
similar instruments. Among the issues addressed in the notice is the degree, if any, to which any income with respect to instruments
such as the Securities should be subject to U.S. withholding tax. It is possible that any Treasury regulations or other guidance
promulgated after consideration of this issue could materially and adversely affect
the withholding tax consequences
of ownership and disposition of the Securities, possibly on a retroactive basis. Non-U.S. Holders should note that we currently
do not intend to withhold on any payment made with respect to the Securities to Non-U.S. Holders (subject to compliance by such
holders with the certification requirement described above and to the discussions below regarding Section 871(m) and FATCA). However,
in the event of a change of law or any formal or informal guidance by the IRS, the U.S. Treasury Department or Congress, we may
decide to withhold on payments made with respect to the Securities to Non-U.S. Holders, and we will not be required to pay any
additional amounts with respect to amounts withheld. Accordingly, Non-U.S. Holders should consult their tax advisers regarding
all aspects of the U.S. federal income tax consequences of an investment in the Securities, including the possible implications
of the notice referred to above.
Section 871(m) Withholding Tax on Dividend
Equivalents
Section 871(m) of the Code and Treasury regulations
promulgated thereunder (“Section 871(m)”) generally impose a 30% (or a lower applicable treaty rate) withholding tax
on dividend equivalents paid or deemed paid to Non-U.S. Holders with respect to certain financial instruments linked to U.S. equities
or indices that include U.S. equities (each, an “Underlying Security”). Subject to certain exceptions, Section 871(m)
generally applies to securities that substantially replicate the economic performance of one or more Underlying Securities, as
determined based on tests set forth in the applicable Treasury regulations (a “Specified Security”). However, 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 (“FDAP 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 (other than
amounts treated as FDAP income). 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 iShares
®
MSCI Emerging Markets ETF
|
The iShares
®
MSCI Emerging Markets ETF is an exchange-traded
fund that seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the
MSCI Emerging Markets Index
SM
. The iShares
®
MSCI Emerging Markets ETF is managed by iShares
®
,
Inc. (“iShares”), a registered investment company that consists of numerous separate investment portfolios, including
the iShares
®
MSCI Emerging Markets ETF. Information provided to or filed with the Securities and Exchange Commission
(the “Commission”) by iShares pursuant to the Securities Act of 1933 and the Investment Company Act of 1940 can be
located by reference to Commission file numbers 033-97598 and 811-09102, 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 iShares
®
MSCI Emerging Markets ETF
is accurate or complete.
The MSCI Emerging Markets Index
SM
is
a stock index calculated, published and disseminated daily by MSCI Inc. and is intended to provide performance benchmarks for certain
emerging equity markets including Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea,
Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
The
MSCI Emerging Markets Index
SM
is described in “MSCI
Emerging Markets IndexSM” and “MSCI Global Investable Market Indices Methodology” in the accompanying index supplement.
We and/or our affiliates may presently or from time to time engage
in business with iShares. In the course of such business, we and/or our affiliates may acquire non-public information with respect
to iShares, 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 iShares as in your judgment is appropriate to make an informed decision with
respect to an investment in the Securities.
iShares
®
is a registered trademark of BlackRock
Institutional Trust Company, N.A. (“BTC”). The Securities are not sponsored, endorsed, sold, or promoted by BTC. BTC
makes no representations or warranties to the owners of the Securities or any member of the public regarding the advisability of
investing in the Securities. BTC has no obligation or liability in connection with the operation, marketing, trading or sale of
the Securities.
iShares
®
MSCI Emerging Markets 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 iShares
®
MSCI Emerging Markets ETF for each quarter
in the period from January 1, 2014 through July 31, 2019. The Closing Price of the iShares
®
MSCI Emerging Markets
ETF on July 31, 2019 was $41.77. We obtained the information in the table below from Bloomberg Financial Markets, without independent
verification. The historical Closing Prices of the iShares
®
MSCI Emerging Markets ETF should not be taken as an
indication of future performance, and no assurance can be given as to the Closing Price of the iShares
®
MSCI Emerging
Markets ETF on the Final Valuation Date.
Quarter Begin
|
Quarter End
|
Quarterly High ($)
|
Quarterly Low ($)
|
Quarterly Close ($)
|
1/1/2014
|
3/31/2014
|
40.99
|
37.09
|
40.99
|
4/1/2014
|
6/30/2014
|
43.95
|
40.82
|
43.23
|
7/1/2014
|
9/30/2014
|
45.85
|
41.56
|
41.56
|
10/1/2014
|
12/31/2014
|
42.44
|
37.73
|
39.29
|
1/1/2015
|
3/31/2015
|
41.07
|
37.92
|
40.13
|
4/1/2015
|
6/30/2015
|
44.09
|
39.04
|
39.62
|
7/1/2015
|
9/30/2015
|
39.78
|
31.32
|
32.78
|
10/1/2015
|
12/31/2015
|
36.29
|
31.55
|
32.19
|
1/1/2016
|
3/31/2016
|
34.28
|
28.25
|
34.25
|
4/1/2016
|
6/30/2016
|
35.26
|
31.87
|
34.36
|
7/1/2016
|
9/30/2016
|
38.20
|
33.77
|
37.45
|
10/1/2016
|
12/31/2016
|
38.10
|
34.08
|
35.01
|
1/1/2017
|
3/31/2017
|
39.99
|
35.43
|
39.39
|
4/1/2017
|
6/30/2017
|
41.93
|
38.81
|
41.39
|
7/1/2017
|
9/30/2017
|
45.85
|
41.05
|
44.81
|
10/1/2017
|
12/31/2017
|
47.81
|
44.82
|
47.12
|
1/1/2018
|
3/31/2018
|
52.08
|
45.69
|
48.28
|
4/1/2018
|
6/30/2018
|
48.14
|
42.33
|
43.33
|
7/1/2018
|
9/30/2018
|
45.03
|
41.14
|
42.92
|
10/1/2018
|
12/31/2018
|
42.93
|
38.00
|
39.06
|
1/1/2019
|
3/31/2019
|
43.71
|
38.45
|
42.92
|
4/1/2019
|
6/30/2019
|
44.59
|
39.91
|
42.91
|
7/1/2019
|
7/31/2019*
|
43.42
|
41.77
|
41.77
|
* 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 iShares
®
MSCI Emerging Markets ETF from January 1, 2008 through July 31, 2019, based on information from Bloomberg.
Past performance
of the iShares
®
MSCI Emerging Markets ETF is not indicative of the future performance of the iShares
®
MSCI Emerging Markets ETF.
Additional Terms of the Securities
|
If the terms discussed in this free writing
prospectus differ from those discussed in the prospectus supplement, index 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 MSCI Emerging Markets Index
SM
, which is the index that the Underlying Shares generally seek to track.
|
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“Share Underlying Index Publisher”
means MSCI Inc. 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:
|
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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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if the Underlying Shares (or any such other security) are securities of Nasdaq, the official closing
price published by Nasdaq on such day, or
|
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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:
|
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(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:
|
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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
|
|
o
|
every quotation of that kind obtained is objected to within five business days after the due date
as described above.
|
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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o
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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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o
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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 Downside Threshold, which is the price at or above which the Underlying Shares must
close on the Final Valuation Date so that you do not suffer a significant loss on your initial investment in the Securities. In
addition, through our affiliates, we are likely to modify our hedge position throughout the term of the Securities, including on
the Final 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 $0.25 for each Security it sells.
MS & Co. is our affiliate and a wholly
owned subsidiary of Morgan Stanley, and it and other affiliates of ours expect to make a profit by selling, structuring and, when
applicable, hedging the Securities. When MS & Co. prices this offering of Securities, it will determine the economic terms
of the Securities, including the level of 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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