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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Morgan Stanley | NYSE:MS | NYSE | Common Stock |
Price Change | % Change | Share Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|
1.68 | 1.81% | 94.33 | 94.42 | 93.28 | 93.34 | 5,043,460 | 01:00:00 |
August 2017
Preliminary Pricing Supplement No. 1,779
Registration Statement Nos. 333-200365; 333-200365-12
Dated August 18, 2017
Filed pursuant to Rule 424(b)(2)
M organ S tanley F inance LLC
Structured Investments
Opportunities in International Equities
Contingent Coupon Buffered Securities Linked to the EURO STOXX 50 ® Index due June 4, 2021
Fully and Unconditionally Guaranteed by Morgan Stanley
Principal at Risk Securities
Unlike ordinary debt securities, the Contingent Coupon Buffered Securities Linked to the EURO STOXX 50 ® Index due June 4, 2021, which we refer to as the securities, do not provide for the regular payment of interest and provide for a minimum payment at maturity of only 12% of the stated principal amount. Instead, the securities offer the opportunity for investors to earn a contingent monthly coupon but only if and for as long as the index closing value of the EURO STOXX 50 ® Index (the “underlying index”) has remained greater than or equal to 88% of the initial index value, which we refer to as the trigger level, on each day during the term of the securities. If the index closing value of the underlying index is less than the trigger level on any day during the term of the securities, a trigger event will have occurred and you will not receive any contingent monthly coupon payment for the corresponding monthly period or for any subsequent monthly period . Therefore, investors in the securities will permanently forfeit their ability to receive subsequent contingent monthly coupon payments if the index closing value declines below the trigger level on any day during the 45-month term of the securities. As a result, investors must be willing to accept the risk of not receiving any contingent monthly coupon payments during the entire term of the securities. In addition, at maturity, if a trigger event has not occurred, investors will receive the stated principal amount of the securities plus the final contingent monthly coupon payment but will not participate in any performance of the underlying index. However, if a trigger event has occurred, investors will receive a return that reflects the performance of the underlying index over the term of the securities plus the buffer amount of 12%. Therefore, if a trigger event occurs and the underlying index recovers such that the final index value is greater than the trigger level, investors will receive the stated principal amount of their investment plus a positive return based on the performance of the underlying index. However, if a trigger event occurs and the final index value is less than the trigger level, investors will lose 1% for every 1% decline in the level of the underlying index below the trigger level, subject to the minimum payment at maturity of 12% of the stated principal amount of the securities. If the final index value is less than the trigger level, a trigger event will necessarily have occurred and you will lose some or a significant portion of your investment. Investors may lose up to 88% of the stated principal amount of the securities. The securities are for investors who seek an opportunity to earn interest at a potentially above-market rate if and for as long as a trigger event has not occurred on any day during the term of the securities in exchange for the risk of forfeiting all subsequent contingent monthly coupon payments if a trigger event occurs during the term of the securities and the risk of losing principal if the EURO STOXX 50 ® Index closes below the trigger level on the final valuation date. The securities are unsecured obligations of Morgan Stanley Finance LLC (“MSFL”) and are fully and unconditionally guaranteed by Morgan Stanley. The securities are issued as part of MSFL’s Series A Global Medium-Term Notes program.
All payments are subject to our credit risk. If we default on our obligations, you could lose some or all of your investment. These securities are not secured obligations and you will not have any security interest in, or otherwise have any access to, any underlying reference asset or assets.
(1) | MS & Co. will act as the agent for this offering and will not receive a sales commission in connection with sales of the securities. See “Supplemental information regarding plan of distribution; conflicts of interest.” For additional information, see “Plan of Distribution (Conflicts of Interest)” in the accompanying prospectus supplement. |
(2) | See “Use of proceeds and hedging” on page 24. |
The securities involve risks not associated with an investment in ordinary debt securities. See “Risk Factors” beginning on page 10.
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this preliminary pricing supplement or the accompanying prospectus supplement, index supplement and prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The securities are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency or instrumentality, nor are they obligations of, or guaranteed by, a bank.
You should read this preliminary pricing supplement together with the related prospectus supplement, index supplement and prospectus, each of which can be accessed via the hyperlinks below. Please also see “Additional Information About the Securities” at the end of this preliminary pricing supplement.
References to “we,” “us” and “our” refer to Morgan Stanley or MSFL, or Morgan Stanley and MSFL collectively, as the context requires.
Prospectus Supplement dated February 16, 2016 Index Supplement dated January 30, 2017 Prospectus dated February 16, 2016
Morgan Stanley Finance LLC
Contingent Coupon Buffered Securities Linked to the EURO STOXX 50 ® Index due June 4, 2021
Principal at Risk Securities
Terms continued from previous page: | |
Monitoring period end-dates: | Monthly, as set forth under “Monitoring Period End-Dates and Coupon Payment Dates” below, subject to postponement for non-index business days and certain market disruption events. We also refer to June 1, 2021 as the final monitoring period end-date. |
Coupon payment dates: | Monthly, as set forth under “Monitoring Period End-Dates and Coupon Payment Dates” below. If any coupon payment date is not a business day, that coupon payment, if any, will be made on the next succeeding business day and no adjustment will be made to any coupon payment made on that succeeding business day; provided that the contingent coupon, if any, with respect to the final valuation date will be paid on the maturity date. |
CUSIP / ISIN: | 61768CPM3 / US61768CPM37 |
Listing: | The securities will not be listed on any securities exchange. |
Monitoring Period End-Dates and Redemption Dates
Monitoring Period End-Dates | Coupon Payment Dates |
September 29, 2017 | October 4, 2017 |
October 30, 2017 | November 2, 2017 |
November 29, 2017 | December 4, 2017 |
December 29, 2017 | January 4, 2018 |
January 29, 2018 | February 1, 2018 |
February 28, 2018 | March 5, 2018 |
March 28, 2018 | April 4, 2018 |
April 30, 2018 | May 4, 2018 |
May 29, 2018 | June 1, 2018 |
June 28, 2018 | July 3, 2018 |
July 30, 2018 | August 2, 2018 |
August 28, 2018 | August 31, 2018 |
September 28, 2018 | October 3, 2018 |
October 29, 2018 | November 1, 2018 |
November 28, 2018 | December 3, 2018 |
December 28, 2018 | January 4, 2019 |
January 28, 2019 | January 31, 2019 |
February 28, 2019 | March 5, 2019 |
March 28, 2019 | April 2, 2019 |
April 29, 2019 | May 3, 2019 |
May 28, 2019 | May 31, 2019 |
June 28, 2019 | July 3, 2019 |
July 29, 2019 | August 1, 2019 |
August 28, 2019 | September 2, 2019 |
September 30, 2019 | October 3, 2019 |
October 28, 2019 | October 31, 2019 |
November 28, 2019 | December 3, 2019 |
December 30, 2019 | January 6, 2020 |
January 28, 2020 | January 31, 2020 |
February 28, 2020 | March 4, 2020 |
March 30, 2020 | April 2, 2020 |
April 28, 2020 | May 5, 2020 |
May 28, 2020 | June 2, 2020 |
June 29, 2020 | July 2, 2020 |
July 28, 2020 | July 31, 2020 |
August 28, 2020 | September 3, 2020 |
September 28, 2020 | October 1, 2020 |
October 28, 2020 | November 2, 2020 |
November 30, 2020 | December 3, 2020 |
December 29, 2020 | January 5, 2021 |
January 28, 2021 | February 2, 2021 |
March 1, 2021 | March 4, 2021 |
March 29, 2021 | April 1, 2021 |
April 28, 2021 | May 4, 2021 |
May 28, 2021 | June 3, 2021 |
June 1, 2021 (final valuation date) | June 4, 2021 (maturity date) |
August 2017 | Page 2 |
Morgan Stanley Finance LLC
Contingent Coupon Buffered Securities Linked to the EURO STOXX 50 ® Index due June 4, 2021
Principal at Risk Securities
Investment Summary
Contingent Coupon Buffered Securities
Principal at Risk Securities
The Contingent Coupon Buffered Securities Linked to the EURO STOXX 50 ® Index due June 4, 2021, which we refer to as the securities, provide an opportunity for investors to earn a contingent monthly coupon at an annual rate of 7.00% (corresponding to approximately $ 5.8333 per month per security) but only if and for as long as the index closing value of the underlying index has remained greater than or equal to 88% of the initial index value, which we refer to as the trigger level, on each day during the term of the securities. If the index closing value of the underlying index is less than the trigger level on any day during the term of the securities, a trigger event will have occurred and you will not receive any contingent monthly coupon payment for the corresponding monthly period or for any subsequent monthly period . Therefore, investors in the securities will permanently forfeit their ability to receive subsequent contingent monthly coupon payments if the index closing value declines below the trigger level on any day during the 45-month term of the securities.
In addition, at maturity, if a trigger event has not occurred, investors will receive the stated principal amount of the securities plus the final contingent monthly coupon payment but will not participate in any performance of the underlying index. However, if a trigger event has occurred, investors will receive a return that reflects the performance of the underlying index over the term of the securities plus the buffer amount of 12%. Therefore, if a trigger event occurs and the underlying index recovers such that the final index value is greater than the trigger level, investors will receive the stated principal amount of their investment plus a positive return based on the performance of the underlying index. However, if a trigger event occurs and the final index value is less than the trigger level, investors will lose 1% for every 1% decline in the level of the underlying index below the trigger level, subject to the minimum payment at maturity of 12% of the stated principal amount. If the final index value is less than the trigger level, a trigger event will necessarily have occurred and you will lose some or a significant portion of your investment. Investors may lose up to 88% of the stated principal amount of the securities.
We are using this preliminary pricing supplement to solicit from you an offer to purchase the securities. You may revoke your offer to purchase the securities at any time prior to the time at which we accept such offer by notifying the relevant agent. We reserve the right to change the terms of, or reject any offer to purchase, the securities prior to their issuance. In the event of any material changes to the terms of the securities, we will notify you.
Morgan Stanley Wealth Management clients may contact their local Morgan Stanley branch office or our principal executive offices at 1585 Broadway, New York, New York 10036 (telephone number (212) 761-4000).
The original issue price of each security is $1,000. 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 pricing date will be less than $1,000. We estimate that the value of each security on the pricing date will be approximately $995.50, or within $22.50 of that estimate. Our estimate of the value of the securities as determined on the pricing date will be set forth in the final pricing supplement.
What goes into the estimated value on the pricing date?
In valuing the securities on the pricing date, we take into account that the securities comprise both a debt component and a performance-based component linked to the underlying index. The estimated value of the securities is determined using our own pricing and valuation models, market inputs and assumptions relating to the underlying index, instruments based on the underlying index, volatility and other factors including current and expected interest rates, as well as an interest rate related to our secondary market credit spread, which is the implied interest rate at which our conventional fixed rate debt trades in the secondary market.
What determines the economic terms of the securities?
In determining the economic terms of the securities, including the contingent monthly coupon rate, the trigger level, the buffer amount and the minimum payment at maturity, we use an internal funding rate, which is likely to be lower than our secondary market credit spreads and therefore advantageous to us. If the issuing, selling, structuring and hedging costs borne by you were lower or if the internal funding rate were higher, one or more of the economic terms of the securities would be more favorable to you.
What is the relationship between the estimated value on the pricing date and the secondary market price of the securities?
The price at which MS & Co. purchases the securities in the secondary market, absent changes in market conditions, including those related to the underlying index, may vary from, and be lower than, the estimated value on the pricing date, because the secondary
August 2017 | Page 3 |
Morgan Stanley Finance LLC
Contingent Coupon Buffered Securities Linked to the EURO STOXX 50 ® Index due June 4, 2021
Principal at Risk Securities
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 6 months following the issue 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 index, 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. may, 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.
August 2017 | Page 4 |
Morgan Stanley Finance LLC
Contingent Coupon Buffered Securities Linked to the EURO STOXX 50 ® Index due June 4, 2021
Principal at Risk Securities
Key Investment Rationale
The securities do not guarantee repayment of more than 12% of principal at maturity and offer investors an opportunity to earn a contingent monthly coupon of 7.00% per annum but only if and for as long as the index closing value of the underlying index has remained greater than or equal to 88% of the initial index value, which we refer to as the trigger level, on each day during the term of the securities. In addition, if a trigger event occurs, the investor becomes exposed to the downside performance of the underlying index and may lose up to 88% of the stated principal amount at maturity. The payment at maturity will vary depending on whether or not a trigger event occurs, as follows:
August 2017 | Page 5 |
Morgan Stanley Finance LLC
Contingent Coupon Buffered Securities Linked to the EURO STOXX 50 ® Index due June 4, 2021
Principal at Risk Securities
How the Contingent Coupon Buffered Securities Work
August 2017 | Page 6 |
Morgan Stanley Finance LLC
Contingent Coupon Buffered Securities Linked to the EURO STOXX 50 ® Index due June 4, 2021
Principal at Risk Securities
Hypothetical Examples
The following hypothetical examples are for illustrative purposes only. The actual initial index value and trigger level will be determined on the pricing date. Any payment on the securities is subject to our credit risk. The numbers in the hypothetical examples may be rounded for ease of analysis. The below examples are based on the following terms:
Stated principal amount: | $1,000 per security |
Hypothetical initial index value: | 3,500 |
Hypothetical trigger level: | 3,080, which is 88% of the hypothetical initial index value |
Contingent monthly coupon: | 7.00% per annum (corresponding to $5.8333 per month per security)* |
Buffer amount: | 12.00% |
Minimum payment at maturity: | $120 per security |
Total number of monthly periods: | 45 |
* The actual contingent coupon will be an amount determined by the calculation agent based on the number of days in the applicable payment period, calculated on a 30/360 basis. The hypothetical contingent monthly coupon payment of $5.8333 is used in these examples for ease of analysis.
Example 1: A trigger event HAS NOT occurred and the final index value is greater than the initial index value.
Because a trigger event has not occurred, investors receive the contingent monthly coupon payment on each coupon payment date over the term of the securities. Because a trigger event has not occurred, investors do not participate in the performance of the underlying index, and the payment at maturity for each $1,000 principal amount of securities will be $1,005.8333 (equal to the stated principal amount of $1,000 plus the contingent monthly coupon payment applicable to the final valuation date). When added to the contingent monthly coupon payments received with respect to the prior coupon payment dates, the total amount paid for each $1,000 principal amount of securities over the term of the securities is $1,250.8319. Investors do not benefit from the appreciation of the underlying index because a trigger event has not occurred.
Example 2: A trigger event HAS occurred on or prior to the first monitoring period end-date, and the final index value is less than the trigger level.
Date | Trigger event has occurred on or prior to monitoring period end-date | Payment (per $1,000 principal amount of securities) |
First monitoring period end-date | Yes | $0 |
Second monitoring period end-date | Yes | $0 |
August 2017 | Page 7 |
Morgan Stanley Finance LLC
Contingent Coupon Buffered Securities Linked to the EURO STOXX 50 ® Index due June 4, 2021
Principal at Risk Securities
Third through forty-fourth monitoring period end-dates | Yes | $0 |
Final valuation date
(final index value = 1,750) |
Yes | $620 |
Total payments over the term of the securities | $620 |
Because a trigger event has occurred on or prior to the first monitoring period end-date, investors receive no contingent monthly coupon payment for that monthly period or for any subsequent monthly period over the term of the securities. Therefore, investors receive no contingent monthly coupon payments for the entire 45-month term of the securities. Because the final index value is less than the trigger level, investors lose 1% of their investment for every 1% that the final index value is less than the trigger level, subject to the minimum payment at maturity. The payment at maturity will be $620 per $1,000 principal amount of securities, representing a substantial loss on the initial investment, calculated as follows:
$1,000 + [$1,000 × (-50.00% + 12.00%)] = $620
Example 3: A trigger event HAS occurred for the first time between the third monitoring period end-date and the fourth monitoring period end-date, and the final index value is greater than or equal to the trigger level.
Date | Trigger event has occurred on or before monitoring period end-date | Payment (per $1,000 principal amount of securities) |
First monitoring period end-date | No | $5.8333 |
Second monitoring period end-date | No | $5.8333 |
Third monitoring period end-date | No | $5.8333 |
Fourth monitoring period end-date | Yes | $0 |
Fifth through forty-fourth monitoring period end-dates | Yes | $0 |
Final valuation date
(final index value = 3,325) |
Yes | $1,070.00 |
Total payments over the term of the securities | $1,087.4999 |
Because a trigger event has occurred between the third monitoring period end-date and the fourth monitoring period end-date, investors receive no contingent monthly coupon payment for the fourth monthly period or for any subsequent monthly period over the term of the securities. Because a trigger event has occurred and the index percent change is -5.00%, the payment at maturity will be $1,070.00 per $1,000 principal amount of securities over the term of the securities, calculated as follows:
$1,000 + [$1,000 × (-5.00% + 12.00%)] = $1,070.00
When added to the contingent monthly coupon payments received with respect to the prior monitoring period end-dates, the total amount paid for each $1,000 principal amount of securities over the term of the securities is $1,087.4999.
Example 4: A trigger event HAS occurred for the first time between the twenty-fifth monitoring period end-date and the twenty-sixth monitoring period end-date, and the final index value is less than the trigger level.
Date | Trigger event has occurred on | Payment (per $1,000 principal amount of securities) |
August 2017 | Page 8 |
Morgan Stanley Finance LLC
Contingent Coupon Buffered Securities Linked to the EURO STOXX 50 ® Index due June 4, 2021
Principal at Risk Securities
or before monitoring period end-date | ||
First monitoring period end-date | No | $5.8333 |
Second monitoring period end-date | No | $5.8333 |
Third monitoring period end-date | No | $5.8333 |
Fourth through twenty-fifth monitoring period end-dates | No | $5.8333 each (22 x $5.8333 = $128.3326) |
Twenty-sixth monitoring period end-date | Yes | $0 |
Twenty-seventh through forty-fourth monitoring period end-dates | Yes | $0 |
Final valuation date
(final index value = 2,450) |
Yes | $820 |
Total payments over the term of the securities | $965.8325 |
Because a trigger event has occurred between the twenty-fifth monitoring period end-date and the twenty-sixth monitoring period end-date, investors receive no contingent monthly coupon payment for the twenty-sixth monthly period or for any subsequent monthly period over the term of the securities. Because a trigger event has occurred and the index percent change is -30.00%, the payment at maturity will be $820 per $1,000 principal amount of securities, representing a substantial loss on the initial investment, calculated as follows:
$1,000 + [$1,000 × (-30% + 12.00%)] = $820
When added to the contingent monthly coupon payments received with respect to the prior monitoring period end-dates, the total amount paid for each $1,000 principal amount of securities over the term of the securities is $965.8325.
August 2017 | Page 9 |
Morgan Stanley Finance LLC
Contingent Coupon Buffered Securities Linked to the EURO STOXX 50 ® Index due June 4, 2021
Principal at Risk Securities
Risk Factors
The following is a non-exhaustive list of certain key risk factors for investors in the securities. For further discussion of these and other risks, you should read the section entitled “Risk Factors” in the accompanying index supplement and prospectus. You should also consult your investment, legal, tax, accounting and other advisers in connection with your investment in the securities.
§ | The securities provide a minimum payment at maturity of only 12% of your principal . The terms of the securities differ from those of ordinary debt securities in that the securities do not guarantee the payment of regular interest and provide a minimum payment at maturity of only 12% of the stated principal amount at maturity. Instead, if a trigger event has occurred and the final index value is less than the trigger level, you will lose 1% of the principal amount of your securities for every 1% that the final index value is less than the trigger level, subject to the minimum payment at maturity of 12% of the principal amount of the securities. If the final index value is less than the trigger level, a trigger event will necessarily have occurred and you will lose some or a significant portion of your investment. Accordingly, investors may lose up to 88% of the stated principal amount of the securities. For purposes of determining whether or not a trigger event has occurred, the index closing value will be monitored on every day during the term of the securities, and therefore it is more likely that a trigger event will occur than if the index closing value were monitored less frequently. |
§ | The securities do not guarantee the payment of any interest, and the opportunity to receive contingent monthly coupon payments will be permanently forfeited if a trigger event occurs. The securities do not guarantee the payment of any interest. If the index closing value of the underlying index is less than the trigger level on any day during the term of the securities, you will not receive a contingent monthly coupon payment for that monthly period or for any subsequent monthly period over the term of the securities. Even if the index closing value of the underlying index subsequently appreciates following the occurrence of a trigger event, you will receive no further contingent monthly coupon payments. A trigger event could occur as early as during the first monitoring period, in which case you will receive no contingent monthly coupon payments over the entire term of the securities. If you do not earn sufficient contingent monthly coupons over the term of the securities, the overall return on the securities may be less than the amount that would be paid on a conventional debt security of ours of comparable maturity. Additionally, if a trigger event occurs and the final index value is less than the trigger level, investors will lose some or a significant portion of their investment at maturity. |
§ | If a trigger event does not occur, the appreciation potential of the securities is limited to the contingent monthly coupon payments that will be paid over the term of the securities. If a trigger event does not occur, you will not participate in the performance of the underlying index. Under these circumstances, the return on the securities will be limited to the contingent monthly coupon payments, regardless of any appreciation in the level of the underlying index, which may be significant. If you receive all available contingent monthly coupon payments over the term of the securities because a trigger event does not occur, you will receive only the principal amount of your securities at maturity (plus the final contingent monthly coupon payment), and you will not benefit from the buffer amount or from any appreciation of the underlying index. |
§ | The market price will 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. We expect that generally the level of interest rates available in the market and the value of the underlying index on any day, including in relation to the trigger level, will affect the value of the securities more than any other factors. Other factors that may influence the value of the securities include: |
o | the volatility (frequency and magnitude of changes in value) of the EURO STOXX 50 ® Index, |
o | whether the index closing value of the EURO STOXX 50 ® Index is currently or has been below the trigger level on any index business day during the term of the securities, |
o | geopolitical conditions and economic, financial, political, regulatory or judicial events that affect the component stocks of the underlying index or securities markets generally and which may affect the value of the underlying index, |
o | dividend rates on the securities underlying the EURO STOXX 50 ® Index, |
o | the time remaining until the securities mature, |
o | interest and yield rates in the market, |
August 2017 | Page 10 |
Morgan Stanley Finance LLC
Contingent Coupon Buffered Securities Linked to the EURO STOXX 50 ® Index due June 4, 2021
Principal at Risk Securities
o | the availability of comparable instruments, |
o | the composition of the EURO STOXX 50 ® Index and changes in the constituent stocks of such index, and |
o | any actual or anticipated changes in our credit ratings or credit spreads. |
Some or all of these factors will influence the price that you will receive if you sell your securities prior to maturity. For example, you may have to sell your securities at a substantial discount from the stated principal amount of $1,000 per security if the value of the EURO STOXX 50 ® Index at the time of sale is near or below the trigger level or if market interest rates rise.
You cannot predict the future performance of the EURO STOXX 50 ® Index based on its historical performance. The index closing value of the underlying index may decrease and be below the trigger level during the term of the securities so that you will forfeit some or all of the contingent monthly coupon payments, or be below the trigger level on the final valuation date so that you will lose some or a significant portion of your initial investment in the securities. See “EURO STOXX 50 ® Index Historical Performance” below.
§ | There are risks associated with investments in securities linked to the value of foreign equity securities. The securities are linked to the value of foreign 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 United States 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. 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 favorably or 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 between countries. |
§ | The securities are subject to our credit risk, and any actual or anticipated changes to our credit ratings or 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 on any coupon payment date and at maturity, and therefore you are subject to our credit risk. If we default on our obligations under the securities, your investment would be at risk and you could lose some or all of your investment. As a result, the market value of the securities prior to maturity will be affected by changes in the market’s view of our creditworthiness. Any actual or anticipated decline in our credit ratings or increase in the 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. |
§ | Not equivalent to investing in the underlying index. Investing in the securities is not equivalent to investing in the underlying index or its component stocks. Investors in the securities will not have voting rights or rights to receive dividends or other distributions or any other rights with respect to stocks that constitute the underlying index. |
§ | If a trigger event occurs, the amount payable at maturity is not linked to the value of the underlying index at any time other than the final valuation date. The final index value will be based on the index closing value on the final valuation date, subject to postponement for non-index business days and certain market disruption events. If a trigger event occurs, even if the value of the underlying index appreciates prior to the final valuation date but then drops by the final valuation date, the payment at maturity will be less than it would have been had the payment at maturity been linked to the |
August 2017 | Page 11 |
Morgan Stanley Finance LLC
Contingent Coupon Buffered Securities Linked to the EURO STOXX 50 ® Index due June 4, 2021
Principal at Risk Securities
value of the underlying index prior to such drop. Although the actual value of the underlying index on the stated maturity date or at other times during the term of the securities may be higher than the index closing value on the final valuation date, if a trigger event occurs, the payment at maturity will be based solely on the index closing value on the final valuation date.
§ | The securities will not be listed on any securities exchange and secondary trading may be limited . Accordingly, you should be willing to hold your securities for the entire 45-month term of the securities . The securities will not be listed on any securities exchange. Therefore, there may be little or no secondary market for the securities. MS & Co. may, 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. |
§ | 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 original issue price reduce the economic terms of the securities, cause the estimated value of the securities to be less than the original 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 original issue price, because secondary market prices will exclude the issuing, selling, structuring and hedging-related costs that are included in the original 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 original 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 6 months following the issue 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 index, 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 pricing 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 document 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 will be influenced by many unpredictable factors” above. |
§ | Hedging and trading activity by our affiliates could potentially 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 (and to other instruments linked to the underlying index or its component stocks), including trading in the stocks that constitute the underlying index as well as in other instruments related to the 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. Some of our affiliates also trade the stocks that constitute the underlying index and other financial instruments related to the underlying index on a regular basis as part of their |
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general broker-dealer and other businesses. Any of these hedging or trading activities on or prior to the pricing date could potentially increase the initial index value and, therefore, could increase the trigger level, which is the value at or above which the underlying index must close on each day during the term of the securities so that you receive a contingent monthly coupon on the securities, and the value at or above which the underlying index must close on the final valuation date so that you are not exposed to the negative performance of the underlying index at maturity. Additionally, such hedging or trading activities during the term of the securities could potentially affect the value of the underlying index during the term of the securities and accordingly, the payout to you at maturity and whether we pay a contingent monthly coupon on the securities.
§ | The calculation agent, which is a subsidiary of Morgan Stanley and an affiliate of MSFL, will make determinations with respect to the securities. As calculation agent, MS & Co. will determine the initial index value, the trigger level, the daily index closing value, including the final index value, whether the contingent monthly coupon will be paid on each coupon payment date, whether a market disruption event has occurred and the payment that you will receive at maturity. 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 and the selection of a successor index or calculation of the index closing value in the event of a market disruption event or discontinuance of the underlying index. These potentially subjective determinations may affect the payout to you at maturity. For further information regarding these types of determinations, see “Additional Information About the Securities—Additional Provisions—Calculation agent,” “—Market disruption event,” “—Postponement of final valuation date,” “—Discontinuance of the underlying index; alteration of method of calculation” and “—Alternate exchange calculation in case of an event of default,” below. In addition, MS & Co. has determined the estimated value of the securities on the pricing date. |
§ | Adjustments to the underlying index could adversely affect the value of the securities. The publisher of the underlying index may add, delete or substitute the component stocks of the underlying index or make other methodological changes that could change the value of the underlying index. Any of these actions could adversely affect the value of the securities. The publisher of the underlying index may also discontinue or suspend calculation or publication of the underlying index at any time. In these circumstances, MS & Co., as the calculation agent, will have the sole discretion to substitute a successor index that is comparable to the discontinued index. MS & Co. could have an economic interest that is different than that of investors in the securities insofar as, for example, MS & Co. is permitted to consider indices that are calculated and published by MS & Co. or any of its affiliates. If MS & Co. determines that there is no appropriate successor index, the determination of whether the contingent monthly coupon will be payable on the securities and the determination of the payment at maturity will be based on whether the value of the underlying index, based on the closing prices of the stocks constituting the underlying index at the time of such discontinuance, without rebalancing or substitution, computed by MS & Co. as calculation agent in accordance with the formula for calculating the underlying index last in effect prior to such discontinuance, is less than the trigger level. |
§ | The U.S. federal income tax consequences of an investment in the securities are uncertain. There is no direct legal authority as to the proper treatment of the securities for U.S. federal income tax purposes, and, therefore, significant aspects of the tax treatment of the securities are uncertain. |
Please read the discussion under “Additional Provisions—Tax considerations” in this document concerning the U.S. federal income tax consequences of an investment in the securities. We intend to treat a security for U.S. federal income tax purposes as a single financial contract that provides for a coupon that will be treated as gross income to you at the time received or accrued, in accordance with your regular method of tax accounting. Under this treatment, the ordinary income treatment of the coupon payments, in conjunction with the capital loss treatment of any loss recognized upon the sale, exchange or settlement of the securities, could result in adverse tax consequences to holders of the securities because the deductibility of capital losses is subject to limitations. We do not plan to request a ruling from the Internal Revenue Service (the “IRS”) regarding the tax treatment of the securities, and the IRS or a court may not agree with the tax treatment described herein. If the IRS were successful in asserting an alternative treatment for the securities, the timing and character of income or loss 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 (as adjusted based on the difference, if any, between the actual and the projected amount of any contingent payments on the securities) 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,
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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.
Non-U.S. Holders should note that we currently intend to withhold on any coupon paid to Non-U.S. Holders generally at a rate of 30%, or at a reduced rate specified by an applicable income tax treaty under an “other income” or similar provision, and will not be required to pay any additional amounts with respect to amounts withheld.
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. While it is not clear whether the securities would be viewed as similar to the prepaid forward contracts described in the notice, it is possible that 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. The notice focuses on a number of issues, the most relevant of which for holders of the securities are the character and timing of income or loss and the degree, if any, to which income realized by non-U.S. investors should be subject to withholding tax. Both U.S. and Non-U.S. Holders (as defined below) should consult their tax advisers regarding the U.S. federal income tax consequences of an investment in the securities, including possible alternative treatments, the issues presented by this notice and any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction.
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EURO STOXX 50 ® Index Summary
The EURO STOXX 50 ® Index was created by STOXX Limited, which is owned by Deutsche Börse AG and SIX Group AG. Publication of the EURO STOXX 50 ® Index began on February 26, 1998, based on an initial index value of 1,000 at December 31, 1991. The EURO STOXX 50 ® Index is composed of 50 component stocks of market sector leaders from within the STOXX 600 Supersector Indices, which includes stocks selected from the Eurozone. The component stocks have a high degree of liquidity and represent the largest companies across all market sectors. For additional information about the EURO STOXX 50 ® Index, see the information set forth under “EURO STOXX 50 ® Index” in the accompanying index supplement.
Information as of market close on August 17, 2017:
Bloomberg Ticker Symbol: | SX5E |
Current Index Value: | 3,461.97 |
52 Weeks Ago: | 2,980.54 |
52 Week High (on 5/5/2017): | 3,658.79 |
52 Week Low (on 9/16/2016): | 2,935.25 |
The following graph sets forth the daily closing values of the underlying index for the period from January 1, 2012 through August 17, 2017. The related table sets forth the published high and low closing values, as well as end-of-quarter closing values, of the underlying index for each quarter in the same period. The closing value of the underlying index on August 17, 2017 was 3,461.97. We obtained the information in the table below from Bloomberg Financial Markets, without independent verification. The historical values of the underlying index should not be taken as an indication of future performance, and no assurance can be given as to the closing value of the underlying index on any day during the term of the securities, including on the final valuation date.
Underlying Index Daily Closing Values
January 1, 2012 to August 17, 2017
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* The red solid line indicates the hypothetical trigger level, assuming the index closing value on August 17, 2017 were the initial index value. |
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EURO STOXX 50 ® Index | High | Low | Period End |
2012 | |||
First Quarter | 2,608.42 | 2,286.45 | 2,477.28 |
Second Quarter | 2,501.18 | 2,068.66 | 2,264.72 |
Third Quarter | 2,594.56 | 2,151.54 | 2,454.26 |
Fourth Quarter | 2,659.95 | 2,427.32 | 2,635.93 |
2013 | |||
First Quarter | 2,749.27 | 2,570.52 | 2,624.02 |
Second Quarter | 2,835.87 | 2,511.83 | 2,602.59 |
Third Quarter | 2,936.20 | 2,570.76 | 2,893.15 |
Fourth Quarter | 3,111.37 | 2,902.12 | 3,109.00 |
2014 | |||
First Quarter | 3,172.43 | 2,962.49 | 3,161.60 |
Second Quarter | 3,314.80 | 3,091.52 | 3,228.24 |
Third Quarter | 3,289.75 | 3,006.83 | 3,225.93 |
Fourth Quarter | 3,277.38 | 2,874.65 | 3,146.43 |
2015 | |||
First Quarter | 3,731.35 | 3,007.91 | 3,697.38 |
Second Quarter | 3,828.78 | 3,424.30 | 3,424.30 |
Third Quarter | 3,686.58 | 3,019.34 | 3,100.67 |
Fourth Quarter | 3,506.45 | 3,069.05 | 3,267.52 |
2016 | |||
First Quarter | 3,178.01 | 2,680.35 | 3,004.93 |
Second Quarter | 3,151.69 | 2,697.44 | 2,864.74 |
Third Quarter | 3,091.66 | 2,761.37 | 3,002.24 |
Fourth Quarter | 3,290.52 | 2,954.53 | 3,290.52 |
2017 | |||
First Quarter | 3,500.93 | 3,230.68 | 3,500.93 |
Second Quarter | 3,658.79 | 3,409.78 | 3,441.88 |
Third Quarter (through August 17, 2017) | 3,527.83 | 3,406.34 | 3,461.97 |
“EURO STOXX 50 ® ” and “STOXX ® ” are registered trademarks of STOXX Limited. For more information, see “EURO STOXX 50 ® Index” in the accompanying index supplement.
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Additional Information About the Securities
Please read this information in conjunction with the summary terms on the front cover of this preliminary pricing supplement.
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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.
In addition, we will not attempt to ascertain whether any issuer of any shares to which a security relates (such shares hereafter referred to as “Underlying Shares”) is treated as a “passive foreign investment company” (“PFIC”) within the meaning of Section 1297 of the Code. If any issuer of Underlying Shares were so treated, certain adverse U.S. federal income tax consequences might apply to a U.S. Holder upon the sale, exchange or settlement of a security. You should refer to information filed with the Securities and Exchange Commission or other governmental authorities by the issuers of the Underlying Shares and consult your tax adviser regarding the possible consequences to you if any issuer is or becomes a PFIC.
This discussion is based on the Code, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof, 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
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 IRS or a court will agree with the tax treatment described herein. We intend to treat a security for U.S. federal income tax purposes as a single financial contract that provides for a coupon that will be treated as gross income to you at the time received or accrued in accordance with your regular method of tax accounting. In the opinion of our counsel, Davis Polk & Wardwell LLP, this treatment of the securities is reasonable under current law; however, our counsel has advised us that it is unable to conclude affirmatively that this treatment is more likely than not to be upheld, and that alternative treatments are possible.
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 each security 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:
· a citizen or individual resident of the United States;
· 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
· 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 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.
Tax Treatment of Coupon Payments . Any coupon payment on the securities should be taxable as ordinary income to a U.S. Holder at the time received or accrued, in accordance with the U.S. Holder’s regular method of accounting for U.S. federal income tax purposes.
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. For this purpose, the amount realized does not include any coupon paid at settlement and may not include sale proceeds attributable to an accrued coupon, which may be treated as a coupon payment. Any such gain or loss recognized should be long-term capital gain or loss if the U.S. Holder has held the securities for more
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than one year at the time of the sale, exchange or settlement, and should be short-term capital gain or loss otherwise. The ordinary income treatment of the coupon payments, in conjunction with the capital loss treatment of any loss recognized upon the sale, exchange or settlement of the securities, could result in adverse tax consequences to holders of the securities because the deductibility of capital losses is subject to limitations.
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 any contingent payments 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 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 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 on whether to require holders of “prepaid forward contracts” and similar 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; whether these instruments are or should be subject to the “constructive ownership” rule, which very generally can operate to recharacterize certain long-term capital gain as ordinary income and impose an interest charge; and appropriate transition rules and effective dates. While it is not clear whether instruments such as the securities would be viewed as similar to the prepaid forward contracts described in the notice, 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 payments on the securities 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 will be filed with the IRS in connection with payments 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:
· an individual who is classified as a nonresident alien;
· a foreign corporation; or
· a foreign estate or trust.
The term “Non-U.S. Holder” does not include any of the following holders:
· a holder who is an individual present in the United States for 183 days or more in the taxable
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year of disposition and who is not otherwise a resident of the United States for U.S. federal income tax purposes;
· certain former citizens or residents of the United States; or
· 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.
Although significant aspects of the tax treatment of each security are uncertain, we intend to withhold on any coupon paid to a Non-U.S. Holder generally at a rate of 30% or at a reduced rate specified by an applicable income tax treaty under an “other income” or similar provision. We will not be required to pay any additional amounts with respect to amounts withheld. In order to claim an exemption from, or a reduction in, the 30% withholding tax, a Non-U.S. Holder of the securities must comply with certification requirements to establish that it is not a U.S. person and is eligible for such an exemption or reduction under an applicable tax treaty. If you are a Non-U.S. Holder, you should consult your tax adviser regarding the tax treatment of the securities, including the possibility of obtaining a refund of any withholding tax and the certification requirement described above.
Section 871(m) Withholding Tax on Dividend Equivalents
Section 871(m) of the Code and Treasury regulations promulgated thereunder (“Section 871(m)”) generally impose a 30% (or a lower applicable treaty rate) withholding tax on dividend equivalents paid or deemed paid to Non-U.S. Holders with respect to certain financial instruments linked to U.S. equities or indices that include U.S. equities (each, an “Underlying Security”). Subject to certain exceptions, Section 871(m) generally applies to securities that substantially replicate the economic performance of one or more Underlying Securities, as determined based on tests set forth in the applicable Treasury regulations (a “Specified Security”). However, the regulations exempt securities issued before January 1, 2018 that do not have a delta of one with respect to any Underlying Security. Based on our determination that the securities do not have a delta of one with respect to any Underlying Security, our counsel is of the opinion that the securities should not be Specified Securities and, therefore, should not be subject to Section 871(m).
Our determination is not binding on the IRS, and the IRS may disagree with this determination. Section 871(m) is complex and its application may depend on your particular circumstances, including whether you enter into other transactions with respect to an Underlying Security. If Section 871(m) withholding is required, we will not be required to pay any additional amounts with respect to the amounts so withheld. You should consult your tax adviser regarding the potential application of Section 871(m) to the securities.
U.S. Federal Estate Tax
Individual Non-U.S. Holders and entities the property of which is potentially includible in such an individual’s gross estate for U.S. federal estate tax purposes (for example, a trust funded by such an individual and with respect to which the individual has retained certain interests or powers) should note that, absent an applicable treaty exemption, the securities may be treated as U.S.-situs property subject to U.S. federal estate tax. Prospective investors that are non-U.S. individuals, or are entities of the type described above, should consult their tax advisers regarding the U.S. federal estate tax consequences of an investment in the securities.
Backup Withholding and Information Reporting
Information returns will be filed with the IRS in connection with any coupon payment and may be filed with the IRS in connection with the payment at maturity on the securities and the payment of proceeds from a sale, exchange or other disposition. 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. The amount of any backup withholding from a payment to a Non-U.S. Holder will be allowed as a credit against the Non-U.S. Holder’s U.S. federal income tax liability and may entitle the Non-U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.
FATCA Legislation
Legislation commonly referred to as “FATCA” generally imposes a withholding tax of 30% on payments to certain non-U.S. entities (including financial intermediaries) with respect to certain financial instruments, unless various U.S. information reporting and due diligence requirements have been satisfied. An
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intergovernmental agreement between the United States and the non-U.S. entity’s jurisdiction may modify these requirements. This legislation generally applies to certain financial instruments that are treated as paying U.S.-source interest or other U.S.-source “fixed or determinable annual or periodical” income (“FDAP income”). Withholding (if applicable) applies to payments of U.S.-source FDAP income and, for dispositions after December 31, 2018, to payments of gross proceeds of the disposition (including upon retirement) of certain financial instruments treated as providing for U.S.-source interest or dividends. While the treatment of the securities is unclear, you should assume that any coupon payment with respect to the securities will be subject to the FATCA rules. It is also possible in light of this uncertainty that an applicable withholding agent will treat gross proceeds of a disposition (including upon retirement) of the securities after 2018 as being subject to the FATCA rules. If withholding applies to the securities, we will not be required to pay any additional amounts with respect to amounts withheld. Both U.S. and Non-U.S. Holders should consult their tax advisers regarding the potential application of FATCA to the securities.
The discussion in the preceding paragraphs, 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 tax consequences of an investment in the securities.
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Trustee: | The Bank of New York Mellon, a New York banking corporation |
Calculation agent: |
The calculation agent for the securities will be MS & Co. 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 contingent monthly coupon, if any, and the payment at maturity shall be made by the calculation agent and shall 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 stated principal amount shall 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 principal amount of the securities shall 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 investor in the securities, including with respect to certain determinations and judgments that the calculation agent must make in determining the payment that you will receive, if any, on each coupon payment date and at maturity or whether a market disruption event has occurred. See “Market disruption event” and “Discontinuance of the underlying index; alteration of method of calculation” below. MS & Co. is obligated to carry out its duties and functions as calculation agent in good faith and using its reasonable judgment.
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Business day: | Any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law or regulation to close in The City of New York. |
Index business day: | A day, as determined by the calculation agent, on which trading is generally conducted on each of the relevant exchange(s) for the underlying index, other than a day on which trading on such exchange(s) is scheduled to close prior to the time of the posting of its regular final weekday closing price. |
Index closing value: | The official closing value of the underlying index, or any successor index as defined under “Discontinuance of the underlying index; alteration of method of calculation” below), published at the regular official weekday close of trading on such index business day by the underlying index publisher, as determined by the calculation agent. In certain circumstances, the index closing value will be based on the alternate calculation of the underlying index described under “Discontinuance of the underlying index; alteration of method of calculation” below. |
Market disruption event: |
With respect to the underlying index, market disruption event means:
(i) the occurrence or existence of any of:
(a) a suspension, absence or material limitation of trading of securities then constituting 20 percent or more of the value of the underlying index (or the successor index) on the relevant exchange(s) 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 exchange(s), or
(b) a breakdown or failure in the price and trade reporting systems of any relevant exchange as a result of which the reported trading prices for securities then constituting 20 percent or more of the value of the underlying index (or the successor index) during the last one-half hour preceding the close of the principal trading session on such relevant exchange(s) are materially inaccurate, or
(c) the suspension, material limitation or absence of trading on any major U.S. securities market for trading in futures or options contracts or exchange-traded funds related to the underlying
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then the calculation agent will determine the index closing value for each such date. The index closing value of the underlying index or the successor index will be computed by the calculation agent in accordance with the formula for and method of calculating such 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 each such date of each security most recently constituting such index without any rebalancing or substitution of such securities following such discontinuance. Notwithstanding these alternative arrangements, discontinuance of the publication of the underlying index may adversely affect the value of the securities.
If at any time, the method of calculating the underlying index or the successor index, or the value thereof, is changed in a material respect, or if the underlying index or the successor index is in any other way modified so that such index does not, in the opinion of the calculation agent, fairly represent the value of such index had such changes or modifications not been made, then, from and after such time, the calculation agent will, at the close of business in New York City on each date on which the index closing value is to be determined, make such calculations and adjustments as, in the good faith judgment of the calculation agent, may be necessary in order to arrive at a value of a stock index comparable to the underlying index or the successor index, as the case may be, as if such changes or modifications had not been made, and the calculation agent will calculate the index closing value with reference to the underlying index or the successor index, as adjusted. Accordingly, if the method of calculating the underlying index or the successor index is modified so that the value of such index is a fraction of what it would have been if it had not been modified (e.g., due to a split in the underlying index), then the calculation agent will adjust such index in order to arrive at a value of the underlying index or the successor index as if it had not been modified (e.g., as if such split had not occurred).
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Alternate exchange calculation in case of an event of default:
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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:
· the lowest amount that a qualified financial institution would charge to effect this assumption or undertaking, plus
· 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:
· no quotation of the kind referred to above is obtained, or
· every quotation of that kind obtained is objected to within five business days after the due date as
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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:
· 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
· 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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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, $1,000 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 beginning on page 3 above comprise the agent’s commissions and the cost of issuing, structuring and hedging the securities.
On or prior to the pricing date, we expect to 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 stocks constituting the underlying index, in futures and/or options contracts on the underlying index or the component stocks of the underlying index listed on major securities markets, or positions in any other available securities or instruments that they may wish to use in connection with such hedging. Such purchase activity could potentially increase the initial index value and, therefore, could increase the trigger level, which is the value at or above which the underlying index must close on each day during the term of the securities so that you receive a contingent monthly coupon on the securities, and the value at or above which the underlying index must close on the final valuation date so that you are not exposed to the negative performance of the underlying index at maturity. 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. Additionally, our hedging activities, as well as our other trading activities, during the term of the securities could potentially affect the value of the underlying index during the term of the securities and accordingly, the payment to you at maturity and whether we pay a contingent coupon on the securities.
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Benefit plan investor considerations: |
Each fiduciary of a pension, profit-sharing or other employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) (a “Plan”), should consider the fiduciary standards of ERISA in the context of the Plan’s particular circumstances before authorizing an investment in the securities. Accordingly, among other factors, the fiduciary should consider whether the investment would satisfy the prudence and diversification requirements of ERISA and would be consistent with the documents and instruments governing the Plan.
In addition, we and certain of our affiliates, including MS & Co., may each be considered a “party in interest” within the meaning of ERISA, or a “disqualified person” within the meaning of the Internal Revenue Code of 1986, as amended (the “Code”), with respect to many Plans, as well as many individual retirement accounts and Keogh plans (also “Plans”). 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 such persons, unless exemptive relief is available under an applicable statutory or administrative exemption.
The U.S. Department of Labor has issued five prohibited transaction class exemptions (“PTCEs”) that may provide exemptive relief for direct or indirect prohibited transactions resulting from the purchase or holding of the securities. Those class exemptions are PTCE 96-23 (for certain transactions determined by in-house
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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) may provide an exemption for the purchase and sale of securities and the related lending transactions, provided that neither the issuer of the securities nor any of its affiliates has or exercises any discretionary authority or control or renders any investment advice with respect to the assets of the Plan involved in the transaction and provided further that the Plan pays no more, and receives no less, than “adequate consideration” in connection with the transaction (the so-called “service provider” exemption). There can be no assurance that any of these class or statutory exemptions will be available with respect to transactions involving the securities.
Because we may be considered a party in interest with respect to many Plans, the securities may not be purchased, held or disposed of by any Plan, any entity whose underlying assets include “plan assets” by reason of any Plan’s investment in the entity (a “Plan Asset Entity”) or any person investing “plan assets” of any Plan, unless such purchase, holding or disposition is eligible for exemptive relief, including relief available under PTCEs 96-23, 95-60, 91-38, 90-1, 84-14 or the service provider exemption or such purchase, holding or disposition is otherwise not prohibited. Any purchaser, including any fiduciary purchasing on behalf of a Plan, transferee or holder of the securities will be deemed to have represented, in its corporate and its fiduciary capacity, by its purchase and holding of the securities that either (a) it is not a Plan or a Plan Asset Entity and is not purchasing such securities on behalf of or with “plan assets” of any Plan or with any assets of a governmental, non-U.S. or church plan that is subject to any federal, state, local or non-U.S. law that is substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the Code (“Similar Law”) or (b) its purchase, holding and disposition are eligible for exemptive relief or such purchase, holding and disposition are not prohibited by ERISA or Section 4975 of the Code or any Similar Law.
Due to the complexity of these rules and the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important that fiduciaries or other persons considering purchasing the securities on behalf of or with “plan assets” of any Plan consult with their counsel regarding the availability of exemptive relief.
The securities are contractual financial instruments. The financial exposure provided by the securities is not a substitute or proxy for, and is not intended as a substitute or proxy for, individualized investment management or advice for the benefit of any purchaser or holder of the securities. The securities have not been designed and will not be administered in a manner intended to reflect the individualized needs and objectives of any purchaser or holder of the securities.
Each purchaser or holder of any securities acknowledges and agrees that:
(i) the purchaser or holder or its fiduciary has made and shall make all investment decisions for the purchaser or holder and the purchaser or holder has not relied and shall not rely in any way upon us or our affiliates to act as a fiduciary or adviser of the purchaser or holder with respect to (A) the design and terms of the securities, (B) the purchaser or holder’s investment in the securities, or (C) the exercise of or failure to exercise any rights we have under or with respect to the securities;
(ii) we and our affiliates have acted and will act solely for our own account in connection with (A) all transactions relating to the securities and (B) all hedging transactions in connection with our obligations under the securities;
(iii) any and all assets and positions relating to hedging transactions by us or our affiliates are assets and positions of those entities and are not assets and positions held for the benefit of the purchaser or holder;
(iv) our interests are adverse to the interests of the purchaser or holder; and
(v) neither we nor any of our affiliates is a fiduciary or adviser of the purchaser or holder in connection with any such assets, positions or transactions, and any information that we or any of our affiliates may provide is not intended to be impartial investment advice.
Each purchaser and holder of the securities has exclusive responsibility for ensuring that its purchase, holding and disposition of the securities do not violate the prohibited transaction rules of ERISA or the Code or any Similar Law. The sale of any securities to any Plan or plan subject to Similar Law is in no respect a representation by us or any of our affiliates or representatives that such an investment meets all relevant legal requirements with respect to investments by plans generally or any particular plan, or that such an investment is appropriate for plans generally or any particular plan.
However, individual retirement accounts, individual retirement annuities and Keogh plans, as well as
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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. | |
Additional considerations: | Client accounts over which Morgan Stanley, Morgan Stanley Wealth Management or any of their respective subsidiaries have investment discretion are not permitted to purchase the securities, either directly or indirectly. |
Supplemental information regarding plan of distribution; conflicts of interest: |
MS & Co. will act as the agent for this offering and will not receive a sales commission in connection with sales of the securities.
MS & Co. is an affiliate of MSFL and a wholly owned subsidiary of Morgan Stanley, and it and other affiliates of ours expect to make a profit by selling, structuring and, when applicable, hedging the securities. When MS & Co. prices this offering of securities, it will determine the economic terms of the securities such that for each security the estimated value on the pricing date will be no lower than the minimum level described in “Investment Summary” beginning on page 3.
MS & Co. will conduct this offering in compliance with the requirements of FINRA Rule 5121 of the Financial Industry Regulatory Authority, Inc., which is commonly referred to as FINRA, regarding a FINRA member firm’s distribution of the securities of an affiliate and related conflicts of interest. MS & Co. or any of our other affiliates may not make sales in this offering to any discretionary account.
In order to facilitate the offering of the securities, the agent may engage in transactions that stabilize, maintain or otherwise affect the price of the securities. Specifically, the agent may sell more securities than it is obligated to purchase in connection with the offering, creating a naked short position in the securities, for its own account. The agent must close out any naked short position by purchasing the securities in the open market. A naked short position is more likely to be created if the agent is concerned that there may be downward pressure on the price of the securities in the open market after pricing that could adversely affect investors who purchase in the offering. As an additional means of facilitating the offering, the agent may bid for, and purchase, the securities or the securities underlying the 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 “Plan of Distribution (Conflicts of Interest)” in the accompanying prospectus supplement and “Use of Proceeds and Hedging” above.
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Selling restrictions: |
General
No action has been or will be taken by us, the agent or any dealer that would permit a public offering of the securities or possession or distribution of this preliminary pricing supplement or the accompanying prospectus supplement, index supplement or prospectus in any jurisdiction, other than the United States, where action for that purpose is required. No offers, sales or deliveries of the securities, or distribution of this preliminary pricing supplement or the accompanying prospectus supplement, index supplement or prospectus or any other offering material relating to the securities, may be made in or from any jurisdiction except in circumstances which will result in compliance with any applicable laws and regulations and will not impose any obligations on us, the agent or any dealer.
The agent has represented and agreed, and each dealer through which we may offer the securities has represented and agreed, that it (i) will comply with all applicable laws and regulations in force in each non-U.S. jurisdiction in which it purchases, offers, sells or delivers the securities or possesses or distributes this preliminary pricing supplement and the accompanying prospectus supplement, index supplement and prospectus and (ii) will obtain any consent, approval or permission required by it for the purchase, offer or sale by it of the securities under the laws and regulations in force in each non-U.S. jurisdiction to which it is subject or in which it makes purchases, offers or sales of the securities. We shall not have responsibility for the agent’s or any dealer’s compliance with the applicable laws and regulations or obtaining any required consent, approval or permission.
In addition to the selling restrictions set forth in “Plan of Distribution (Conflicts of Interest)” in the accompanying prospectus supplement, the following selling restrictions also apply to the securities:
Brazil
The securities have not been and will not be registered with the Comissão de Valores Mobiliários (The Brazilian Securities Commission). The securities may not be offered or sold in the Federative Republic of Brazil except in circumstances which do not constitute a public offering or distribution under Brazilian laws
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and regulations.
Chile
The securities have not been registered with the Superintendencia de Valores y Seguros in Chile and may not be offered or sold publicly in Chile. No offer, sales or deliveries of the securities or distribution of this preliminary pricing supplement or the accompanying prospectus supplement, index supplement or prospectus, may be made in or from Chile except in circumstances which will result in compliance with any applicable Chilean laws and regulations.
Mexico
The securities have not been registered with the National Registry of Securities maintained by the Mexican National Banking and Securities Commission and may not be offered or sold publicly in Mexico. This preliminary pricing supplement, the accompanying prospectus supplement, the accompanying index supplement and the accompanying prospectus may not be publicly distributed in Mexico.
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Where you can find more information: |
Morgan Stanley and MSFL have filed a registration statement (including a prospectus, as supplemented by the prospectus supplement and index supplement) with the Securities and Exchange Commission, or SEC, for the offering to which this communication relates. 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 without cost by visiting EDGAR on the SEC web site at . www.sec.gov. Alternatively, Morgan Stanley, MSFL, any underwriter or any dealer participating in the offering will arrange to send you the prospectus, the prospectus supplement and the index supplement if you so request by calling toll-free 800-584-6837.
You may access these documents on the SEC web site at . www.sec.gov as follows:
Prospectus Supplement dated February 16, 2016
Index Supplement dated January 30, 2017
Prospectus dated February 16, 2016
Terms used but not defined in this preliminary pricing supplement are defined in the prospectus supplement, in the index supplement or in the prospectus. |
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