July 2019
Preliminary
Terms No. 2,223
Registration Statement Nos. 333-221595; 333-221595-01
Dated July 1, 2019
Filed pursuant to Rule 433
Morgan Stanley Finance LLC
STRUCTURED INVESTMENTS
Opportunities in U.S. Equities
Buffered Participation Securities Based on the Value of the Worst Performing of the S&P 500 ® Index and the Russell 2000 ® Index due July 31, 2024
Fully and Unconditionally Guaranteed by Morgan Stanley
Principal at Risk Securities
The Buffered Participation Securities, or “Buffered Securities,” are unsecured obligations of Morgan Stanley Finance LLC (“MSFL”) and are fully and unconditionally guaranteed by Morgan Stanley. The Buffered Securities provide a minimum payment at maturity of only 15% of the stated principal amount, will pay a fixed annual coupon (including at maturity) at the rate specified below and have the terms described in the accompanying product supplement for participation securities, index supplement and prospectus, as supplemented or modified by this document. The payment at maturity on the Buffered Securities will be based on the value of the worst performing of the S&P 500 ® Index and the Russell 2000 ® Index. At maturity, investors will receive the final annual coupon payment as well as a payment at maturity determined as follows: if the final index value of each underlying index is greater than its respective initial index value, investors will receive the stated principal amount of their investment plus a return reflecting 100% of the upside performance of the worst performing underlying index. If the final index value of either underlying index is less than or equal to its respective initial index value, but the final index value of each underlying index is greater than or equal to 85% of its respective initial index value, meaning that neither underlying index has decreased from its initial index value by an amount greater than the buffer amount of 15%, investors will receive the stated principal amount of their investment. However, if the final index value of either underlying index is less than 85% of its respective initial index value, meaning that either underlying index has decreased from its respective initial index value by an amount greater than the buffer amount of 15%, investors will lose 1% for every 1% decline in the worst performing underlying index beyond the specified buffer amount, subject to the minimum payment at maturity of 15% of the stated principal amount. Investors may lose up to 85% of the stated principal amount of the Buffered Securities. Because the payment at maturity of the Buffered Securities is based on the worst performing of the underlying indices, a decline in either underlying index beyond the buffer amount will result in a loss, and potentially a significant loss, of your investment even if the other underlying index has appreciated or has not declined as much. These long-dated Buffered Securities are for investors who seek an equity index-based return and who are willing to risk their principal and risk exposure to the worst performing of two underlying indices in exchange for the buffer feature that applies to a limited range of performance of the worst performing underlying index. The Buffered Securities are notes 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 Buffered 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.
SUMMARY TERMS | |||
Issuer: | Morgan Stanley Finance LLC | ||
Guarantor: | Morgan Stanley | ||
Maturity date: | July 31, 2024 | ||
Underlying indices: | S&P 500 ® Index (the “SPX Index”) and the RTY 2000 ® Index (the “RTY Index”) | ||
Aggregate principal amount: | $ | ||
Annual coupon: | A fixed annual coupon at an annual rate of 1.00% will be paid on each coupon payment date. | ||
Coupon payment dates: | July 31, 2020, July 31, 2021, July 31, 2022, July 31, 2023 and the maturity date. If any such day is not a business day, that annual coupon will be paid on the next succeeding business day, and no adjustment will be made to any annual coupon payment made on that succeeding business day. The final annual coupon payment will be made on the maturity date. | ||
Payment at maturity: | At maturity, in addition to the final annual coupon payment, investors will receive a payment at maturity determined as follows: | ||
If the final index value of each underlying index is greater than its respective initial index value, | |||
$1,000 + ($1,000 × index percent change of the worst performing underlying index) | |||
If the final index value of either underlying index is less than or equal to its respective initial index value but the final index value of each underlying index is greater than or equal to 85% of its respective initial index value, meaning that neither underlying index has decreased from its initial index value by an amount greater than the buffer amount of 15%, | |||
$1,000 | |||
If the final index value of either underlying index is less than 85% of its respective initial index value, meaning that either underlying index has decreased from its respective initial index value by an amount greater than the buffer amount of 15%, | |||
($1,000 × index performance factor of the worst performing underlying index) + $150 | |||
Under these circumstances, the payment at maturity will be less than the stated principal amount of $1,000 . However, under no circumstances will the Buffered Securities pay less than $150 per Buffered Security at maturity (aside from the final annual coupon payment). | |||
Index percent change: | With respect to each underlying index, (final index value – initial index value) / initial index value | ||
Worst performing underlying index: | The underlying index with the lesser index percent change | ||
Index performance factor: | With respect to each underlying index, final index value / initial index value | ||
Initial index value: |
With respect to the SPX Index, , which is the index closing value of such index on the pricing date With respect to the RTY Index, , which is the index closing value of such index on the pricing date |
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Final index value: | With respect to each underlying index, the index closing value of such index on the valuation date | ||
Valuation date: | July 26, 2024, subject to adjustment for non-index business days and certain market disruption events | ||
Minimum payment at maturity: | $150 per Buffered Security (15% of the stated principal amount) (aside from the final annual coupon payment) | ||
Buffer amount: | 15% | ||
Stated principal amount: | $1,000 per Buffered Security | ||
Issue price: | $1,000 per Buffered Security | ||
Pricing date: | July 26, 2019 | ||
Original issue date: | July 31, 2019 (3 business days after the pricing date) | ||
CUSIP / ISIN: | 61769HKM6 / US61769HKM69 | ||
Listing: | The Buffered Securities will not be listed on any securities exchange. | ||
Agent: | Morgan Stanley & Co. LLC (“MS & Co.”), a wholly owned subsidiary of Morgan Stanley and an affiliate of MSFL. See “Supplemental information regarding plan of distribution; conflicts of interest.” | ||
Estimated value on the pricing date: | Approximately $935.40 per Buffered Security, or within $30.00 of that estimate. See “Investment Summary” on page 2. | ||
Commissions and issue price: | Price to public | Agent’s commissions (1) | Proceeds to us (2) |
Per Buffered Security | $1,000 | $ | $ |
Total | $ | $ | $ |
(1) | Selected dealers and their financial advisors will collectively receive from the agent, MS & Co., a fixed sales commission of $ for each Buffered Security they sell. See “Supplemental information regarding plan of distribution; conflicts of interest.” For additional information, see “Plan of Distribution (Conflicts of Interest)” in the accompanying product supplement. |
(2) | See “Use of proceeds and hedging” on page 20. |
The Buffered Securities involve risks not associated with an investment in ordinary debt securities. See “Risk Factors” beginning on page 6.
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this document or the accompanying product supplement, index supplement and prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The Buffered 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 document together with the related product supplement, index supplement and prospectus, each of which can be accessed via the hyperlinks below. Please also see “Additional Terms of the Buffered Securities” and “Additional Information About the Buffered Securities” at the end of this document.
As used in this document, “we,” “us” and “our” refer to Morgan Stanley or MSFL, or Morgan Stanley and MSFL collectively, as the context requires.
Product Supplement for Participation Securities dated November 16, 2017 Index Supplement dated November 16, 2017
Prospectus dated November 16, 2017
Morgan Stanley Finance LLC
Buffered Participation Securities Based on the Value of the Worst Performing of the S&P 500 ® Index and the Russell 2000 ® Index due July 31, 2024
Principal at Risk Securities
Investment Summary
Buffered Participation Securities
Principal at Risk Securities
The Buffered Participation Securities Based on the Value of the Worst Performing of the S&P 500 ® Index and the Russell 2000 ® Index due July 31, 2024 (the “Buffered Securities”) can be used:
§ | To gain exposure to the worst performing of two U.S. equity indices |
§ | To obtain a fixed annual coupon at a rate of 1.00% per annum |
§ | To obtain a buffer against a specified level of negative performance of the worst performing underlying index |
If the final index value of either underlying index is less than 85% of its respective initial index value, investors will be negatively exposed to the decline in the worst performing underlying index beyond the buffer amount and will lose some or a substantial portion of their investment.
Maturity: | 5 years |
Annual coupon: | A fixed annual coupon at an annual rate of 1.00% will be paid on each coupon payment date. |
Minimum payment at maturity: | $150 per Buffered Security (15% of the stated principal amount). Investors may lose up to 85% of the stated principal amount of the Buffered Securities. |
Buffer amount: | 15%, with 1-to-1 downside exposure to the worst performing underlying index below the buffer |
Listing: | The Buffered Securities will not be listed on any securities exchange |
The original issue price of each Buffered Security is $1,000. This price includes costs associated with issuing, selling, structuring and hedging the Buffered Securities, which are borne by you, and, consequently, the estimated value of the Buffered Securities on the pricing date will be less than $1,000. We estimate that the value of each Buffered Security on the pricing date will be approximately $935.40, or within $30.00 of that estimate. Our estimate of the value of the Buffered 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 Buffered Securities on the pricing date, we take into account that the Buffered Securities comprise both a debt component and a performance-based component linked to the underlying indices. The estimated value of the Buffered Securities is determined using our own pricing and valuation models, market inputs and assumptions relating to the underlying indices, instruments based on the underlying indices, 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 Buffered Securities?
In determining the economic terms of the Buffered Securities, including the buffer amount, the minimum payment at maturity and the annual coupon rate, 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 Buffered 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 Buffered Securities?
The price at which MS & Co. purchases the Buffered Securities in the secondary market, absent changes in market conditions, including those related to the underlying indices, may vary from, and be lower than, the estimated value on the pricing date, because the secondary market price takes into account our secondary market credit spread as well as the bid-offer spread that MS & Co. would charge in a secondary market transaction of this type and other factors. However, because the costs associated with issuing, selling, structuring and hedging the Buffered 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 Buffered Securities in the secondary market, absent changes in market conditions, including those related to the underlying indices, 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 Buffered Securities, and, if it once chooses to make a market, may cease doing so at any time.
July 2019 | Page 2 |
Morgan Stanley Finance LLC
Buffered Participation Securities Based on the Value of the Worst Performing of the S&P 500 ® Index and the Russell 2000 ® Index due July 31, 2024
Principal at Risk Securities
Key Investment Rationale
The Buffered Securities pay a fixed annual coupon (including at maturity) at the rate specified herein and offer a return at maturity based on the performance of the worst performing underlying index. At maturity, investors will receive the final annual coupon payment as well as a payment at maturity determined as follows: if the final index value of each underlying index is greater than its respective initial index value, investors will receive the stated principal amount of their investment plus a return reflecting 100% of the upside performance of the worst performing underlying index. If the final index value of either underlying index is less than or equal to its respective initial index value but the final index value of each underlying index is greater than or equal to 85% of its respective initial index value, investors will receive the stated principal amount of their investment. However, if the final index value of either underlying index is less than 85% of its respective initial index value, investors will lose 1% for every 1% decline in the worst performing underlying index beyond the specified buffer amount, subject to the minimum payment at maturity. Investors may lose up to 85% of the stated principal amount of the Buffered Securities. All payments on the Buffered Securities are subject to our credit risk.
Because the payment at maturity of the Buffered Securities is based on the worst performing of the underlying indices, a decline in either underlying index to less than 85% of its respective initial index value will result in a loss, and potentially a significant loss, of your investment, even if the other underlying index has appreciated or has not declined as much.
July 2019 | Page 3 |
Morgan Stanley Finance LLC
Buffered Participation Securities Based on the Value of the Worst Performing of the S&P 500 ® Index and the Russell 2000 ® Index due July 31, 2024
Principal at Risk Securities
Hypothetical Examples
The following hypothetical examples illustrate how to calculate the payment at maturity on the Buffered Securities. The following examples are for illustrative purposes only. You will receive a fixed annual coupon (including at maturity) at a rate of 1.00% per annum regardless of the performance of the underlying indices. The actual initial index value for each underlying index will be determined on the pricing date. Any payment at maturity on the Buffered Securities is subject to our credit risk. The below examples are based on the following terms:
Stated principal amount: | $1,000 per Buffered Security |
Annual coupon: | A fixed annual coupon at an annual rate of 1.00% is paid on each coupon payment date. |
Hypothetical initial index value: |
With respect to the SPX Index: 2,000 With respect to the RTY Index: 1,100 |
Buffer amount: | 15% |
EXAMPLE 1: The final index value of each underlying index is greater than its respective initial index value.
Final index value | SPX Index: 2,200 | ||
RTY Index: 1,540 | |||
Index percent change |
SPX Index: (2,200 – 2,000) / 2,000 = 10% RTY Index: (1,540 – 1,100) / 1,100 = 40% |
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Payment at maturity (in addition to the final annual coupon payment) | = | $1,000 + ($1,000 × index percent change of the worst performing underlying index) | |
= | $1,000 + ($1,000 × 10%) | ||
= | $1,100 |
In example 1, the final index values of both the SPX Index and RTY Index are greater than their initial index values. The SPX Index has appreciated by 10% while the RTY Index has appreciated by 40%. Therefore, investors receive at maturity, in additional to the final annual coupon payment, the stated principal amount plus 100% of the appreciation of the worst performing underlying index, which is the SPX Index in this example. Investors receive $1,100 per Buffered Security at maturity, in addition to the final annual coupon payment.
EXAMPLE 2: The final index value of one underlying index is greater than its respective initial index value while the final index value of the other underlying index is less than 85% of its respective initial index value.
Final index value | SPX Index: 2,200 | ||
RTY Index: 550 | |||
Index percent change |
SPX Index: (2,200 – 2,000) / 2,000 = 10% RTY Index: (550 – 1,100) / 1,100 = -50% |
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Index performance factor |
SPX Index: 2,200 / 2,000 = 110% RTY Index: 550 / 1,100 = 50% |
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Payment at maturity (in addition to the final annual coupon payment) | = | ($1,000 × index performance factor of the worst performing underlying index) + $150 | |
= | ($1,000 × 50%) + $150 | ||
= | $650 |
In example 2, the final index value of the SPX Index is greater than its respective initial index value, while the final index value of the RTY Index is less than 85% of its respective initial index value. While the SPX Index has appreciated by 10%, the RTY index has declined by 50%. Therefore, investors receive the final annual coupon payment but are exposed to the negative performance of the RTY Index, which is the worst performing underlying index in this example, beyond the buffer amount of 15%, and receive a
July 2019 | Page 4 |
Morgan Stanley Finance LLC
Buffered Participation Securities Based on the Value of the Worst Performing of the S&P 500 ® Index and the Russell 2000 ® Index due July 31, 2024
Principal at Risk Securities
payment at maturity of $650 per Buffered Security, in addition to the final annual coupon payment. In this example, investors are exposed to the negative performance of the worst performing underlying index even though the other underlying index has appreciated in value by 10%.
EXAMPLE 3 : The final index value of each underlying index is less than its respective initial index value, but neither underlying index has decreased from its initial index value by an amount greater than the buffer amount of 15%.
Final index value | SPX Index: 1,900 | ||
RTY Index: 990 | |||
Index percent change |
SPX Index: (1,900 – 2,000) / 2,000 = -5% RTY Index: (990 – 1,100) / 1,100 = -10% |
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Payment at maturity (in addition to the final annual coupon payment) | = | $1,000 |
In example 3, the final index value of each underlying index is less than its respective initial index value, but neither underlying index has decreased from its initial index value by an amount greater than the buffer amount of 15%. The SPX index has declined by 5% while the RTY Index has declined by 10%. Therefore, investors receive at maturity the stated principal amount of $1,000, in addition to the final annual coupon payment.
EXAMPLE 4 : The final index value of each underlying index is less than 85% of its respective initial index value.
Final index value | SPX Index: 600 | ||
RTY Index: 440 | |||
Index percent change |
SPX Index: (600 – 2,000) / 2,000 = -70% RTY Index: (440 – 1,100) / 1,100 = -60% |
||
Index performance factor |
SPX Index: 600 / 2,000 = 30% RTY Index: 440 / 1,100 = 40% |
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Payment at maturity (in addition to the final annual coupon payment) | = | ($1,000 × index performance factor of the worst performing underlying index) + $150 | |
= | ($1,000 × 30%) + $150 | ||
= | $450 |
In example 4, the final index values of both the SPX Index and the RTY Index are less than their respective initial index values by an amount greater than the buffer amount of 15%. The SPX index has declined by 70% while the RTY Index has declined by 60%. Therefore, investors receive the final annual coupon payment but are exposed to the negative performance of the SPX Index, which is the worst performing underlying index in this example, beyond the buffer amount of 15%, and receive a payment at maturity of $450 per Buffered Security, in addition to the final annual coupon payment.
Because the payment at maturity of the Buffered Securities is based on the worst performing of the underlying indices, a decline in either underlying index by an amount greater than the buffer amount of 15% will result in a loss, and potentially a significant loss, of your investment, even if the other underlying index has appreciated or has not declined as much.
July 2019 | Page 5 |
Morgan Stanley Finance LLC
Buffered Participation Securities Based on the Value of the Worst Performing of the S&P 500 ® Index and the Russell 2000 ® Index due July 31, 2024
Principal at Risk Securities
Risk Factors
The following is a non-exhaustive list of certain key risk factors for investors in the Buffered Securities. For further discussion of these and other risks, you should read the section entitled “Risk Factors” in the accompanying product supplement for participation securities, index supplement and prospectus. We also urge you to consult your investment, legal, tax, accounting and other advisers in connection with your investment in the Buffered Securities.
§ | The Buffered Securities provide a minimum payment at maturity of only 15% of the stated principal amount. The terms of the Buffered Securities differ from those of ordinary debt securities in that the Buffered Securities provide a minimum payment at maturity of only 15% of the stated principal amount of the Buffered Securities (aside from the final annual coupon payment). If the final index value of either underlying index is less than 85% of its initial index value, you will receive for each Buffered Security that you hold a payment at maturity that is less than the stated principal amount of each Buffered Security by an amount proportionate to the decline in the value of the worst performing underlying index from its initial index value, plus $150 per Buffered Security. Accordingly, investors may lose up to 85% of the stated principal amount of the Buffered Securities (aside from the final annual coupon payment). |
§ | You are exposed to the price risk of both underlying indices. Your return on the Buffered Securities is not linked to a basket consisting of both underlying indices. Rather, it will be based upon the independent performance of each underlying index. Unlike an instrument with a return linked to a basket of underlying assets, in which risk is mitigated and diversified among all the components of the basket, you will be exposed to the risks related to both underlying indices. Poor performance by either underlying index over the term of the securities will negatively affect your return and will not be offset or mitigated by any positive performance by the other underlying index. If either underlying index declines to below 85% of its respective initial index value as of the valuation date, you will lose some or a substantial portion of your investment, even if the other underlying index has appreciated or has not declined as much. Accordingly, your investment is subject to the price risk of both underlying indices. |
§ | Because the Buffered Securities are linked to the performance of the worst performing underlying index, you are exposed to greater risk of sustaining a loss on your investment than if the Buffered Securities were linked to just one underlying index. The risk that you will suffer a loss on your investment is greater if you invest in the Buffered Securities as opposed to substantially similar securities that are linked to the performance of just one underlying index. With two underlying indices, it is more likely that either underlying index will decline to below 85% of its initial index value as of the valuation date than if the Buffered Securities were linked to only one underlying index. Therefore it is more likely that you will suffer a loss on your investment. |
§ | The market price of the Buffered Securities will be influenced by many unpredictable factors. Several factors will influence the value of the Buffered Securities in the secondary market and the price at which MS & Co. may be willing to purchase or sell the Buffered Securities in the secondary market, including the value, volatility and dividend yield of the underlying indices, interest and yield rates in the market, time remaining until the Buffered Securities mature, geopolitical conditions and economic, financial, political, regulatory or judicial events and any actual or anticipated changes in our credit ratings or credit spreads. Generally, the longer the time remaining to maturity, the more the market price of the Buffered Securities will be affected by the other factors described above. The levels of the underlying indices may be, and have recently been, volatile, and we can give you no assurance that the volatility will lessen. See “S&P 500 ® Index Overview” and “Russell 2000 ® Index Overview” below. You may receive less, and possibly significantly less, than the stated principal amount per Buffered Security if you try to sell your Buffered Securities prior to maturity. |
§ | The Buffered 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 Buffered Securities. You are dependent on our ability to pay all amounts due on the Buffered Securities at maturity or on any coupon payment date, and therefore you are subject to our credit risk. If we default on its obligations under the Buffered 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 Buffered 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 Buffered 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 |
July 2019 | Page 6 |
Morgan Stanley Finance LLC
Buffered Participation Securities Based on the Value of the Worst Performing of the S&P 500 ® Index and the Russell 2000 ® Index due July 31, 2024
Principal at Risk Securities
under the related guarantee by Morgan Stanley and that guarantee will rank pari passu with all other unsecured, unsubordinated obligations of Morgan Stanley. Holders will have recourse only to a single claim against Morgan Stanley and its assets under the guarantee. Holders of securities issued by MSFL should accordingly assume that in any such proceedings they would not have any priority over and should be treated pari passu with the claims of other unsecured, unsubordinated creditors of Morgan Stanley, including holders of Morgan Stanley-issued securities.
§ | The Buffered Securities are linked to the Russell 2000 ® Index and are subject to risks associated with small-capitalization companies. As the Russell 2000 ® Index is one of the underlying indices, and the Russell 2000 ® Index consists of stocks issued by companies with relatively small market capitalization, the Buffered Securities are linked to the value of small-capitalization companies. These companies often have greater stock price volatility, lower trading volume and less liquidity than large-capitalization companies and therefore the Russell 2000 ® Index may be more volatile than indices that consist of stocks issued by large-capitalization companies. Stock prices of small-capitalization companies are also more vulnerable than those of large-capitalization companies to adverse business and economic developments, and the stocks of small-capitalization companies may be thinly traded. In addition, small capitalization companies are typically less well-established and less stable financially than large-capitalization companies and may depend on a small number of key personnel, making them more vulnerable to loss of personnel. Such companies tend to have smaller revenues, less diverse product lines, smaller shares of their product or service markets, fewer financial resources and less competitive strengths than large-capitalization companies and are more susceptible to adverse developments related to their products. |
§ | The amount payable on the Buffered Securities is not linked to the values of the underlying indices at any time other than the valuation date. The final index value of each underlying index will be based on the index closing value of such index on the valuation date, subject to postponement for non-index business days and certain market disruption events. Even if both underlying indices appreciate prior to the valuation date but the value of either underlying index drops by the valuation date to less than 85% of its initial index value, the payment at maturity will be less than it would have been had the payment at maturity been linked to the values of the underlying indices prior to such drop. Although the actual values of the underlying indices on the stated maturity date or at other times during the term of the Buffered Securities may be higher than their respective final index values, the payment at maturity will be based solely on the index closing values on the valuation date. |
§ | Investing in the Buffered Securities is not equivalent to investing in either underlying index. Investing in the Buffered Securities is not equivalent to investing in either underlying index or the component stocks of either underlying index. As an investor in the Buffered Securities, you will not have voting rights or rights to receive dividends or other distributions or any other rights with respect to stocks that constitute either underlying index. |
§ | Adjustments to the underlying indices could adversely affect the value of the Buffered Securities. The publisher of either underlying index may add, delete or substitute the stocks constituting such underlying index or make other methodological changes that could change the value of such underlying index. The publisher of either underlying index may discontinue or suspend calculation or publication of such underlying index at any time. In these circumstances, the calculation agent will have the sole discretion to substitute a successor index that is comparable to the discontinued underlying index and will be permitted to consider indices that are calculated and published by the calculation agent or any of its affiliates. |
§ | 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 Buffered Securities in the original issue price reduce the economic terms of the Buffered Securities, cause the estimated value of the Buffered 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 Buffered 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 Buffered Securities in the original issue price and the lower rate we are willing to pay as issuer make the economic terms of the Buffered Securities less favorable to you than they otherwise would be.
However, because the costs associated with issuing, selling, structuring and hedging the Buffered 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 Buffered Securities in the secondary market, absent changes in market conditions, including those related to the underlying indices, 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.
July 2019 | Page 7 |
Morgan Stanley Finance LLC
Buffered Participation Securities Based on the Value of the Worst Performing of the S&P 500 ® Index and the Russell 2000 ® Index due July 31, 2024
Principal at Risk Securities
§ | The estimated value of the Buffered 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 Buffered Securities than those generated by others, including other dealers in the market, if they attempted to value the Buffered 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 Buffered Securities in the secondary market (if any exists) at any time. The value of your Buffered 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 of the Buffered Securities will be influenced by many unpredictable factors” above. |
§ | The Buffered Securities will not be listed on any securities exchange and secondary trading may be limited. The Buffered Securities will not be listed on any securities exchange. Therefore, there may be little or no secondary market for the Buffered Securities. MS & Co. may, but is not obligated to, make a market in the Buffered 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 Buffered 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 Buffered Securities. Even if there is a secondary market, it may not provide enough liquidity to allow you to trade or sell the Buffered Securities easily. Since other broker-dealers may not participate significantly in the secondary market for the Buffered Securities, the price at which you may be able to trade your Buffered 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 Buffered Securities, it is likely that there would be no secondary market for the Buffered Securities. Accordingly, you should be willing to hold your Buffered Securities to maturity. |
§ | Hedging and trading activity by our affiliates could potentially adversely affect the value of the Buffered Securities. One or more of our affiliates and/or third-party dealers expect to carry out hedging activities related to the Buffered Securities (and possibly to other instruments linked to the underlying indices or their component stocks), including trading in the stocks that constitute the underlying indices as well as in other instruments related to the underlying indices. As a result, these entities may be unwinding or adjusting hedge positions during the term of the Buffered Securities, and the hedging strategy may involve greater and more frequent dynamic adjustments to the hedge as the valuation date approaches. Some of our affiliates also trade the stocks that constitute the underlying indices and other financial instruments related to the underlying indices on a regular basis as part of their general broker-dealer and other businesses. Any of these hedging or trading activities on or prior to the pricing date could potentially affect the initial index value of either underlying index, and, therefore, could increase the value at or above which such underlying index must close on the valuation date so that investors do not suffer a loss on their initial investment in the Buffered Securities (depending also on the performance of the other underlying index). Additionally, such hedging or trading activities during the term of the Buffered Securities, including on the valuation date, could adversely affect the closing value of either underlying index on the valuation date, and, accordingly, the amount of cash an investor will receive at maturity (depending also on the performance of the other underlying index). |
§ | The calculation agent, which is a subsidiary of Morgan Stanley and an affiliate of MSFL, will make determinations with respect to the Buffered Securities. As calculation agent, MS & Co. will determine the initial index values and the final index values, including whether any underlying index has decreased to below 85% of its respective initial index value, and will calculate the amount of cash you 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 final index value in the event of a market disruption event or discontinuance of an underlying index. These potentially subjective determinations may adversely affect the payout to you at maturity. For further information regarding these types of determinations, see “Description of Participation Securities—Postponement of Valuation Date(s),” “—Alternate Exchange Calculation in case of an Event of Default” and “—Calculation Agent and Calculations” and related definitions in the accompanying product supplement. In addition, MS & Co. has determined the estimated value of the Buffered Securities on the pricing date. |
§ | The U.S. federal income tax consequences of an investment in the Buffered Securities are uncertain. There is no direct legal authority as to the proper treatment of the Buffered Securities for U.S. federal income tax purposes, and, therefore, significant aspects of the tax treatment of the Buffered Securities are uncertain. |
Please read the discussion under “Additional Information—Tax considerations” in this document concerning the U.S. federal income tax consequences of an investment in the Buffered Securities. We intend to treat a security for U.S. federal income tax
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Principal at Risk Securities
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 Buffered Securities, could result in adverse tax consequences to holders of the Buffered 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 Buffered 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 Buffered Securities, the timing and character of income or loss on the Buffered Securities might differ significantly from the tax treatment described herein. For example, under one possible treatment, the IRS could seek to recharacterize the Buffered Securities as debt instruments. In that event, U.S. Holders (as defined below) would be required to accrue into income original issue discount on the Buffered 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 Buffered Securities) and recognize all income and gain in respect of the Buffered Securities as ordinary income. The risk that financial instruments providing for buffers, triggers or similar downside protection features, such as the Buffered 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 (as defined below) 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 Buffered 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 Buffered Securities, possibly with retroactive effect. The notice focuses on a number of issues, the most relevant of which for holders of the Buffered 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 should consult their tax advisers regarding the U.S. federal income tax consequences of an investment in the Buffered 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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Buffered Participation Securities Based on the Value of the Worst Performing of the S&P 500 ® Index and the Russell 2000 ® Index due July 31, 2024
Principal at Risk Securities
S&P 500 ® Index Overview
The S&P 500 ® Index, which is calculated, maintained and published by S&P Dow Jones Indices LLC (“S&P”), consists of stocks of 500 component companies selected to provide a performance benchmark for the U.S. equity markets. The calculation of the S&P 500 ® Index is based on the relative value of the float adjusted aggregate market capitalization of the 500 component companies as of a particular time as compared to the aggregate average market capitalization of 500 similar companies during the base period of the years 1941 through 1943. For additional information about the S&P 500 ® Index, see the information set forth under “S&P 500 ® Index” in the accompanying index supplement.
Information as of market close on June 25, 2019:
Bloomberg Ticker Symbol: | SPX |
Current Index Value: | 2,917.38 |
52 Weeks Ago: | 2,717.07 |
52 Week High (on 6/20/2019): | 2,954.18 |
52 Week Low (on 12/24/2018): | 2,351.10 |
The following graph sets forth the daily closing values of the SPX Index for the period from January 1, 2014 through June 25, 2019. The related table sets forth the published high and low closing values, as well as end-of-quarter closing values, of the SPX Index for each quarter in the same period. The closing value of the SPX Index on June 25, 2019 was 2,917.38. We obtained the information in the table and graph below from Bloomberg Financial Markets, without independent verification. The SPX Index has at times experienced periods of high volatility, and you should not take the historical values of the SPX Index as an indication of its future performance.
SPX Index Daily Closing Values
January 1, 2014 to June 25, 2019 |
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Principal at Risk Securities
S&P 500 ® Index | High | Low | Period End |
2014 | |||
First Quarter | 1,878.04 | 1,741.89 | 1,872.34 |
Second Quarter | 1,962.87 | 1,815.69 | 1,960.23 |
Third Quarter | 2,011.36 | 1,909.57 | 1,972.29 |
Fourth Quarter | 2,090.57 | 1,862.49 | 2,058.90 |
2015 | |||
First Quarter | 2,117.39 | 1,992.67 | 2,067.89 |
Second Quarter | 2,130.82 | 2,057.64 | 2,063.11 |
Third Quarter | 2,128.28 | 1,867.61 | 1,920.03 |
Fourth Quarter | 2,109.79 | 1,923.82 | 2,043.94 |
2016 | |||
First Quarter | 2,063.95 | 1,829.08 | 2,059.74 |
Second Quarter | 2,119.12 | 2,000.54 | 2,098.86 |
Third Quarter | 2,190.15 | 2,088.55 | 2,168.27 |
Fourth Quarter | 2,271.72 | 2,085.18 | 2,238.83 |
2017 | |||
First Quarter | 2,395.96 | 2,257.83 | 2,362.72 |
Second Quarter | 2,453.46 | 2,328.95 | 2,423.41 |
Third Quarter | 2,519.36 | 2,409.75 | 2,519.36 |
Fourth Quarter | 2,690.16 | 2,529.12 | 2,673.61 |
2018 | |||
First Quarter | 2,872.87 | 2,581.00 | 2,640.87 |
Second Quarter | 2,786.85 | 2,581.88 | 2,718.37 |
Third Quarter | 2,930.75 | 2,713.22 | 2,913.98 |
Fourth Quarter | 2,925.51 | 2,351.10 | 2,506.85 |
2019 | |||
First Quarter | 2,854.88 | 2,447.89 | 2,834.40 |
Second Quarter (through June 25, 2019) | 2,954.18 | 2,744.45 | 2,917.38 |
“Standard & Poor’s ® ,” “S&P ® ,” “S&P 500 ® ,” “Standard & Poor’s 500” and “500” are trademarks of Standard and Poor’s Financial Services LLC. For more information, see “S&P 500 ® Index” in the accompanying index supplement.
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Morgan Stanley Finance LLC
Buffered Participation Securities Based on the Value of the Worst Performing of the S&P 500 ® Index and the Russell 2000 ® Index due July 31, 2024
Principal at Risk Securities
Russell 2000 ® Index Overview
The Russell 2000 ® Index is an index calculated, published and disseminated by FTSE Russell, and measures the composite price performance of stocks of 2,000 companies incorporated in the U.S. and its territories. All 2,000 stocks are traded on a major U.S. exchange and are the 2,000 smallest securities that form the Russell 3000 ® Index. The Russell 3000 ® Index is composed of the 3,000 largest U.S. companies as determined by market capitalization and represents approximately 98% of the U.S. equity market. The Russell 2000 ® Index consists of the smallest 2,000 companies included in the Russell 3000 ® Index and represents a small portion of the total market capitalization of the Russell 3000 ® Index. The Russell 2000 ® Index is designed to track the performance of the small capitalization segment of the U.S. equity market. For additional information about the Russell 2000 ® Index, see the information set forth under “Russell 2000 ® Index” in the accompanying index supplement.
Information as of market close on June 25, 2019:
Bloomberg Ticker Symbol: | RTY |
Current Index Value: | 1,521.035 |
52 Weeks Ago: | 1,657.510 |
52 Week High (on 8/31/2018): | 1,740.753 |
52 Week Low (on 12/24/2018): | 1,266.925 |
The following graph sets forth the daily closing values of the RTY Index for the period from January 1, 2014 through June 25, 2019. The related table sets forth the published high and low closing values, as well as end-of-quarter closing values, of the RTY index for each quarter in the same period. The closing value of the RTY Index on June 25, 2019 was 1,521.035. We obtained the information in the table below from Bloomberg Financial Markets, without independent verification. The RTY Index has at times experienced periods of high volatility, and you should not take the historical values of the RTY Index as an indication of its future performance.
RTY Index Daily Closing Values
January 1, 2014 to June 25, 2019 |
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Principal at Risk Securities
Russell 2000 ® Index | High | Low | Period End |
2014 | |||
First Quarter | 1,208.651 | 1,093.594 | 1,173.038 |
Second Quarter | 1,192.960 | 1,095.986 | 1,192.960 |
Third Quarter | 1,208.150 | 1,101.676 | 1,101.676 |
Fourth Quarter | 1,219.109 | 1,049.303 | 1,204.696 |
2015 | |||
First Quarter | 1,266.373 | 1,154.709 | 1,252.772 |
Second Quarter | 1,295.799 | 1,215.417 | 1,253.947 |
Third Quarter | 1,273.328 | 1,083.907 | 1,100.688 |
Fourth Quarter | 1,204.159 | 1,097.552 | 1,135.889 |
2016 | |||
First Quarter | 1,114.028 | 953.715 | 1,114.028 |
Second Quarter | 1,188.954 | 1,089.646 | 1,151.923 |
Third Quarter | 1,263.438 | 1,139.453 | 1,251.646 |
Fourth Quarter | 1,388.073 | 1,156.885 | 1,357.130 |
2017 | |||
First Quarter | 1,413.635 | 1,345.598 | 1,385.920 |
Second Quarter | 1,425.985 | 1,345.244 | 1,415.359 |
Third Quarter | 1,490.861 | 1,356.905 | 1,490.861 |
Fourth Quarter | 1,548.926 | 1,464.095 | 1,535.511 |
2018 | |||
First Quarter | 1,610.706 | 1,463.793 | 1,529.427 |
Second Quarter | 1,706.985 | 1,492.531 | 1,643.069 |
Third Quarter | 1,740.753 | 1,653.132 | 1,696.571 |
Fourth Quarter | 1,672.992 | 1,266.925 | 1,348.559 |
2019 | |||
First Quarter | 1,590.062 | 1,330.831 | 1,539.739 |
Second Quarter (through June 25, 2019) | 1,614.976 | 1,465.487 | 1,521.035 |
The “Russell 2000 ® Index” is a trademark of FTSE Russell. For more information, see “Russell 2000 ® Index” in the accompanying index supplement.
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Buffered Participation Securities Based on the Value of the Worst Performing of the S&P 500 ® Index and the Russell 2000 ® Index due July 31, 2024
Principal at Risk Securities
Additional Terms of the Buffered Securities
Please read this information in conjunction with the summary terms on the front cover of this document.
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Buffered Participation Securities Based on the Value of the Worst Performing of the S&P 500 ® Index and the Russell 2000 ® Index due July 31, 2024
Principal at Risk Securities
appear upon the registry books, (ii) to the trustee by facsimile confirmed by mailing such notice to the trustee by first class mail, postage prepaid, at its New York office and (iii) to The Depository Trust Company (the “depositary”) by telephone or facsimile, confirmed by mailing such notice to the depositary by first class mail, postage prepaid. Any notice that is mailed to a registered holder of the Buffered Securities in the manner herein provided shall be conclusively presumed to have been duly given to such registered holder, whether or not such registered holder receives the notice. The issuer shall give such notice as promptly as possible, and in no case later than (i) with respect to notice of postponement of the maturity date, the business day immediately preceding the scheduled maturity date and (ii) with respect to notice of the date to which the maturity date has been rescheduled, the business day immediately following the actual valuation date.
The issuer shall, or shall cause the calculation agent to, (i) provide written notice to the trustee, on which notice the trustee may conclusively rely, and to the depositary of the amount of cash to be delivered as annual coupon with respect to the Buffered Securities on or prior to 10:30 a.m. (New York City time) on the business day preceding each coupon payment date, and (ii) deliver the aggregate cash amount due with respect to the applicable coupon to the trustee for delivery to the depositary, as holder of the Buffered Securities, on the applicable coupon payment date.
The issuer shall, or shall cause the calculation agent to, (i) provide written notice to the trustee and to the depositary of the amount of cash to be delivered with respect to each Buffered Security on or prior to 10:30 a.m. (New York City time) on the business day preceding the maturity date, and (ii) deliver the aggregate cash amount due with respect to the Buffered Securities to the trustee for delivery to the depositary, as holder of the Buffered Securities, on the maturity date. |
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Buffered Participation Securities Based on the Value of the Worst Performing of the S&P 500 ® Index and the Russell 2000 ® Index due July 31, 2024
Principal at Risk Securities
Additional Information About the Buffered Securities
Additional Information: | |
Minimum ticketing size: | $1,000 / 1 Buffered Security |
Tax considerations: |
Prospective investors should note that the discussion under the section called “United States Federal Taxation” in the accompanying product supplement does not apply to the Buffered Securities issued under this document and is superseded by the following discussion.
The following is a general discussion of the material U.S. federal income tax consequences and certain estate tax consequences of the ownership and disposition of the Buffered Securities. This discussion applies only to investors in the Buffered Securities who:
· purchase the Buffered Securities in the original offering; and · hold the Buffered Securities as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”).
This discussion does not describe all of the tax consequences that may be relevant to a holder in light of the holder’s particular circumstances or to holders subject to special rules, such as:
· certain financial institutions; · insurance companies; · certain dealers and traders in securities or commodities; · investors holding the Buffered Securities as part of a “straddle,” wash sale, conversion transaction, integrated transaction or constructive sale transaction; · U.S. Holders (as defined below) whose functional currency is not the U.S. dollar; · partnerships or other entities classified as partnerships for U.S. federal income tax purposes; · regulated investment companies; · real estate investment trusts; or · tax-exempt entities, including “individual retirement accounts” or “Roth IRAs” as defined in Section 408 or 408A of the Code, respectively.
If an entity that is classified as a partnership for U.S. federal income tax purposes holds the Buffered Securities, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. If you are a partnership holding the Buffered Securities or a partner in such a partnership, you should consult your tax adviser as to the particular U.S. federal tax consequences of holding and disposing of the Buffered Securities to you.
In addition, we will not attempt to ascertain whether any issuer of any shares to which a Buffered 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 or as a “U.S. real property holding corporation” (“USRPHC”) within the meaning of Section 897 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 in the case of a PFIC and to a Non-U.S. Holder in the case of a USRPHC, upon the sale, exchange or settlement of a Buffered 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 or USRPHC.
As the law applicable to the U.S. federal income taxation of instruments such as the |
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Morgan Stanley Finance LLC
Buffered Participation Securities Based on the Value of the Worst Performing of the S&P 500 ® Index and the Russell 2000 ® Index due July 31, 2024
Principal at Risk Securities
Buffered Securities is technical and complex, the discussion below necessarily represents only a general summary. 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. Moreover, the discussion below does not address the consequences to taxpayers subject to special tax accounting rules under Section 451(b) of the Code.
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 Buffered 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 Buffered Securities or instruments that are similar to the Buffered 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 Buffered 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. Moreover, our counsel’s opinion is based on market conditions as of the date of this preliminary pricing supplement and is subject to confirmation on the pricing date.
You should consult your tax adviser regarding all aspects of the U.S. federal tax consequences of an investment in the Buffered Securities (including possible alternative treatments of the Buffered 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 Buffered 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 Buffered Securities
Assuming the treatment of the Buffered 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 Buffered Securities should equal the amount paid by the U.S. Holder to acquire the Buffered Securities.
Tax Treatment of Coupon Payments . Any coupon payment on the Buffered 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 Buffered Securities . Upon a sale, exchange or settlement of the Buffered 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 |
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Buffered Participation Securities Based on the Value of the Worst Performing of the S&P 500 ® Index and the Russell 2000 ® Index due July 31, 2024
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the U.S. Holder’s tax basis in the Buffered 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. Subject to the discussion above regarding the possible application of Section 1297 of the Code, any such gain or loss recognized should be long-term capital gain or loss if the U.S. Holder has held the Buffered Securities for more 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 Buffered Securities, could result in adverse tax consequences to holders of the Buffered Securities because the deductibility of capital losses is subject to limitations.
Possible Alternative Tax Treatments of an Investment in the Buffered Securities
Due to the absence of authorities that directly address the proper tax treatment of the Buffered 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 Buffered 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 Buffered 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 Buffered 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 Buffered Securities. Furthermore, any gain realized by a U.S. Holder at maturity or upon a sale, exchange or other disposition of the Buffered 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 Buffered 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 Buffered Securities are possible, which, if applied, could significantly affect the timing and character of the income or loss with respect to the Buffered 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 Buffered 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 Buffered 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 Buffered 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 Buffered Securities and the payment of proceeds from a sale, exchange or other disposition of the Buffered 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 |
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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 Buffered Securities and the payment of proceeds from a sale, exchange or other disposition of the Buffered 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 Buffered 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 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 Buffered 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 Buffered Securities.
Although significant aspects of the tax treatment of each Buffered 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 Buffered 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. In addition, as discussed above, if any issuer of Underlying Shares were treated as a USRPHC, certain adverse U.S. federal income tax consequences might apply to a Non-U.S. Holder upon the sale, exchange or settlement of the Buffered Securities. 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, pursuant to an IRS notice, Section 871(m) will not apply to securities issued before January 1, 2021 that do not have a delta of one with respect to any Underlying Security. Based on the terms of the Buffered Securities and current market conditions, we expect that the Buffered Securities will not have a delta of one with respect to any Underlying Security on the pricing date. However, we will provide an updated determination in the pricing supplement. Assuming that the Buffered Securities do not have a delta of one with respect to any Underlying Security, our counsel is of the opinion that the Buffered |
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Principal at Risk Securities
the Buffered Securities, our hedging counterparty will reimburse the cost of the agent’s commissions. The costs of the Buffered Securities borne by you and described beginning on page 2 above comprise the agent’s commissions and the cost of issuing, structuring and hedging the Buffered Securities.
On or prior to the pricing date, we will hedge our anticipated exposure in connection with the Buffered Securities by entering into hedging transactions with our affiliates and/or third-party dealers. We expect our hedging counterparties to take positions in stocks of the underlying indices, futures and/or options contracts on the underlying indices, any component stocks of the underlying indices 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 value of either underlying index on the pricing date, and therefore could increase the value at or above which such underlying index must close on the valuation date so that investors do not suffer a loss on their initial investment in the Buffered Securities (depending also on the performance of the other underlying index). In addition, through our affiliates, we are likely to modify our hedge position throughout the term of the Buffered Securities, including on the valuation date, by purchasing and selling the stocks constituting the underlying indices, futures or options contracts on the underlying indices or its component stocks listed on major securities markets or positions in any other available securities or instruments that we may wish to use in connection with such hedging activities. As a result, these entities may be unwinding or adjusting hedge positions during the term of the Buffered Securities, and the hedging strategy may involve greater and more frequent dynamic adjustments to the hedge as the valuation date approaches. We cannot give any assurance that our hedging activities will not affect the value of either underlying index, and, therefore, adversely affect the value of the Buffered Securities or the payment you will receive at maturity (depending also on the performance of the other underlying index). For further information on our use of proceeds and hedging, see “Use of Proceeds and Hedging” in the accompanying product supplement for participation securities. |
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Benefit plan investor considerations: |
Each fiduciary of a pension, profit-sharing or other employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) (a “Plan”), should consider the fiduciary standards of ERISA in the context of the Plan’s particular circumstances before authorizing an investment in the Buffered Securities. Accordingly, among other factors, the fiduciary should consider whether the investment would satisfy the prudence and diversification requirements of ERISA and would be consistent with the documents and instruments governing the Plan.
In addition, we and certain of our affiliates, including MS & Co., may each be considered a “party in interest” within the meaning of ERISA, or a “disqualified person” within the meaning of the Internal Revenue Code of 1986, as amended (the “Code”), with respect to many Plans, as well as many individual retirement accounts and Keogh plans (such accounts and plans, together with other plans, accounts and arrangements subject to Section 4975 of the Code, also “Plans”). ERISA Section 406 and Section 4975 of the Code 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 Buffered 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 Buffered Securities are acquired pursuant to an exemption from the “prohibited transaction” rules. A violation of these “prohibited transaction” rules could result in an excise tax or other liabilities under ERISA and/or Section 4975 of the Code for those persons, unless exemptive relief is available under an applicable statutory or administrative exemption.
The U.S. Department of Labor has issued five prohibited transaction class exemptions (“PTCEs”) that may provide exemptive relief for direct or indirect prohibited transactions resulting from the purchase or holding of the Buffered Securities. Those class exemptions are PTCE 96-23 (for certain transactions determined by in-house asset managers), PTCE 95-60 (for certain transactions involving insurance company general |
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Principal at Risk Securities
accounts), PTCE 91-38 (for certain transactions involving bank collective investment funds), PTCE 90-1 (for certain transactions involving insurance company separate accounts) and PTCE 84-14 (for certain transactions determined by independent qualified professional asset managers). In addition, ERISA Section 408(b)(17) and Section 4975(d)(20) of the Code 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 Buffered Securities.
Because we may be considered a party in interest with respect to many Plans, the Buffered 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 Buffered Securities will be deemed to have represented, in its corporate and its fiduciary capacity, by its purchase and holding of the Buffered Securities that either (a) it is not a Plan or a Plan Asset Entity and is not purchasing such Buffered Securities on behalf of or with “plan assets” of any Plan or with any assets of a governmental, non-U.S. or church plan that is subject to any federal, state, local or non-U.S. law that is substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the Code (“Similar Law”) or (b) its purchase, holding and disposition of these Buffered Securities will not constitute or result in a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or violate any Similar Law.
Due to the complexity of these rules and the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important that fiduciaries or other persons considering purchasing the Buffered Securities on behalf of or with “plan assets” of any Plan consult with their counsel regarding the availability of exemptive relief.
The Buffered Securities are contractual financial instruments. The financial exposure provided by the Buffered 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 Buffered Securities. The Buffered 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 Buffered Securities.
Each purchaser or holder of any Buffered 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 Buffered Securities, (B) the purchaser or holder’s investment in the Buffered Securities, or (C) the exercise of or failure to exercise any rights we have under or with respect to the Buffered 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 Buffered Securities and (B) all hedging transactions in connection with our obligations under the Buffered 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 |
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Principal at Risk Securities
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 Buffered Securities has exclusive responsibility for ensuring that its purchase, holding and disposition of the Buffered Securities do not violate the prohibited transaction rules of ERISA or the Code or any Similar Law. The sale of any Buffered Securities to any Plan or plan subject to Similar Law is in no respect a representation by us or any of our affiliates or representatives that such an investment meets all relevant legal requirements with respect to investments by plans generally or any particular plan, or that such an investment is appropriate for plans generally or any particular plan. In this regard, neither this discussion nor anything provided in this document is or is intended to be investment advice directed at any potential Plan purchaser or at Plan purchasers generally and such purchasers of the Buffered Securities should consult and rely on their own counsel and advisers as to whether an investment in the Buffered Securities is suitable.
However, individual retirement accounts, individual retirement annuities and Keogh plans, as well as employee benefit plans that permit participants to direct the investment of their accounts, will not be permitted to purchase or hold the Buffered 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 Buffered Securities by the account, plan or annuity. |
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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 Buffered Securities, either directly or indirectly. |
Supplemental information regarding plan of distribution; conflicts of interest: |
Selected dealers, which may include our affiliates, and their financial advisors will collectively receive from the agent a fixed sales commission of $ for each Buffered Security they sell.
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 Buffered Securities. When MS & Co. prices this offering of Buffered Securities, it will determine the economic terms of the Buffered Securities such that for each Buffered Security the estimated value on the pricing date will be no lower than the minimum level described in “Investment Summary” on page 2.
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. See “Plan of Distribution (Conflicts of Interest)” and “Use of Proceeds and Hedging” in the accompanying product supplement for participation securities. |
Where you can find more information: |
Morgan Stanley and MSFL have filed a registration statement (including a prospectus, as supplemented by the product supplement for participation securities and the 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 product supplement for participation securities, 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 product supplement for participation securities, index supplement and prospectus 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: |
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Principal at Risk Securities
Product Supplement for Participation Securities dated November 16, 2017 Index Supplement dated November 16, 2017 Prospectus dated November 16, 2017
Terms used but not defined in this document are defined in the product supplement for participation securities, in the index supplement or in the prospectus. |
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