October 2019
Preliminary Terms No. 2,628
Registration Statement Nos. 333-221595; 333-221595-01
Dated September 30, 2019
Filed pursuant to Rule 433
Morgan Stanley Finance LLC
STRUCTURED INVESTMENTS
Opportunities in U.S. Equities
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Fully and Unconditionally Guaranteed by Morgan Stanley
Principal at Risk Securities
The Dual Directional Buffered PLUS, or “Buffered PLUS,” are unsecured obligations of Morgan Stanley Finance LLC (“MSFL”) and are fully and unconditionally guaranteed by Morgan Stanley. The Buffered PLUS will pay no interest, provide a minimum payment at maturity of only 20% of the stated principal amount and have the terms described in the accompanying product supplement for PLUS, index supplement and prospectus, as supplemented or modified by this document. The payment at maturity on the Buffered PLUS will be based on the value of the worst performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index. At maturity, 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 leveraged 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 80% 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 20%, investors will receive the stated principal amount of their investment plus an unleveraged positive return based on the absolute value of the performance of the worst performing underlying index, which will be inherently limited to a maximum return of 20%. However, if the final index value of either underlying index is less than 80% 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 20%, the absolute return feature will no longer be available and instead 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 20% of the stated principal amount. Investors may lose up to 80% of the stated principal amount of the Buffered PLUS. Because the payment at maturity of the Buffered PLUS 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 PLUS are for investors who seek an equity index-based return and who are willing to risk their principal, risk exposure to the worst performing of two underlying indices and forgo current income in exchange for the leverage, buffer and absolute return features that in each case apply to a limited range of performance of the worst performing underlying index. The Buffered PLUS are notes issued as part of MSFL’s Series A Global Medium-Term Notes program.
The Buffered PLUS differ from the PLUS described in the accompanying product supplement for PLUS in that the Buffered PLUS offer the potential for a positive return at maturity if the worst performing underlying index depreciates by no more than 20%.
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 PLUS 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: | October 31, 2024 | ||
Underlying indices: | Dow Jones Industrial AverageSM (the “INDU Index”) and the RTY 2000® Index (the “RTY Index”) | ||
Aggregate principal amount: | $ | ||
Payment at maturity: | If the final index value of each underlying index is greater than its respective initial index value, | ||
$1,000 + ($1,000 × leverage factor × 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 80% 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 20%, | |||
$1,000 + ($1,000 × absolute index return of the worst performing underlying index) | |||
If the final index value of either underlying index is less than 80% 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 20%, | |||
($1,000 × index performance factor of the worst performing underlying index) + $200 | |||
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 PLUS pay less than $200 per Buffered PLUS at maturity. | |||
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 percentage change | ||
Index performance factor: | With respect to each underlying index, final index value / initial index value | ||
Absolute index return: | The absolute value of the index percent change. For example, a -5% index percent change will result in a +5% absolute index return. | ||
Initial index value: |
With respect to the INDU 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: | October 28, 2024, subject to adjustment for non-index business days and certain market disruption events | ||
Minimum payment at maturity: | $200 per Buffered PLUS (20% of the stated principal amount) | ||
Leverage factor: | At least 130%. The actual leverage factor will be determined on the pricing date. | ||
Buffer amount: | 20% | ||
Stated principal amount: | $1,000 per Buffered PLUS | ||
Issue price: | $1,000 per Buffered PLUS | ||
Pricing date: | October 28, 2019 | ||
Original issue date: | October 31, 2019, 2019 (3 business days after the pricing date) | ||
CUSIP / ISIN: | 61769HXZ3 / US61769HXZ36 | ||
Listing: | The Buffered PLUS 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 $932.50 per Buffered PLUS, 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 PLUS | $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 PLUS 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 for PLUS. |
(2) | See “Use of proceeds and hedging” on page 18. |
The Buffered PLUS involve risks not associated with an investment in ordinary debt securities. See “Risk Factors” beginning on page 7.
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 PLUS 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 PLUS” and “Additional Information About the Buffered PLUS” 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 PLUS dated November 16, 2017 Index Supplement dated November 16, 2017
Prospectus dated November 16, 2017
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
Investment Summary
Buffered Performance Leveraged Upside Securities
Principal at Risk Securities
The Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024 (the “Buffered PLUS”) can be used:
§ | To gain exposure to the worst performing of two U.S. equity indices |
§ | To potentially outperform the worst performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index by taking advantage of the leverage factor |
§ | To obtain an unleveraged positive return for a limited range of negative performance of the worst performing underlying index |
If the final index value of either underlying index is less than 80% 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 |
Leverage factor: | At least 130%. The actual leverage factor will be determined on the pricing date. |
Minimum payment at maturity: | $200 per Buffered PLUS (20% of the stated principal amount). Investors may lose up to 80% of the stated principal amount of the Buffered PLUS. |
Buffer amount: | 20%, with 1-to-1 downside exposure to the worst performing underlying index below the buffer |
Coupon: | None |
Listing: | The Buffered PLUS will not be listed on any securities exchange |
The original issue price of each Buffered PLUS is $1,000. This price includes costs associated with issuing, selling, structuring and hedging the Buffered PLUS, which are borne by you, and, consequently, the estimated value of the Buffered PLUS on the pricing date will be less than $1,000. We estimate that the value of each Buffered PLUS on the pricing date will be approximately $932.50, or within $30.00 of that estimate. Our estimate of the value of the Buffered PLUS 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 PLUS on the pricing date, we take into account that the Buffered PLUS comprise both a debt component and a performance-based component linked to the underlying indices. The estimated value of the Buffered PLUS 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 PLUS?
In determining the economic terms of the Buffered PLUS, including the leverage factor, 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 Buffered PLUS 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 PLUS?
The price at which MS & Co. purchases the Buffered PLUS 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 PLUS 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 PLUS 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 PLUS, and, if it once chooses to make a market, may cease doing so at any time.
October 2019 | Page 2 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
Key Investment Rationale
The Buffered PLUS offer the potential for a positive return at maturity based on the absolute value of a limited range of percentage changes of the worst performing underlying index. At maturity, 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 leveraged 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 80% of its respective initial index value, investors will receive the stated principal amount of their investment plus an unleveraged positive return based on the absolute value of the performance of the worst performing underlying index. However, if the final index value of either underlying index is less than 80% of its respective initial index value, the absolute return feature will no longer be available and instead 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 80% of the stated principal amount of the Buffered PLUS. All payments on the Buffered PLUS are subject to our credit risk.
Leveraged Performance | The Buffered PLUS offer investors an opportunity to receive at least 130% of the positive return of the worst performing of the underlying indices if both underlying indices have appreciated in value, or an unleveraged return reflecting the absolute value of the performance of the worst performing of the underlying indices if one or both underlying indices have declined but neither underlying index has declined by an amount greater than the buffer amount of 20%. The actual leverage factor will be determined on the pricing date. |
Absolute Return Feature | The Buffered PLUS enable investors to obtain an unleveraged positive return 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 80% of its respective initial index value. |
Upside Scenario if Both Underlying Indices Appreciate | Both underlying indices increase in value, and, at maturity, the Buffered PLUS redeem for the stated principal amount of $1,000 plus at least 130% of the index percent change of the worst performing underlying index. The actual leverage factor will be determined on the pricing date. |
Absolute Return Scenario | 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 80% of its respective initial index value. In this case, you receive a 1% positive return on the Buffered PLUS for each 1% negative return on the worst performing underlying index. For example, if the final index value of the worst performing underlying index is 10% less than its respective initial index value, the Buffered PLUS will provide a total positive return of 10% at maturity. The maximum return you may receive in this scenario is a positive 20% return at maturity. |
Downside Scenario | The final index value of either underlying index is less than 80% of its respective initial index value. In this case, the Buffered PLUS redeem for less than the stated principal amount by an amount proportionate to the percentage decrease of the worst performing underlying index over the term of the Buffered PLUS, plus the buffer amount of 20%. For example, if the final index value of the worst performing underlying index is 75% less than its initial index value, the Buffered PLUS will be redeemed at maturity for a loss of 55% of principal at $450, or 45% of the stated principal amount. The minimum payment at maturity is $200 per Buffered PLUS. |
Because the payment at maturity of the Buffered PLUS is based on the worst performing of the underlying indices, a decline in either underlying index to less than 80% 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.
October 2019 | Page 3 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
Hypothetical Examples
The following hypothetical examples illustrate how to calculate the payment at maturity on the Buffered PLUS. The following examples are for illustrative purposes only. The actual initial index value for each underlying index will be determined on the pricing date. Any payment at maturity on the Buffered PLUS is subject to our credit risk. The below examples are based on the following terms:
Stated principal amount: | $1,000 per Buffered PLUS |
Hypothetical leverage factor: | 130%. The actual leverage factor will be determined on the pricing date. |
Hypothetical initial index value: |
With respect to the INDU Index: 25,000
With respect to the RTY Index: 1,100
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Minimum payment at maturity: | $200 per Buffered PLUS (20% of the stated principal amount) |
Buffer amount: | 20% |
EXAMPLE 1: The final index value of each underlying index is greater than its respective initial index value.
Final index value | INDU Index: 37,500 | ||
RTY Index: 1,540 | |||
Index percent change |
INDU Index: (37,500 – 25,000) / 25,000 = 50%
RTY Index: (1,540 – 1,100) / 1,100 = 40%
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Payment at maturity | = | $1,000 + ($1,000 × leverage factor × index percent change of the worst performing underlying index) | |
= | $1,000 + ($1,000 × 130% × 40%) | ||
= | $1,520 |
In example 1, the final index values of both the INDU Index and RTY Index are greater than their initial index values. The INDU Index has appreciated by 50% while the RTY Index has appreciated by 40%. Therefore, investors receive at maturity the stated principal amount plus 130% of the appreciation of the worst performing underlying index, which is the RTY Index in this example. Investors receive $1,520 per Buffered PLUS at maturity (assuming a hypothetical leverage factor of 130%). The actual leverage factor will be determined on the pricing date.
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 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 20%.
Final index value | INDU Index: 35,000 | ||
RTY Index: 990 | |||
Index percent change |
INDU Index: (35,000 – 25,000) / 25,000 = 40%
RTY Index: (990 – 1,100) / 1,100 = -10%
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Payment at maturity | = | $1,000 + ($1,000 × absolute index return of the worst performing underlying index) | |
= | $1,000 + ($1,000 × 10%) | ||
= | $1,100 |
In example 2, the final index value of the INDU Index is greater than its respective initial index value, while the final index value of the RTY Index is less than its respective initial index value. The INDU Index has appreciated by 40%, while the RTY index has declined by 10%, but neither underlying index has decreased from its initial index value by an amount greater than the buffer amount of 20%. Therefore, investors receive at maturity the stated principal amount plus 100% of the absolute value of the
October 2019 | Page 4 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
performance of the worst performing underlying index, which is the RTY Index in this example. Investors receive $1,100 per Buffered PLUS at maturity. In this example, investors receive a positive return even though one of the underlying indices has declined in value by 10%, due to the absolute return feature of the Buffered PLUS and because neither underlying index has declined to below 80% of its initial index value.
EXAMPLE 3: 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 80% of its respective initial index value.
Final index value | INDU Index: 27,500 | ||
RTY Index: 550 | |||
Index percent change |
INDU Index: (27,500 – 25,000) / 25,000 = 10%
RTY Index: (550 – 1,100) / 1,100 = -50%
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Index performance factor |
INDU Index: 27,500 / 25,000 = 110%
RTY Index: 550 / 1,100 = 50%
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Payment at maturity | = | ($1,000 × index performance factor of the worst performing underlying index) + $200 | |
= | ($1,000 × 50%) + $200 | ||
= | $700 |
In example 3, the final index value of the INDU Index is greater than its respective initial index value, while the final index value of the RTY Index is less than 80% of its respective initial index value. While the INDU Index has appreciated by 10%, the RTY index has declined by 50%. Therefore, investors 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 20%, and receive a payment at maturity of $700 per Buffered PLUS. In this example, investors lose the benefit of the absolute return feature and are exposed to the negative performance of the worst performing underlying index even though the other underlying index has appreciated in value by 10%, because the final index value of each index is not greater than or equal to 80% of its respective initial index value.
EXAMPLE 4: 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 20%.
Final index value | INDU Index: 22,500 | ||
RTY Index: 968 | |||
Index percent change |
INDU Index: (22,500 – 25,000) / 25,000 = -10%
RTY Index: (968 – 1,100) / 1,100 = -12%
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Payment at maturity | = | $1,000 + ($1,000 × absolute index return of the worst performing underlying index) | |
= | $1,000 + ($1,000 × 12%) | ||
= | $1,120 |
In example 4, 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 20%. The INDU index has declined by 10% while the RTY Index has declined by 12%. Therefore, investors receive at maturity the stated principal amount plus 100% of the absolute value of the performance of the worst performing underlying index, which is the RTY Index in this example. Investors receive $1,120 per Buffered PLUS at maturity.
EXAMPLE 5: The final index value of each underlying index is less than 80% of its respective initial index value.
Final index value | INDU Index: 7,500 | ||
RTY Index: 440 | |||
Index percent change |
INDU Index: (600 – 25,000) / 25,000 = -70%
RTY Index: (440 – 1,100) / 1,100 = -60%
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October 2019 | Page 5 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
Index performance factor |
INDU Index: 7,500 / 25,000 = 30%
RTY Index: 440 / 1,100 = 40% |
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|
Payment at maturity | = | ($1,000 × index performance factor of the worst performing underlying index) + $200 | |
= | ($1,000 × 30%) + $200 | ||
= | $500 |
In example 5, the final index values of both the INDU Index and the RTY Index are less than their respective initial index values by an amount greater than the buffer amount of 20%. The INDU index has declined by 70% while the RTY Index has declined by 60%. Therefore, investors are exposed to the negative performance of the INDU Index, which is the worst performing underlying index in this example, beyond the buffer amount of 20%, and receive a payment at maturity of $500 per Buffered PLUS.
Because the payment at maturity of the Buffered PLUS 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 20% 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.
October 2019 | Page 6 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
Risk Factors
The following is a non-exhaustive list of certain key risk factors for investors in the Buffered PLUS. For further discussion of these and other risks, you should read the section entitled “Risk Factors” in the accompanying product supplement for PLUS, 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 PLUS.
§ | The Buffered PLUS do not pay interest and provide a minimum payment at maturity of only 20% of the stated principal amount. The terms of the Buffered PLUS differ from those of ordinary debt securities in that the Buffered PLUS do not pay interest and provide a minimum payment at maturity of only 20% of the stated principal amount of the Buffered PLUS. If the final index value of either underlying index is less than 80% of its initial index value, the absolute return feature will no longer be available and you will instead receive for each Buffered PLUS that you hold a payment at maturity that is less than the stated principal amount of each Buffered PLUS by an amount proportionate to the decline in the value of the worst performing underlying index from its initial index value, plus $200 per Buffered PLUS. Accordingly, investors may lose up to 80% of the stated principal amount of the Buffered PLUS. |
§ | You are exposed to the price risk of both underlying indices. Your return on the Buffered PLUS it 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 80% 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 PLUS 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 PLUS 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 PLUS 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 80% of its initial index value as of the valuation date than if the Buffered PLUS 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 PLUS will be influenced by many unpredictable factors. Several factors will influence the value of the Buffered PLUS in the secondary market and the price at which MS & Co. may be willing to purchase or sell the Buffered PLUS 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 PLUS 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 PLUS 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 “Dow Jones Industrial AverageSM Overview” and “Russell 2000® Index Overview” below. You may receive less, and possibly significantly less, than the stated principal amount per Buffered PLUS if you try to sell your Buffered PLUS prior to maturity. |
§ | The Buffered PLUS 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 PLUS. You are dependent on our ability to pay all amounts due on the Buffered PLUS at maturity and therefore you are subject to our credit risk. If we default on its obligations under the Buffered PLUS, 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 PLUS 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 PLUS. |
§ | 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 |
October 2019 | Page 7 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
independent assets available for distributions to holders of MSFL securities if they make claims in respect of such securities in a bankruptcy, resolution or similar proceeding. Accordingly, any recoveries by such holders will be limited to those available under the related guarantee by Morgan Stanley and that guarantee will rank pari passu with all other unsecured, unsubordinated obligations of Morgan Stanley. Holders will have recourse only to a single claim against Morgan Stanley and its assets under the guarantee. Holders of securities issued by MSFL should accordingly assume that in any such proceedings they would not have any priority over and should be treated pari passu with the claims of other unsecured, unsubordinated creditors of Morgan Stanley, including holders of Morgan Stanley-issued securities.
§ | The Buffered PLUS 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 PLUS 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 PLUS 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 80% 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 PLUS 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 PLUS is not equivalent to investing in either underlying index. Investing in the Buffered PLUS is not equivalent to investing in either underlying index or the component stocks of either underlying index. As an investor in the Buffered PLUS, 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 PLUS. 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 PLUS in the original issue price reduce the economic terms of the Buffered PLUS, cause the estimated value of the Buffered PLUS 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 PLUS 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 PLUS in the original issue price and the lower rate we are willing to pay as issuer make the economic terms of the Buffered PLUS less favorable to you than they otherwise would be.
October 2019 | Page 8 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
However, because the costs associated with issuing, selling, structuring and hedging the Buffered PLUS 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 PLUS 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.
§ | The estimated value of the Buffered PLUS 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 PLUS than those generated by others, including other dealers in the market, if they attempted to value the Buffered PLUS. 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 PLUS in the secondary market (if any exists) at any time. The value of your Buffered PLUS 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 PLUS will be influenced by many unpredictable factors” above. |
§ | The Buffered PLUS will not be listed on any securities exchange and secondary trading may be limited. The Buffered PLUS will not be listed on any securities exchange. Therefore, there may be little or no secondary market for the Buffered PLUS. MS & Co. may, but is not obligated to, make a market in the Buffered PLUS 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 PLUS, 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 PLUS. Even if there is a secondary market, it may not provide enough liquidity to allow you to trade or sell the Buffered PLUS easily. Since other broker-dealers may not participate significantly in the secondary market for the Buffered PLUS, the price at which you may be able to trade your Buffered PLUS 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 PLUS, it is likely that there would be no secondary market for the Buffered PLUS. Accordingly, you should be willing to hold your Buffered PLUS to maturity. |
§ | Hedging and trading activity by our affiliates could potentially adversely affect the value of the Buffered PLUS. One or more of our affiliates and/or third-party dealers expect to carry out hedging activities related to the Buffered PLUS (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 PLUS, 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 PLUS (depending also on the performance of the other underlying index). Additionally, such hedging or trading activities during the term of the Buffered PLUS, 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 PLUS. 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 80% 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 PLUS—Postponement of Valuation Date(s),” “—Alternate Exchange Calculation in case of an Event of Default” |
October 2019 | Page 9 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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 PLUS on the pricing date.
§ | The U.S. federal income tax consequences of an investment in the Buffered PLUS are uncertain. Please read the discussion under “Additional Information—Tax considerations” in this document and the discussion under “United States Federal Taxation” in the accompanying product supplement for PLUS (together, the “Tax Disclosure Sections”) concerning the U.S. federal income tax consequences of an investment in the Buffered PLUS. If the Internal Revenue Service (the “IRS”) were successful in asserting an alternative treatment, the timing and character of income on the Buffered PLUS might differ significantly from the tax treatment described in the Tax Disclosure Sections. For example, under one possible treatment, the IRS could seek to recharacterize the Buffered PLUS as debt instruments. In that event, U.S. Holders would be required to accrue into income original issue discount on the Buffered PLUS every year at a “comparable yield” determined at the time of issuance and recognize all income and gain in respect of the Buffered PLUS as ordinary income. Additionally, as discussed under “United States Federal Taxation—FATCA” in the accompanying product supplement for PLUS, the withholding rules commonly referred to as “FATCA” would apply to the Buffered PLUS if they were recharacterized as debt instruments. However, recently proposed regulations (the preamble to which specifies that taxpayers are permitted to rely on them pending finalization) eliminate the withholding requirement on payments of gross proceeds of a taxable disposition (other than amounts treated as “FDAP income,” as defined in the accompanying product supplement for PLUS). The risk that financial instruments providing for buffers, triggers or similar downside protection features, such as the Buffered PLUS, would be recharacterized as debt is greater than the risk of recharacterization for comparable financial instruments that do not have such features. We do not plan to request a ruling from the IRS regarding the tax treatment of the Buffered PLUS, and the IRS or a court may not agree with the tax treatment described in the Tax Disclosure Sections. |
In 2007, the U.S. Treasury Department and the IRS released a notice requesting comments on the U.S. federal income tax treatment of “prepaid forward contracts” and similar instruments. The notice focuses in particular on whether to require holders of these instruments to accrue income over the term of their investment. It also asks for comments on a number of related topics, including the character of income or loss with respect to these instruments; whether short-term instruments should be subject to any such accrual regime; the relevance of factors such as the exchange-traded status of the instruments and the nature of the underlying property to which the instruments are linked; the degree, if any, to which income (including any mandated accruals) realized by non-U.S. investors should be subject to withholding tax; and 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. While the notice requests comments on appropriate transition rules and effective dates, any Treasury regulations or other guidance promulgated after consideration of these issues could materially and adversely affect the tax consequences of an investment in the Buffered PLUS, possibly with retroactive effect. 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 PLUS, 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.
October 2019 | Page 10 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
Dow Jones Industrial AverageSM Overview
The Dow Jones Industrial AverageSM is a price-weighted index composed of 30 common stocks that is published by S&P Dow Jones Indices LLC, the marketing name and a licensed trademark of CME Group Inc., as representative of the broad market of U.S. industry. For additional information about the Dow Jones Industrial AverageSM, see the information set forth under “Dow Jones Industrial AverageSM” in the accompanying index supplement.
Information as of market close on September 25, 2019:
Bloomberg Ticker Symbol:
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INDU
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Current Index Value: | 26,970.71 |
52 Weeks Ago: | 26,492.21 |
52 Week High (on 7/15/2019): | 27,359.16 |
52 Week Low (on 12/24/2018): | 21,792.20 |
The following graph sets forth the daily closing values of the INDU Index for the period from January 1, 2014 through September 25, 2019. The related table sets forth the published high and low closing values, as well as end-of-quarter closing values, of the INDU Index for each quarter in the same period. The closing value of the INDU Index on September 25, 2019 was 26,970.71. We obtained the information in the table and graph below from Bloomberg Financial Markets, without independent verification. The INDU index has at times experienced periods of high volatility, and you should not take the historical values of the INDU index as an indication of its future performance.
INDU Index Daily Closing Values
January 1, 2014 to September 25, 2019 |
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October 2019 | Page 11 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
Dow Jones Industrial AverageSM | High | Low | Period End |
2014 | |||
First Quarter | 16,530.94 | 15,372.80 | 16,457.66 |
Second Quarter | 16,947.08 | 16,026.75 | 16,826.60 |
Third Quarter | 17,279.74 | 16,368.27 | 17,042.90 |
Fourth Quarter | 18,053.71 | 16,117.24 | 17,823.07 |
2015 | |||
First Quarter | 18,288.63 | 17,164.95 | 17,776.12 |
Second Quarter | 18,312.39 | 17,596.35 | 17,619.51 |
Third Quarter | 18,120.25 | 15,666.44 | 16,284.70 |
Fourth Quarter | 17,918.15 | 16,272.01 | 17,425.03 |
2016 | |||
First Quarter | 17,716.66 | 15,660.18 | 17,685.09 |
Second Quarter | 18,096.27 | 17,140.24 | 17,929.99 |
Third Quarter | 18,636.05 | 17,840.62 | 18,308.15 |
Fourth Quarter | 19,974.62 | 17,888.28 | 19,762.60 |
2017 | |||
First Quarter | 21,115.55 | 19,732.40 | 20,663.22 |
Second Quarter | 21,528.99 | 20,404.49 | 21,349.63 |
Third Quarter | 22,412.59 | 21,320.04 | 22,405.09 |
Fourth Quarter | 24,837.51 | 22,557.60 | 24,719.22 |
2018 | |||
First Quarter | 26,616.71 | 23,533.20 | 24,103.11 |
Second Quarter | 25,322.31 | 23,644.19 | 24,271.41 |
Third Quarter | 26,743.50 | 24,174.82 | 26,458.31 |
Fourth Quarter | 26,828.39 | 21,792.20 | 23,327.46 |
2019 | |||
First Quarter | 26,091.95 | 22,686.22 | 25,928.68 |
Second Quarter | 26,753.17 | 24,815.04 | 26,599.96 |
Third Quarter (through September 25, 2019) | 27,359.16 | 25,479.42 | 26,970.71 |
“Dow Jones,” “Dow Jones Industrial Average,” “Dow Jones Indexes” and “DJIA” are service marks of Dow Jones Trademark Holdings LLC. See “Dow Jones Industrial AverageSM” in the accompanying index supplement.
October 2019 | Page 12 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
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 September 25, 2019:
Bloomberg Ticker Symbol: | RTY |
Current Index Value: | 1,550.654 |
52 Weeks Ago: | 1,708.805 |
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 September 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 September 25, 2019 was 1,550.654. 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 September 25, 2019 |
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October 2019 | Page 13 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
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 | 1,614.976 | 1,465.487 | 1,566.572 |
Third Quarter (through September 25, 2019) | 1,585.599 | 1,456.039 | 1,550.654 |
The “Russell 2000® Index” is a trademark of FTSE Russell. For more information, see “Russell 2000® Index” in the accompanying index supplement.
October 2019 | Page 14 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
Additional Terms of the Buffered PLUS
Please read this information in conjunction with the summary terms on the front cover of this document.
October 2019 | Page 15 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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 and to the depositary of the amount of cash to be delivered with respect to each stated principal amount of the Buffered PLUS, 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 PLUS to the trustee for delivery to the depositary, as holder of the Buffered PLUS, on the maturity date.
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October 2019 | Page 16 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
Additional Information About the Buffered PLUS
Additional Information: | |
Minimum ticketing size: | $1,000 / 1 Buffered PLUS |
Tax considerations: | Although there is uncertainty regarding the U.S. federal income tax consequences of an investment in the Buffered PLUS due to the lack of governing authority, in the opinion of our counsel, Davis Polk & Wardwell LLP, under current law, and based on current market conditions, a Buffered PLUS should be treated as a single financial contract that is an “open transaction” for U.S. federal income tax purposes. However, because our counsel’s opinion is based in part on market conditions as of the date of this document, it is subject to confirmation on the pricing date. |
Assuming this treatment of the Buffered PLUS is respected and subject to the discussion in “United States Federal Taxation” in the accompanying product supplement for PLUS, the following U.S. federal income tax consequences should result based on current law: | |
§ A U.S. Holder should not be required to recognize taxable income over the term of the Buffered PLUS prior to settlement, other than pursuant to a sale or exchange. | |
§ Upon sale, exchange or settlement of the Buffered PLUS, a U.S. Holder should recognize gain or loss equal to the difference between the amount realized and the U.S. Holder’s tax basis in the Buffered PLUS. Such gain or loss should be long-term capital gain or loss if the investor has held the Buffered PLUS for more than one year, and short-term capital gain or loss otherwise. | |
In 2007, the U.S. Treasury Department and the Internal Revenue Service (the “IRS”) released a notice requesting comments on the U.S. federal income tax treatment of “prepaid forward contracts” and similar instruments. The notice focuses in particular on whether to require holders of these instruments to accrue income over the term of their investment. It also asks for comments on a number of related topics, including the character of income or loss with respect to these instruments; whether short-term instruments should be subject to any such accrual regime; the relevance of factors such as the exchange-traded status of the instruments and the nature of the underlying property to which the instruments are linked; the degree, if any, to which income (including any mandated accruals) realized by non-U.S. investors should be subject to withholding tax; and 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. While the notice requests comments on appropriate transition rules and effective dates, any Treasury regulations or other guidance promulgated after consideration of these issues could materially and adversely affect the tax consequences of an investment in the Buffered PLUS, possibly with retroactive effect.
As discussed in the accompanying product supplement for PLUS, Section 871(m) of the Internal Revenue Code of 1986, as amended, 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 PLUS and current market conditions, we expect that the Buffered PLUS 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 final pricing supplement. Assuming that the Buffered PLUS do not have a delta of one with respect to any Underlying Security, our counsel is of the opinion that the Buffered PLUS 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
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October 2019 | Page 17 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
October 2019 | Page 18 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
documents and instruments governing the Plan.
In addition, we and certain of our affiliates, including MS & Co., may each be considered a “party in interest” within the meaning of ERISA, or a “disqualified person” within the meaning of the Internal Revenue Code of 1986, as amended (the “Code”), with respect to many Plans, as well as many individual retirement accounts and Keogh plans (such accounts and plans, together with other plans, accounts and arrangements subject to Section 4975 of the Code, also “Plans”). ERISA Section 406 and Code Section 4975 generally prohibit transactions between Plans and parties in interest or disqualified persons. Prohibited transactions within the meaning of ERISA or the Code would likely arise, for example, if the Buffered PLUS 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 PLUS 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 PLUS. Those class exemptions are PTCE 96-23 (for certain transactions determined by in-house asset managers), PTCE 95-60 (for certain transactions involving insurance company general accounts), PTCE 91-38 (for certain transactions involving bank collective investment funds), PTCE 90-1 (for certain transactions involving insurance company separate accounts) and PTCE 84-14 (for certain transactions determined by independent qualified professional asset managers). In addition, ERISA Section 408(b)(17) and 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 PLUS.
Because we may be considered a party in interest with respect to many Plans, the Buffered PLUS 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 PLUS will be deemed to have represented, in its corporate and its fiduciary capacity, by its purchase and holding of the Buffered PLUS that either (a) it is not a Plan or a Plan Asset Entity and is not purchasing such Buffered PLUS 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 PLUS 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 PLUS on behalf of or with “plan assets” of any Plan consult with their counsel regarding the availability of exemptive relief.
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October 2019 | Page 19 |
Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
The Buffered PLUS are contractual financial instruments. The financial exposure provided by the Buffered PLUS 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 PLUS. The Buffered PLUS 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 PLUS.
Each purchaser or holder of any Buffered PLUS 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 PLUS, (B) the purchaser or holder’s investment in the Buffered PLUS, or (C) the exercise of or failure to exercise any rights we have under or with respect to the Buffered PLUS;
(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 PLUS and (B) all hedging transactions in connection with our obligations under the Buffered PLUS;
(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 Buffered PLUS has exclusive responsibility for ensuring that its purchase, holding and disposition of the Buffered PLUS do not violate the prohibited transaction rules of ERISA or the Code or any Similar Law. The sale of any Buffered PLUS to any Plan or plan subject to Similar Law is in no respect a representation by us or any of our affiliates or representatives that such an investment meets all relevant legal requirements with respect to investments by plans generally or any particular plan, or that such an investment is appropriate for plans generally or any particular plan. In this regard, neither this discussion nor anything provided in this document is or is intended to be investment advice directed at any potential Plan purchaser or at Plan purchasers generally and such purchasers of these Buffered PLUS should consult and rely on their own counsel and advisers as to whether an investment in these Buffered PLUS 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 PLUS 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 PLUS 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 PLUS, either directly or indirectly. |
Supplemental information regarding plan of distribution; conflicts of |
Selected dealers, which may include our affiliates, and their financial advisors will collectively
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Morgan Stanley Finance LLC
Dual Directional Buffered PLUS Based on the Value of the Worst Performing of the Dow Jones Industrial AverageSM and the Russell 2000® Index due October 31, 2024
Buffered Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
interest: |
receive from the agent a fixed sales commission of $ for each Buffered PLUS 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 PLUS. When MS & Co. prices this offering of Buffered PLUS, it will determine the economic terms of the Buffered PLUS, including the leverage factor, such that for each Buffered PLUS 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 PLUS.
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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 product supplement for PLUS 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 PLUS, 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 PLUS, 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:
Product Supplement for PLUS 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 PLUS, in the index supplement or in the prospectus.
“Performance Leveraged Upside SecuritiesSM” and “PLUSSM” are our service marks.
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