CALCULATION
OF REGISTRATION FEE
|
|
Maximum Aggregate
|
|
Amount of Registration
|
Title of Each Class of Securities Offered
|
|
Offering
Price
|
|
Fee
|
Contingent Income Securities due 2023
|
|
$7,019,000
|
|
$813.50
|
October 2016
Pricing Supplement No. 1,109
Registration Statement Nos. 333-200365;
333-200365-12
Dated October 21, 2016
Filed pursuant to Rule 424(b)(2)
M
organ
S
tanley
F
inance
LLC
Structured Investments
Opportunities in U.S. Equities
Contingent Income
Securities due October 26, 2023
All Payments on the Securities Subject to the Coupon Barrier and Downside Threshold
Features Linked to the S&P 500
®
Index
Fully
and Unconditionally Guaranteed by Morgan Stanley
Principal at Risk Securities
Unlike ordinary debt securities, the Contingent Income Securities
due October 26, 2023, All Payments on the Securities Subject to the Coupon Barrier and Downside Threshold Features Linked to the
S&P 500
®
Index, which we refer to as the securities, do not provide for the regular payment of interest or
guarantee the return of any principal at maturity. Instead, the securities offer the opportunity for investors to earn a contingent
quarterly coupon
but only if
the index closing value of the S&P 500
®
Index on the applicable quarterly
determination date is greater than or equal to 75% of the initial index value, which we refer to as the coupon barrier level.
If the index closing value is less than the coupon barrier level on any determination date, you will not receive any contingent
quarterly coupon for that quarterly period. As a result, investors must be willing to accept the risk of not receiving any contingent
quarterly coupon during the entire 7-year term of the securities. At maturity, if the final index value is greater than or equal
to 62% of the initial index value, which we refer to as the downside threshold level, investors will receive the stated principal
amount of the securities and, if the final index value is also greater than or equal to the coupon barrier level, the contingent
quarterly coupon with respect to the final determination date. However, if the final index value is less than the downside threshold
level, investors will be fully exposed to the decline in the value of the S&P 500
®
Index over the term of the
securities, and the payment at maturity will be less than 62% of the stated principal amount of the securities and could be zero.
Accordingly, investors may lose up to their entire initial investment in the securities.
Investors will not participate
in any appreciation of the S&P 500
®
Index. These long-dated securities are for investors who seek an opportunity
to earn interest at a potentially above-market rate in exchange for the risk of losing their principal and the risk of receiving
no contingent quarterly coupon when the S&P 500
®
Index on the related determination date closes below the coupon
barrier level. The securities are unsecured obligations of Morgan Stanley Finance LLC (“MSFL”) and are fully and unconditionally
guaranteed by Morgan Stanley. The securities are issued as part of MSFL’s Series A Global Medium-Term Notes program.
All payments are subject to our credit risk. If we default
on our obligations, you could lose some or all of your investment. These securities are not secured obligations and you will not
have any security interest in, or otherwise have any access to, any underlying reference asset or assets.
FINAL TERMS
|
Issuer:
|
Morgan Stanley Finance LLC
|
Guarantor:
|
Morgan Stanley
|
Underlying index:
|
S&P 500
®
Index
|
Aggregate principal amount:
|
$7,019,000
|
Stated principal amount:
|
$1,000 per security
|
Issue price:
|
$1,000 per security
|
Pricing date:
|
October 21, 2016
|
Original issue date:
|
October 26, 2016 (3 business days after the pricing date)
|
Maturity date:
|
October 26, 2023
|
Contingent quarterly coupon:
|
·
If,
on any determination date, the index closing value on such date is
greater than or equal to
the coupon barrier level, we
will pay a contingent quarterly coupon at an annual rate of 6.00% (corresponding to approximately $15.00 per quarter per security)
on the related contingent coupon payment date.
·
If,
on any determination date, the index closing value on such date is
less than
the coupon barrier level, no contingent quarterly
coupon will be paid with respect to that determination date.
|
Payment at maturity:
|
·
If the final index value is
greater than or equal to
the downside threshold level:
|
the stated principal amount
and
, if the final index value is also greater than or equal to the coupon barrier level, the contingent quarterly coupon with respect to the final determination date
|
|
·
If the final index value is
less than
the downside threshold level:
|
(i) the stated principal amount
multiplied by
(ii) the index performance factor
|
Index performance factor:
|
The final index value
divided by
the initial index value.
|
Coupon barrier level:
|
1,605.87, which is equal to 75% of the initial index value
|
Downside threshold level:
|
1,327.519, which is equal to approximately 62% of the initial index value
|
Initial index value:
|
2,141.16, which is the index closing value of the underlying index on the pricing date
|
Final index value:
|
The index closing value of the underlying index on the final determination date
|
Determination dates:
|
Quarterly. See “Determination Dates and Contingent Coupon Payment Dates” below. The determination dates are subject to postponement due to non-index business days or certain market disruption events. See “Additional Information About the Securities—Additional Provisions—Postponement of determination dates” below.
|
Contingent coupon payment dates:
|
Quarterly. See “Determination Dates and Contingent Coupon Payment Dates” and “Additional Information about the Securities—Additional Provisions—Postponement of contingent coupon payment dates and maturity date” below.
|
CUSIP / ISIN:
|
61768CAX5 / US61768CAX56
|
Listing:
|
The securities will not be listed on any securities exchange.
|
Agent:
|
Morgan Stanley & Co. LLC (“MS & Co.”), an affiliate of MSFL and a wholly owned subsidiary of Morgan Stanley. See “Supplemental information regarding plan of distribution; conflicts of interest.”
|
Estimated value on the pricing date:
|
$940.90 per security. See “Investment Summary” beginning on page 3.
|
Commissions and issue price:
|
Price to public
|
Agent’s commissions and fees
|
Proceeds to us
(3)
|
Per security
|
$1,000
|
$30
(1)
|
|
|
|
$5
(2)
|
$965
|
Total
|
$7,019,000
|
$245,665
|
$6,773,335
|
|
(1)
|
Selected dealers, including Morgan Stanley Wealth
Management (an affiliate of the agent), and their financial advisors will collectively receive from the agent, MS & Co., a
fixed sales commission of $30 for each 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 prospectus supplement.
|
|
(2)
|
Reflects a structuring fee payable to Morgan Stanley Wealth Management by the agent or its affiliates of $5 for each security.
|
|
(3)
|
See “Use of proceeds and hedging” on page 22.
|
The 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 pricing supplement or the accompanying prospectus
supplement, index supplement and prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The securities are not deposits or savings accounts and are
not insured by the Federal Deposit Insurance Corporation or any other governmental agency or instrumentality, nor are they obligations
of, or guaranteed by, a bank.
You should read this pricing supplement together with the
related prospectus supplement, index supplement and prospectus, each of which can be accessed via the hyperlinks below. Please
also see “Additional Information About the Securities” at the end of this pricing supplement.
References to “we,” “us”
and “our” refer to Morgan Stanley or MSFL, or Morgan Stanley and MSFL collectively, as the context requires.
Prospectus
Supplement dated February 16, 2016
Index
Supplement dated February 29, 2016
Prospectus
dated February 16, 2016
Morgan Stanley Finance LLC
Contingent Income Securities due October 26, 2023
All Payments on the Securities Subject to the Coupon Barrier and Downside Threshold Features Linked to the S&P 500
®
Index
Principal at Risk Securities
Determination Dates and Contingent Coupon Payment Dates
Determination Dates
|
Contingent Coupon Payment Dates
|
1/23/2017
|
1/26/2017
|
4/21/2017
|
4/26/2017
|
7/21/2017
|
7/26/2017
|
10/23/2017
|
10/26/2017
|
1/22/2018
|
1/25/2018
|
4/23/2018
|
4/26/2018
|
7/23/2018
|
7/26/2018
|
10/22/2018
|
10/25/2018
|
1/22/2019
|
1/25/2019
|
4/22/2019
|
4/25/2019
|
7/22/2019
|
7/25/2019
|
10/21/2019
|
10/24/2019
|
1/21/2020
|
1/24/2020
|
4/21/2020
|
4/24/2020
|
7/21/2020
|
7/24/2020
|
10/21/2020
|
10/26/2020
|
1/21/2021
|
1/26/2021
|
4/21/2021
|
4/26/2021
|
7/21/2021
|
7/26/2021
|
10/21/2021
|
10/26/2021
|
1/21/2022
|
1/26/2022
|
4/21/2022
|
4/26/2022
|
7/21/2022
|
7/26/2022
|
10/21/2022
|
10/26/2022
|
1/23/2023
|
1/26/2023
|
4/21/2023
|
4/26/2023
|
7/21/2023
|
7/26/2023
|
10/23/2023 (final determination date)
|
10/26/2023 (maturity date)
|
Morgan Stanley Finance LLC
Contingent Income Securities due October 26, 2023
All Payments on the Securities Subject to the Coupon Barrier and Downside Threshold Features Linked to the S&P 500
®
Index
Principal at Risk Securities
Investment Summary
Contingent Income Securities
Principal at Risk Securities
The Contingent Income Securities due October 26, 2023, All Payments
on the Securities Subject to the Coupon Barrier and Downside Threshold Features Linked to the S&P 500
®
Index,
which we refer to as the securities, provide an opportunity for investors to earn a contingent quarterly coupon at an annual rate
of 6.00% (corresponding to approximately $15.00 per quarter per security) on the related contingent coupon payment dates but only
if the index closing value of the underlying index on the applicable quarterly determination date is greater than or equal to 75%
of the initial index value, which we refer to as the coupon barrier level. It is possible that the index closing value of the underlying
index could remain below the coupon barrier level for extended periods of time or even throughout the entire term of the securities
so that you may receive few or no contingent quarterly coupons during the entire 7-year term of the securities.
If the final index value is greater than or equal to 62% of the
initial index value, which we refer to as the downside threshold level, the payment at maturity will be the stated principal amount
and, if the final index value is also greater than or equal to the coupon barrier level, the contingent quarterly coupon with respect
to the final determination date. However, if the final index value is less than the downside threshold level, investors will be
fully exposed to the decline in the underlying index over the term of the securities on a 1-to-1 basis, and will receive an amount
of cash that is significantly less than the stated principal amount, in proportion to the decline in the underlying index. Under
this scenario, the value of any such payment will be less than 62% of the stated principal amount of the securities and could be
zero. Investors in the securities must be willing to accept the risk of losing their entire principal and also the risk of not
receiving any contingent quarterly coupons. In addition, investors will not participate in any appreciation of the underlying index.
Morgan Stanley Wealth Management clients may contact their local
Morgan Stanley branch office or our principal executive offices at 1585 Broadway, New York, New York 10036 (telephone number (212)
761-4000).
Morgan Stanley Finance LLC
Contingent Income Securities due October 26, 2023
All Payments on the Securities Subject to the Coupon Barrier and Downside Threshold Features Linked to the S&P 500
®
Index
Principal at Risk Securities
The original issue price of each security is $1,000. This price
includes costs associated with issuing, selling, structuring and hedging the securities, which are borne by you, and, consequently,
the estimated value of the securities on the pricing date is less than $1,000. We estimate that the value of each security on the
pricing date is $940.90.
What goes into the estimated value on the pricing date?
In valuing the securities on the pricing date, we take into account
that the securities comprise both a debt component and a performance-based component linked to the underlying index. The estimated
value of the securities is determined using our own pricing and valuation models, market inputs and assumptions relating to the
underlying index, instruments based on the underlying index, volatility and other factors including current and expected interest
rates, as well as an interest rate related to our secondary market credit spread, which is the implied interest rate at which our
conventional fixed rate debt trades in the secondary market.
What determines the economic terms of the securities?
In determining the economic terms of the securities, including
the contingent quarterly coupon rate, the coupon barrier level and the downside threshold level, we use an internal funding rate,
which is likely to be lower than our secondary market credit spreads and therefore advantageous to us. If the issuing, selling,
structuring and hedging costs borne by you were lower or if the internal funding rate were higher, one or more of the economic
terms of the securities would be more favorable to you.
What is the relationship between the estimated value on the
pricing date and the secondary market price of the securities?
The price at which MS & Co. purchases the securities in the
secondary market, absent changes in market conditions, including those related to the underlying index, may vary from, and be lower
than, the estimated value on the pricing date, because the secondary market price takes into account our secondary market credit
spread as well as the bid-offer spread that MS & Co. would charge in a secondary market transaction of this type and other
factors. However, because the costs associated with issuing, selling, structuring and hedging the securities are not fully deducted
upon issuance, for a period of up to 12 months following the issue date, to the extent that MS & Co. may buy or sell the securities
in the secondary market, absent changes in market conditions, including those related to the underlying index, and to our secondary
market credit spreads, it would do so based on values higher than the estimated value. We expect that those higher values will
also be reflected in your brokerage account statements.
MS & Co. may, but is not obligated to, make a market in the
securities and, if it once chooses to make a market, may cease doing so at any time.
Morgan Stanley Finance LLC
Contingent Income Securities due October 26, 2023
All Payments on the Securities Subject to the Coupon Barrier and Downside Threshold Features Linked to the S&P 500
®
Index
Principal at Risk Securities
Key Investment Rationale
The securities do not guarantee any repayment of principal at
maturity and offer investors an opportunity to earn a contingent quarterly coupon of 6.00% per annum of the stated principal amount
but only if
the index closing value on the applicable quarterly determination date is greater than or equal to 75% of the
initial index value, which we refer to as the coupon barrier level. The payment at maturity will vary depending on the final index
value, as follows:
Upside Scenario:
A contingent quarterly coupon is paid for some or all quarterly periods and you receive your principal back at maturity
|
This scenario assumes that the underlying index closes at or above the coupon barrier level on some or all of the quarterly determination dates, including the final determination date. In this scenario, investors receive the contingent quarterly coupon with respect to each such determination date. At maturity, because the underlying index closes at or above both the coupon barrier level and the downside threshold level, investors receive both the stated principal amount and the contingent quarterly coupon with respect to the final determination date. Investors will not participate in any appreciation in the value of the underlying index from the initial index value, and the return on the securities will be limited to the contingent quarterly coupons, if any, that are paid on the securities.
|
Downside Scenario:
No contingent quarterly coupon is paid during the term of the securities, or the contingent quarterly coupon is paid for only a limited number of quarterly periods, and your payment at maturity is exposed to the negative performance of the underlying index
|
This scenario assumes that the underlying index closes below the coupon barrier level on all or nearly all of the quarterly determination dates. In this scenario, investors do not receive any contingent quarterly coupons, or receive contingent quarterly coupons for only a limited number of contingent coupon payment dates. At maturity, the underlying index closes below both the coupon barrier level and the downside threshold level. Therefore, investors do not receive the contingent quarterly coupon for the last quarterly period and receive a payment at maturity that is less than 62% of the stated principal amount of the securities and could be zero.
|
S&P 500
®
Index Summary
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.
Information as of market close on October 21, 2016:
Bloomberg Ticker Symbol:
|
SPX
|
Current Index Value:
|
2,141.16
|
52 Weeks Ago:
|
2,018.94
|
52 Week High (on 8/15/2016):
|
2,190.15
|
52 Week Low (on 2/11/2016):
|
1,829.08
|
For additional information about the S&P 500
®
Index, see the information set forth under “S&P 500
®
Index” in the accompanying index supplement.
Furthermore, for additional historical information, see “S&P 500
®
Index Historical Performance”
below.
Morgan Stanley Finance LLC
Contingent Income Securities due October 26, 2023
All Payments on the Securities Subject to the Coupon Barrier and Downside Threshold Features Linked to the S&P 500
®
Index
Principal at Risk Securities
Risk Factors
The following is a non-exhaustive list of certain key risk
factors for investors in the securities. For further discussion of these and other risks, you should read the section entitled
“Risk Factors” in the accompanying index supplement and prospectus. You should also consult your investment, legal,
tax, accounting and other advisers in connection with your investment in the securities.
|
§
|
The securities do not guarantee the return of any principal.
The terms of the securities differ from those of ordinary debt securities in that the securities do not guarantee the payment of
regular interest or the return of any of the principal amount at maturity. Instead, if the final index value is less than the downside
threshold level, you will be fully exposed to the decline in the underlying index over the term of the securities on a 1-to-1 basis,
and you will receive for each security that you hold at maturity an amount of cash that is significantly less than the stated principal
amount, in proportion to the decline in the underlying index.
Under this scenario, the value of any such payment will be less
than 62% of the stated principal amount and could be zero.
|
|
§
|
You will not receive any contingent quarterly coupon for any quarterly period where the index closing value on the related
determination date is less than the coupon barrier level.
You will receive a contingent quarterly coupon with respect to a
quarterly period
only if
the index closing value on the related determination date is greater than or equal to the coupon
barrier level of 75% of the initial index value. If the index closing value remains below the coupon barrier level on each determination
date over the term of the securities, you will not receive any contingent quarterly coupons.
|
|
§
|
Investors will not participate in any appreciation in the value of the underlying index.
Investors will not participate
in any appreciation in the value of the underlying index from the initial index value, and the return on the securities will be
limited to the contingent quarterly coupons, if any, that are paid with respect to each determination date on which the index closing
value is greater than or equal to the coupon barrier level. It is possible that the index closing value could be below the coupon
barrier level on most or all of the determination dates so that you will receive few or no contingent quarterly coupons. If you
do not earn sufficient contingent quarterly coupons over the term of the securities, the overall return on the securities may be
less than the amount that would be paid on a conventional debt security of ours of comparable maturity.
|
|
§
|
The contingent quarterly coupon, if any, is paid on a quarterly basis and is based solely on the index closing value of
the underlying index on the specified determination dates.
Whether the contingent quarterly coupon will be paid with respect
to a determination date will be based on the index closing value on such date. As a result, you will not know whether you will
receive the contingent quarterly coupon until near the end of the relevant quarterly period. Moreover, because the contingent quarterly
coupon is based solely on the index closing value on a specific determination date, if such index closing value is less than the
coupon barrier level, you will not receive any contingent quarterly coupon with respect to such determination date, even if the
index closing value of the underlying index was higher on other days during the term of the securities.
|
|
§
|
The market price will be influenced by many unpredictable factors.
Several factors, many of which are beyond our control, will influence the value of the securities
in the secondary market and the price at which MS & Co. may be willing to purchase or sell the securities in the secondary
market. We expect that generally the level of interest rates available in the market and the value of the
underlying
index
on any day, including in relation to the coupon
barrier level and downside threshold level, will affect the value of the securities more than any other factors. Other factors
that may influence the value of the securities include:
|
|
o
|
the volatility (frequency and magnitude of changes in value) of the S&P 500
®
Index,
|
|
o
|
whether the index closing value of the S&P 500
®
Index is currently or has been below the coupon barrier
level or downside threshold level on any determination date,
|
|
o
|
geopolitical conditions and economic, financial, political, regulatory or judicial events that affect the component stocks
of the underlying index or securities markets generally and which may affect the value of the underlying index,
|
|
o
|
dividend rates on the securities underlying the S&P 500
®
Index,
|
|
o
|
the time remaining until the securities mature,
|
Morgan Stanley Finance LLC
Contingent Income Securities due October 26, 2023
All Payments on the Securities Subject to the Coupon Barrier and Downside Threshold Features Linked to the S&P 500
®
Index
Principal at Risk Securities
|
o
|
interest and yield rates in the market,
|
|
o
|
the availability of comparable instruments,
|
|
o
|
the composition of the S&P 500
®
Index and changes in the constituent stocks of such index, and
|
|
o
|
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 securities will be affected by the other factors described
above. Some or all of these factors will influence the price that you will receive if you sell your securities prior to maturity.
For example, you may have to sell your securities at a substantial discount from the stated principal amount of $1,000 per security
if the value of the S&P 500
®
Index at the time of sale is near or below the coupon barrier level, and especially
if it is near or below the downside threshold level, or if market interest rates rise.
You cannot predict the future performance
of the S&P 500
®
Index based on its historical performance. The value of the underlying index may decrease and
be below the coupon barrier level on each determination date so that you will receive no contingent quarterly coupons, and the
value of the underlying index may decrease and be below the downside threshold level on the final determination date so that you
will lose a significant portion or all of your investment. There can be no assurance that the index closing value of the underlying
index will be greater than or equal to the coupon barrier level on any determination date so that you will receive any contingent
quarterly coupon during the term of the securities, or that it will be greater than or equal to the downside threshold level on
the final determination date so that you do not suffer a significant loss on your initial investment in the securities. See “S&P
500
®
Index Historical Performance” below.
|
§
|
The securities are subject to our credit risk, and any actual or anticipated changes to our credit ratings or credit spreads
may adversely affect the market value of the securities.
You are dependent on our ability to pay all amounts due on the securities
on each contingent coupon payment date or at maturity, and therefore you are subject to our credit risk. If we default on our obligations
under the securities, your investment would be at risk and you could lose some or all of your investment. As a result, the market
value of the securities prior to maturity will be affected by changes in the market’s view of our creditworthiness. Any actual
or anticipated decline in our credit ratings or increase in the credit spreads charged by the market for taking our credit risk
is likely to adversely affect the market value of the securities.
|
|
§
|
As a finance subsidiary, MSFL has no independent operations and
will have no independent assets.
As a finance subsidiary, MSFL has no independent operations
beyond the issuance and administration of its securities and will have no independent assets available for distributions to holders
of MSFL securities if they make claims in respect of such securities in a bankruptcy, resolution or similar proceeding. Accordingly,
any recoveries by such holders will be limited to those available under the related guarantee by Morgan Stanley and that guarantee
will rank
pari passu
with all other unsecured, unsubordinated obligations of Morgan Stanley. Holders will have recourse
only to a single claim against Morgan Stanley and its assets under the guarantee. Holders of securities issued by MSFL should accordingly
assume that in any such proceedings they would not have any priority over and should be treated
pari passu
with the claims
of other unsecured, unsubordinated creditors of Morgan Stanley, including holders of Morgan Stanley-issued securities.
|
|
§
|
Not equivalent to investing in the underlying index.
Investing
in the securities is not equivalent to investing in the underlying index or its component stocks. Investors in the securities will
not have voting rights or rights to receive dividends or other distributions or any other rights with respect to stocks that constitute
the underlying index
, and investors will not participate in any appreciation of the underlying index over the term
of the securities
.
|
|
§
|
The securities will not be listed on any securities exchange and secondary trading may be limited
.
Accordingly, you should be willing to hold your securities for the entire 7-year term of the securities
.
The securities will not be listed on any securities exchange. Therefore, there may be little or no secondary market for the securities.
MS & Co. may, but is not obligated to, make a market in the securities and, if it once chooses to make a market, may cease
doing so at any time. When it does make a market, it will generally do so for transactions of routine secondary market size at
prices based on its estimate of the current value of the securities, taking into account its bid/offer spread, our credit spreads,
market volatility, the notional size of the proposed sale, the cost of unwinding any related hedging positions, the time remaining
to maturity and the likelihood that it will be able to resell the securities. Even if there is a secondary market, it may not provide
enough liquidity to allow you to trade or sell the securities easily. Since other broker-dealers may not participate significantly
in the secondary market for the securities, the price at which you may be able to trade your securities is likely to depend on
the price, if any, at which MS & Co. is willing to transact. If, at any time, MS & Co. were to cease making a market in
the
|
Morgan Stanley Finance LLC
Contingent Income Securities due October 26, 2023
All Payments on the Securities Subject to the Coupon Barrier and Downside Threshold Features Linked to the S&P 500
®
Index
Principal at Risk Securities
securities, it is likely that there
would be no secondary market for the securities. Accordingly, you should be willing to hold your securities to maturity.
|
§
|
The rate we are willing to pay for securities of this type, maturity and issuance size is likely to be lower than the rate
implied by our secondary market credit spreads and advantageous to us. Both the lower rate and the inclusion of costs associated
with issuing, selling, structuring and hedging the securities in the original issue price reduce the economic terms of the securities,
cause the estimated value of the securities to be less than the original issue price and will adversely affect secondary market
prices.
Assuming no change in market conditions or any other relevant factors, the prices, if any, at which dealers, including
MS & Co., may be willing to purchase the securities in secondary market transactions will likely be significantly lower than
the original issue price, because secondary market prices will exclude the issuing, selling, structuring and hedging-related costs
that are included in the original issue price and borne by you and because the secondary market prices will reflect our secondary
market credit spreads and the bid-offer spread that any dealer would charge in a secondary market transaction of this type as well
as other factors.
|
The inclusion of the costs of issuing,
selling, structuring and hedging the securities in the original issue price and the lower rate we are willing to pay as issuer
make the economic terms of the securities less favorable to you than they otherwise would be.
However, because the costs associated
with issuing, selling, structuring and hedging the securities are not fully deducted upon issuance, for a period of up to 12 months
following the issue date, to the extent that MS & Co. may buy or sell the securities in the secondary market, absent changes
in market conditions, including those related to the underlying index, and to our secondary market credit spreads, it would do
so based on values higher than the estimated value, and we expect that those higher values will also be reflected in your brokerage
account statements.
|
§
|
The estimated value of the securities is determined by reference to our pricing and valuation models, which may differ from
those of other dealers and is not a maximum or minimum secondary market price.
These pricing and valuation models are proprietary
and rely in part on subjective views of certain market inputs and certain assumptions about future events, which may prove to be
incorrect. As a result, because there is no market-standard way to value these types of securities, our models may yield a higher
estimated value of the securities than those generated by others, including other dealers in the market, if they attempted to value
the securities. In addition, the estimated value on the pricing date does not represent a minimum or maximum price at which dealers,
including MS & Co., would be willing to purchase your securities in the secondary market (if any exists) at any time. The value
of your securities at any time after the date of this document will vary based on many factors that cannot be predicted with accuracy,
including our creditworthiness and changes in market conditions. See also “The market price will be influenced by many unpredictable
factors” above.
|
|
§
|
Hedging and trading activity by our affiliates could potentially affect the value of the securities.
One or more of
our affiliates and/or third-party dealers have carried out, and will continue to carry out, hedging activities related to the securities
(and to other instruments linked to the underlying index or its component stocks), including trading in the stocks that constitute
the underlying index as well as in other instruments related to the underlying index. As a result, these entities may be unwinding
or adjusting hedge positions during the term of the securities, and the hedging strategy may involve greater and more frequent
dynamic adjustments to the hedge as the final determination date approaches. Some of our affiliates also trade the stocks that
constitute the underlying index and other financial instruments related to the underlying index on a regular basis as part of their
general broker-dealer and other businesses. Any of these hedging or trading activities on or prior to the pricing date could have
increased the initial index value and, therefore, could have increased (i) the coupon barrier level, which is the value at or above
which the underlying index must close on each determination date so that you receive a contingent quarterly coupon on the securities
and (ii) the downside threshold level, which is the value at or above which the underlying index must close on the final determination
date so that you are not exposed to the negative performance of the underlying index at maturity. Additionally, such hedging or
trading activities during the term of the securities could potentially affect the value of the underlying index on the determination
dates and accordingly, the payout to you at maturity, if any, and whether we pay a contingent quarterly coupon on the securities.
|
|
§
|
The calculation agent, which is a subsidiary of Morgan Stanley and an affiliate of MSFL, will make determinations with respect
to the securities.
As calculation agent, MS & Co. has determined the initial index value, the coupon barrier level and
the downside threshold level, and will determine the index closing value on each determination date, including the
|
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®
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final index value, whether the contingent
quarterly coupon will be paid on each contingent coupon payment date, whether a market disruption event has occurred, and the payment
that you will receive at maturity, if any. Moreover, certain determinations made by MS & Co., in its capacity as calculation
agent, may require it to exercise discretion and make subjective judgments, such as with respect to the occurrence or non-occurrence
of market disruption events and the selection of a successor index or calculation of the index closing value in the event of a
market disruption event or discontinuance of the underlying index. These potentially subjective determinations may affect the payout
to you at maturity, if any. For further information regarding these types of determinations, see “Additional Information
About the Securities—Additional Provisions—Calculation agent,” “—Market disruption event,”
“—Postponement of determination dates,” “—Discontinuance of the underlying index; alteration of method
of calculation” and “—Alternate exchange calculation in case of an event of default,” below. In addition,
MS & Co. has determined the estimated value of the securities on the pricing date.
|
§
|
Adjustments to the underlying index could adversely affect the value of the securities.
The publisher of the underlying
index may add, delete or substitute the component stocks of the underlying index or make other methodological changes that could
change the value of the underlying index. Any of these actions could adversely affect the value of the securities. The publisher
of the underlying index may also discontinue or suspend calculation or publication of the underlying index at any time. In these
circumstances, MS & Co., as the calculation agent, will have the sole discretion to substitute a successor index that is comparable
to the discontinued index. MS & Co. could have an economic interest that is different than that of investors in the securities
insofar as, for example, MS & Co. is permitted to consider indices that are calculated and published by MS & Co. or any
of its affiliates. If MS & Co. determines that there is no appropriate successor index on any determination date, the determination
of whether the contingent quarterly coupon will be payable on the securities on the applicable contingent coupon payment date or
the determination of the payment at maturity, as applicable, will be based on whether the value of the underlying index based on
the closing prices of the stocks constituting the underlying index at the time of such discontinuance, without rebalancing or substitution,
computed by MS & Co. as calculation agent in accordance with the formula for calculating the underlying index last in effect
prior to such discontinuance, is less than the coupon barrier level or downside threshold level, as applicable.
|
|
§
|
The U.S. federal income tax consequences of an investment in the securities are uncertain.
There is no direct legal
authority as to the proper treatment of the securities for U.S. federal income tax purposes, and, therefore, significant aspects
of the tax treatment of the securities are uncertain.
|
Please read the discussion under
“Additional Provisions—Tax considerations” in this document concerning the U.S. federal income tax consequences
of an investment in the securities. We intend to treat a security for U.S. federal income tax purposes as a single financial contract
that provides for a coupon that will be treated as gross income to you at the time received or accrued, in accordance with your
regular method of tax accounting. Under this treatment, the ordinary income treatment of the coupon payments, in conjunction with
the capital loss treatment of any loss recognized upon the sale, exchange or settlement of the securities, could result in adverse
tax consequences to holders of the securities because the deductibility of capital losses is subject to limitations. We do not
plan to request a ruling from the Internal Revenue Service (the “IRS”) regarding the tax treatment of the securities,
and the IRS or a court may not agree with the tax treatment described herein. If the IRS were successful in asserting an alternative
treatment for the securities, the timing and character of income or loss on the securities might differ significantly from the
tax treatment described herein. For example, under one possible treatment, the IRS could seek to recharacterize the securities
as debt instruments. In that event, U.S. Holders would be required to accrue into income original issue discount on the securities
every year at a “comparable yield” determined at the time of issuance (as adjusted based on the difference, if any,
between the actual and the projected amount of any contingent payments on the securities) and recognize all income and gain in
respect of the securities as ordinary income. The risk that financial instruments providing for buffers, triggers or similar downside
protection features, such as the securities, would be recharacterized as debt is greater than the risk of recharacterization for
comparable financial instruments that do not have such features.
Non-U.S. Holders should note that we currently intend to withhold
on any coupon paid to Non-U.S. Holders generally at a rate of 30%, or at a reduced rate specified by an applicable income tax treaty
under an “other income” or similar provision, and will not be required to pay any additional amounts with respect to
amounts withheld.
In 2007, the U.S. Treasury Department and the IRS released a notice requesting comments on the U.S. federal income tax treatment
of “prepaid forward contracts” and similar instruments. While it is not clear whether the securities would be viewed
as similar to the prepaid forward contracts described in the notice, it is possible that any Treasury regulations or other guidance
issued after consideration of these issues could materially and adversely affect the tax consequences of an investment in the securities,
possibly with retroactive effect. The notice focuses on a number of issues, the most relevant of
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which for holders of the securities
are the character and timing of income or loss and the degree, if any, to which income realized by non-U.S. investors should be
subject to withholding tax. Both U.S. and Non-U.S. Holders (as defined below) should consult their tax advisers regarding the U.S.
federal income tax consequences of an investment in the securities, including possible alternative treatments, the issues presented
by this notice and any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction.
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Hypothetical Examples
The following hypothetical examples are for illustrative purposes
only. Whether you receive a contingent quarterly coupon will be determined on each quarterly determination date, and the payment
at maturity, if any, will be determined on the final determination date. The actual initial index value, coupon barrier level and
downside threshold level are set forth on the cover page of this document. Any payment on the securities is subject to our credit
risk. The numbers in the hypothetical examples may be rounded for ease of analysis. The below examples are based on the following
terms:
Hypothetical Initial Index Value:
|
2,000
|
Hypothetical Coupon Barrier Level:
|
1,500, which is 75% of the hypothetical initial index value
|
Hypothetical Downside Threshold Level:
|
1,240, which is 62% of the hypothetical initial index value
|
Contingent Quarterly Coupon:
|
6.00% per annum (corresponding to $15.00 per quarter per security)*
|
Stated Principal Amount:
|
$1,000 per security
|
Total Number of Determination Dates:
|
28
|
* The actual contingent quarterly coupon will be an amount
determined by the calculation agent based on the number of days in the applicable payment period, calculated on a 30/360 basis.
The hypothetical contingent quarterly coupon of $15.00 is used in these examples for ease of analysis.
Example 1.
On 3 determination dates
prior to the final determination date, the index closing value is greater than or equal to the coupon barrier level of 1,500, and
the index closing value on each other determination date prior to the final determination date is less than the coupon barrier
level of 1,500. Therefore, you would receive the contingent quarterly coupon of $15.00 with respect to those 3 determination dates,
totaling $15.00 x 3 = $45.00. With respect to the remaining 25 determination dates, you would receive no contingent quarterly coupon.
On the final determination date, the index closing value is 800, which is less than both the coupon barrier level of 1,500 and
the downside threshold level of 1,240. As the final index value is less than the coupon barrier level, you would not receive the
final contingent quarterly coupon. Also, as the final index value is less than the downside threshold level, you would receive
a payment at maturity equal to the product of the stated principal amount and the index performance factor, calculated as follows:
stated principal amount
x (final index value / initial index value) = $1,000 x (800 / 2,000) = $400.00
The total payment over the 7-year term of the
securities is $45.00 + $400.00 = $445.00 per security, representing a substantial loss on your initial investment.
Example 2.
On 20 determination dates
prior to the final determination date, the index closing value is greater than or equal to the coupon barrier level of 1,500, and
the index closing value on each other determination date prior to the final determination date is less than the coupon barrier
level of 1,500. Therefore, you would receive the contingent quarterly coupon of $15.00 with respect to those 20 determination dates,
totaling $15.00 x 20 = $300. With respect to the remaining 7 determination dates before the final determination date, you would
receive no contingent quarterly coupon. On the final determination date, the index closing value is 1,800, which is greater than
both the coupon barrier level of 1,500 and the downside threshold level of 1,240. As the final index value is greater than or equal
to both the coupon barrier level and the downside threshold level, you would receive the stated principal amount plus a contingent
quarterly coupon with respect to the final determination date, calculated as follows:
stated principal
amount + contingent quarterly coupon = $1,000 + $15.00 = $1,015.00
The total payment over the 7-year term of the
securities is $300 + $1,015.00 = $1,315.00 per security.
Example 3.
On 20 determination dates
prior to the final determination date, the index closing value is greater than or equal to the coupon barrier level of 1,500, and
the index closing value on each other determination date prior to the final determination date is less than the coupon barrier
level of 1,500. Therefore, you would receive the contingent quarterly coupon of $15.00 with respect to those 20 determination dates,
totaling $15.00 x 20 = $300. With respect to the remaining 7 determination dates before the final determination date, you would
receive no contingent quarterly coupon. On the final determination date, the index closing value is 1,300, which is less than the
coupon barrier level of 1,500 but greater than the downside threshold level of 1,240. As the final index value is less than the
coupon barrier level, you would not receive a contingent quarterly coupon with respect to the final determination date. As the
final index value is greater than or equal to the downside threshold level, you would receive the stated principal amount of $1,000
at maturity.
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The total payment over the 7-year term of the
securities is $300 + $1,000 = $1,300.00 per security.
Example 4.
On each determination date
prior to the final determination date, the index closing value is greater than or equal to the coupon barrier level of 1,500. Therefore,
you would receive the contingent quarterly coupon of $15.00 with respect to each such determination date, totaling $15.00 x 27
= $405.00. On the final determination date, the index closing value is 3,000, which is greater than both the coupon barrier level
of 1,500 and the downside threshold level of 1,240. As the final index value is greater than or equal to the coupon barrier level
and the downside threshold level, you would receive the stated principal amount plus a contingent quarterly coupon with respect
to the final determination date, calculated as follows:
stated principal
amount + contingent quarterly coupon = $1,000 + $15.00 = $1,015.00
The total payment over the 7-year term of the
securities is $405.00 + $1,015.00 = $1,420 per security.
This example represents the maximum amount
payable over the 7-year term of the securities, and illustrates that although the level of the underlying index has appreciated
significantly, the investor’s return is limited to the contingent quarterly coupons, without any participation in the appreciation
of the underlying index.
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S&P 500
®
Index Historical
Performance
The following graph sets forth
the daily closing values of the underlying index for the period from January 1, 2011 through October 21, 2016. The related table
sets forth the published high and low closing values, as well as end-of-quarter closing values, of the underlying index for each
quarter in the same period. The closing value of the underlying index on October 21, 2016 was 2,141.16. We obtained the information
in the table below from Bloomberg Financial Markets, without independent verification. The historical values of the underlying
index should not be taken as an indication of future performance, and no assurance can be given as to the closing value of the
underlying index on any determination date.
Underlying Index Daily
Closing Values
January 1, 2011 to October
21, 2016
|
|
* The black dashed line in the graph indicates the coupon barrier level of 1,605.87, which is 75% of the initial index value, and the red solid line indicates the downside threshold level of 1,327.519, which is approximately 62% of the initial index value.
|
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S&P 500
®
Index
|
High
|
Low
|
Period End
|
2011
|
|
|
|
First Quarter
|
1,343.01
|
1,256.88
|
1,325.83
|
Second Quarter
|
1,363.61
|
1,265.42
|
1,320.64
|
Third Quarter
|
1,353.22
|
1,119.46
|
1,131.42
|
Fourth Quarter
|
1,285.09
|
1,099.23
|
1,257.60
|
2012
|
|
|
|
First Quarter
|
1,416.51
|
1,277.06
|
1,408.47
|
Second Quarter
|
1,419.04
|
1,278.04
|
1,362.16
|
Third Quarter
|
1,465.77
|
1,334.76
|
1,440.67
|
Fourth Quarter
|
1,461.40
|
1,353.33
|
1,426.19
|
2013
|
|
|
|
First Quarter
|
1,569.19
|
1,457.15
|
1,569.19
|
Second Quarter
|
1,669.16
|
1,541.61
|
1,606.28
|
Third Quarter
|
1,725.52
|
1,614.08
|
1,681.55
|
Fourth Quarter
|
1,848.36
|
1,655.45
|
1,848.36
|
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 (through October 21, 2016)
|
2,163.66
|
2,126.50
|
2,141.16
|
License Agreement between Morgan Stanley and Standard &
Poor’s Financial Services LLC
“Standard & Poor’s
®
,” “S&P
®
,”
“S&P 500
®
,” “Standard & Poor’s 500” and “500” are trademarks of
Standard and Poor’s Financial Services LLC and have been licensed for use by S&P Dow Jones Indices LLC and Morgan Stanley.
See “S&P 500
®
Index” in the accompanying index supplement.
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