Morgan Stanley Issues Contingent Income Auto-Callable Securities Linked to Space Exploration Technologies Stock

Structure and Payment Mechanics of the Structured Notes

The securities represent an unconditional guarantee from Morgan Stanley for obligations issued by Morgan Stanley Finance LLC. Investors purchasing these notes at the issue price of $1,000 per security are entering into a principal-at-risk investment with contingent income features. The estimated value on the pricing date was approximately $951.30 per security, indicating an embedded cost of approximately $48.70 per security reflecting the value of embedded derivatives and issuer credit spread.

The investment structure incorporates memory features for coupon payments, meaning that if contingent coupons are not paid on scheduled coupon payment dates, those unpaid amounts may be recovered on subsequent coupon payment dates if market conditions permit. The coupon barrier level is set at 55% of the initial level of the underlying Space Exploration Technologies Corp. stock, meaning investors receive no coupon payment on any observation date where the stock closes below this threshold. The disclosure states that unpaid contingent coupons will be paid on the first subsequent coupon payment date when the closing level meets or exceeds the barrier level, provided no additional interest accrues on previously unpaid amounts beyond their original interest period.

Contingent Coupon Payment Terms and Observation Schedule

The securities will pay a contingent coupon at an annual rate of 25.00% on each coupon payment date, but only if the closing level of the underlying Space Exploration Technologies Corp. stock is greater than or equal to the coupon barrier level on the related observation date. This contingent structure means that investors face the risk of receiving no coupon payments for extended periods if the underlying stock performance remains weak relative to the 55% barrier level. The filing does not disclose the specific coupon payment dates in full detail within the excerpted content, referencing instead an "Observation Dates and Coupon Payment Dates" section that would appear in accompanying documentation.

If any coupon payment date is not a business day, the coupon payment, if any, will be made on the next succeeding business day without adjustment to the coupon amount itself. Critically, the disclosure states that investors will not receive payment for any unpaid contingent coupons if the closing level of the underlier remains below the coupon barrier level on each subsequent observation date through the final observation date of July 31, 2029. This creates the possibility that investors could receive zero coupon payments over the entire three-year investment horizon despite holding the securities until maturity.

Automatic Early Redemption Conditions and Call Thresholds

The securities are not subject to automatic early redemption until the first redemption determination date of October 30, 2026. If on any redemption determination date the closing level of the underlying stock is greater than or equal to the call threshold level, the securities will be automatically redeemed on the related early redemption date for an early redemption payment equal to the stated principal amount plus the contingent coupon with respect to the related interest period and any previously unpaid contingent coupons. The call threshold level is established at 100% of the initial level, meaning the securities will be called if the Space Exploration Technologies Corp. stock returns to its initial pricing level.

Following the initial October 30, 2026 redemption determination date, subsequent redemption determination dates are scheduled for January 29, 2027, April 30, 2027, July 30, 2027, October 29, 2027, January 31, 2028, April 28, 2028, July 31, 2028, October 31, 2028, January 31, 2029, and April 30, 2029. If the securities are automatically redeemed on any of these dates, no further payments will be made to investors. The early redemption dates corresponding to these determination dates range from November 4, 2026 through May 3, 2029. This frequent check schedule—occurring approximately quarterly—provides multiple opportunities for early redemption if the underlying stock appreciates to its initial level.

Maturity Outcomes and Principal Loss Mechanics

If the securities have not been automatically redeemed prior to maturity and the final level of the underlying stock is greater than or equal to the downside threshold level on the final observation date of July 31, 2029, investors will receive the stated principal amount at maturity in addition to the contingent coupon with respect to the final observation date and any previously unpaid contingent coupons, if payable. However, if the final level is less than the downside threshold level, investors will suffer losses calculated at 1% for every 1% decline in the level of the underlier over the term of the securities.

Under these adverse scenarios, the payment at maturity will be significantly less than the stated principal amount and could be zero. The disclosure explicitly states that "you will not participate in any appreciation of the underlier," emphasizing that the maximum gain is capped at the contingent coupon payments plus full principal recovery if the securities reach the call threshold or if held to maturity above the downside threshold. The filing further emphasizes that "investors in the securities must be willing to accept the risk of losing their entire initial investment," acknowledging the substantial downside exposure inherent in the structure.

Credit Risk and Guarantee Structure

All payments on the securities are subject to the credit risk of Morgan Stanley Finance LLC and its guarantor, Morgan Stanley. The filing discloses that if Morgan Stanley defaults on its obligations, investors could lose some or all of their investment. The securities are not secured obligations, and investors will not have any security interest in or access to any underlying reference asset or assets. This distinction is critical: investors bear both the market risk of the Space Exploration Technologies Corp. stock performance and the credit risk of the Morgan Stanley guarantee.

The guarantee by Morgan Stanley is stated to be "full and unconditional," but remains contingent on Morgan Stanley's continued financial viability and ability to satisfy its obligations. The unsecured nature of these obligations means they rank equal to other unsecured, unsubordinated indebtedness of Morgan Stanley and would be subject to Morgan Stanley's creditor hierarchy in any insolvency scenario. Investors receive no collateral backing or segregated assets supporting their claims.

Pricing, Distribution, and Agent Commissions

The securities are priced to the public at $1,000 per security, with selected dealers and their financial advisors collectively receiving from the agent, Morgan Stanley & Co. LLC, a fixed sales commission of $20 for each security sold. This results in net proceeds to Morgan Stanley Finance LLC of $980 per security. The estimated value on the pricing date of approximately $951.30 per security indicates that the fair value was approximately $48.70 below the $1,000 issue price, representing the time value of embedded options and the credit spread embedded in the security.

Morgan Stanley & Co. LLC serves as both the agent for the offering and a wholly owned subsidiary of Morgan Stanley, creating structural conflicts of interest as disclosed in the filing. The offering is registered under registration statement numbers 333-293641 and 333-293641-01, filed pursuant to Rule 424(b)(2) under the Securities Act of 1933. The disclosure notes that selected dealers will collectively receive commissions, suggesting that the offering was distributed through a network of dealers rather than solely by Morgan Stanley & Co. LLC itself.

Risk Factors and Principal-at-Risk Characteristics

The securities involve risks not associated with an investment in ordinary debt securities, as emphasized in the filing's risk factors section referenced on page 8 of the full document. These securities do not guarantee repayment of principal and do not provide for regular payment of interest in the manner of conventional bonds. Instead, coupon payments are contingent on specific market conditions, and principal repayment at maturity is contingent on the final level of the underlying stock remaining above the downside threshold level.

The filing explicitly states that "the securities are for investors who seek an opportunity to earn interest at a potentially above-market rate in exchange for the risk of losing a significant portion or all of their principal and the risk of receiving no coupons over the entire term of the securities." The 25.00% annual contingent coupon represents above-market interest rates available at the time of issuance but comes with substantial downside exposure. The securities are further not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency, eliminating traditional deposit protection.

Underlying Asset and Strike/Pricing Date Details

The underlying asset for these securities is the Class A common stock of Space Exploration Technologies Corp. The strike date and pricing date for the securities are both July 31, 2026, establishing the reference levels from which performance is measured. The original issue date is August 7, 2026, representing the settlement date when investors receive their securities. The final observation date is July 31, 2029, subject to postponement for non-trading days and certain market disruption events, creating a three-year investment horizon from pricing to final maturity.

The filing does not disclose the specific initial level of the Space Exploration Technologies Corp. stock on the strike date, referring instead to percentage levels (100% of initial level, 55% of initial level) without stating the actual dollar amount. Investors relying on this preliminary pricing supplement would need to reference accompanying product supplement and prospectus documents to determine the exact initial level and calculate specific dollar thresholds for call levels, coupon barriers, and downside thresholds. The conditional nature of early redemption, contingent coupon payments, and final maturity payments all depend on specific percentage levels of this unstated initial stock price.

Regulatory Status and Investor Considerations

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, nor have they determined whether the offering document or accompanying prospectus is truthful or complete. The regulatory filing notes that any representation to the contrary would constitute a criminal offense. This preliminary pricing supplement, filed pursuant to Rule 424(b)(2), represents preliminary offering documentation subject to finalization and is not yet a final offering document.

Investors are instructed to read the preliminary pricing supplement together with the related product supplement dated April 8, 2026, tax supplement dated April 8, 2026, and prospectus dated April 8, 2026, which can be accessed via hyperlinks referenced in the filing. The disclosure states that additional terms and information appear in "Additional Terms of the Securities" and "Additional Information About the Securities" sections at the end of the full document. These layered documents collectively describe the complete terms, conditions, and risk factors associated with the securities. The structure of this tiered disclosure approach—preliminary pricing supplement, product supplement, tax supplement, and prospectus—reflects the complexity of the structured investment product and the need for investors to review comprehensive documentation before making investment decisions.