Key Terms
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Issuer:
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JPMorgan Chase Financial Company LLC
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Guarantor:
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JPMorgan Chase & Co.
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Index:
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The S&P GSCI
®
Crude Oil Index Excess Return (Bloomberg ticker: SPGCCLP)
|
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Interest Rate:
|
8.00% per annum, payable at a rate of 0.66667% per month
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Automatic Call:
|
If the closing level of the Index on any Review Date (other than the final Review Date) is
greater than or equal to
the Initial Index Level, the notes will be automatically called for a cash payment, for each $1,000 principal amount note, equal to (a) $1,000
plus
(b) any accrued and unpaid interest, payable on the applicable Call Settlement Date.
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Payment at Maturity:
|
If the notes have not been automatically called and a Trigger Event has
not
occurred, you will receive a cash payment at maturity, for each $1,000 principal amount note, equal to (a) $1,000
plus
(b) any accrued and unpaid interest.
|
|
If the notes have not been automatically called and a Trigger
Event
has
occurred, at maturity you will lose 1% of the principal amount of your notes for every 1% that the Ending
Index Level is less than the Initial Index Level. Under these circumstances, your payment at maturity per $1,000 principal amount
note, in addition to any accrued and unpaid interest, will be calculated as follows:
$1,000 + ($1,000 × Index Return)
If the notes have not been automatically called and
a Trigger Event has occurred, you will lose more than 40% of your principal amount at maturity and could lose up to the entire
principal amount of your notes at maturity.
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Trigger Event:
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A Trigger Event occurs if the Ending Index Level is less than the Trigger Level.
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Trigger Level:
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An amount that represents 60% of the Initial Index Level
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Index Return:
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Ending Index Level – Initial Index Level
Initial Index Level
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Initial Index Level:
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The closing level of the Index on the Pricing Date
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Ending Index Level:
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The closing level of the Index on the final Review Date
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Pricing Date:
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On or about August 24, 2016
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Original Issue Date:
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On or about August 29, 2016 (Settlement Date)
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Review Dates
†
:
|
August 17, 2017, September 15, 2017, October 17, 2017, November 15, 2017, December 14, 2017, January 17, 2018, February 14, 2018, March 15, 2018, April 17, 2018, May 17, 2018, June 15, 2018, July 17, 2018, August 16, 2018, September 17, 2018, October 17, 2018, November 14, 2018, December 14, 2018, January 16, 2019 and February 14, 2019
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Interest Payment Dates
†
:
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September 20, 2016, October 20, 2016, November 21, 2016, December 20, 2016, January 20, 2017, February 21, 2017, March 21, 2017, April 20, 2017, May 22, 2017, June 20, 2017, July 20, 2017, August 22, 2017, September 20, 2017, October 20, 2017, November 20, 2017, December 19, 2017, January 22, 2018, February 20, 2018, March 20, 2018, April 20, 2018, May 22, 2018, June 20, 2018, July 20, 2018, August 21, 2018, September 20, 2018, October 22, 2018, November 19, 2018, December 19, 2018, January 22, 2019 and the Maturity Date
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Call Settlement Date
†
:
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If the notes are automatically called on any Review Date (other than the Review Date), the first Interest Payment Date immediately following that Review Date
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Maturity Date
†
:
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February 20, 2019
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CUSIP:
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46646EVZ2
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†
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Subject to postponement in the event of certain market
disruption events and as described under “General Terms of Notes — Postponement of a Determination Date — Notes
Linked to a Single Underlying — Notes Linked to a Single Index” and “General Terms of Notes — Postponement
of a Payment Date” in the accompanying product supplement or early acceleration in the event of a commodity hedging disruption
event as described under “General Terms of Notes — Consequences of a Commodity Hedging Disruption Event — Acceleration
of the Notes” in the accompanying product supplement and in “Selected Risk Considerations — We May Accelerate
Your Notes If a Commodity Hedging Disruption Event Occurs” in this pricing supplement
|
Investing in the notes involves a number of risks.
See “Risk Factors” beginning on page PS-9 of the accompanying product supplement, “Risk Factors” beginning
on page US-2 of the accompanying underlying supplement and “Selected Risk Considerations” beginning on page PS-3 of
this pricing supplement.
Neither the Securities and Exchange Commission (the “SEC”)
nor any state securities commission has approved or disapproved of the notes or passed upon the accuracy or the adequacy of this
pricing supplement or the accompanying product supplement, underlying supplement, prospectus supplement and prospectus. Any representation
to the contrary is a criminal offense.
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Price to Public (1)
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Fees and Commissions (2)
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Proceeds to Issuer
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Per note
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$1,000
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$
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$
|
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Total
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$
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$
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$
|
|
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(1)
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See “Supplemental Use of Proceeds” in this pricing supplement for information about the components of the price
to public of the notes.
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(2)
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J.P. Morgan Securities LLC, which we refer to as JPMS, acting as agent for JPMorgan Financial, will pay all of the selling
commissions it receives from us to other affiliated or unaffiliated dealers. In no event will these selling commissions exceed
$6.50 per $1,000 principal amount note. See “Plan of Distribution (Conflicts of Interest)” in the accompanying product
supplement.
|
If the notes priced
today, the estimated value of the notes would be approximately $965.20 per $1,000 principal amount note. The estimated value of
the notes, when the terms of the notes are set, will be provided in the pricing supplement and will not be less than $950.00 per
$1,000 principal amount note.
See “The Estimated Value of the Notes” in this pricing supplement for additional
information.
The notes are not bank deposits, are not insured by the Federal
Deposit Insurance Corporation or any other governmental agency and are not obligations of, or guaranteed by, a bank.
August , 2016
Additional
Terms Specific to the Notes
You may revoke your offer to purchase the notes
at any time prior to the time at which we accept such offer by notifying the applicable agent. We reserve the right to change the
terms of, or reject any offer to purchase, the notes prior to their issuance. In the event of any changes to the terms of the notes,
we will notify you and you will be asked to accept such changes in connection with your purchase. You may also choose to reject
such changes, in which case we may reject your offer to purchase.
You should read this pricing supplement together with
the accompanying prospectus, as supplemented by the accompanying prospectus supplement, relating to our Series A medium-term notes
of which these notes are a part, and the more detailed information contained in the accompanying product supplement and the accompanying
underlying supplement.
This pricing supplement, together with the documents listed below, contains the terms of the notes and
supersedes all other prior or contemporaneous oral statements as well as any other written materials including preliminary or indicative
pricing terms, correspondence, trade ideas, structures for implementation, sample structures, fact sheets, brochures or other educational
materials of ours.
You should carefully consider, among other things, the matters set forth in the “Risk Factors”
sections of the accompanying product supplement and the accompanying underlying supplement, as the notes involve risks not associated
with conventional debt securities. We urge you to consult your investment, legal, tax, accounting and other advisers before you
invest in the notes.
You may access these documents on the SEC website at
www.sec.gov as follows (or if such address has changed, by reviewing our filings for the relevant date on the SEC website):
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|
·
|
Product
supplement no. 2-I dated April 15, 2016:
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http://www.sec.gov/Archives/edgar/data/19617/000095010316012640/crt-dp64829_424b2.pdf
|
|
·
|
Underlying
supplement no. 1-I dated April 15, 2016:
|
http://www.sec.gov/Archives/edgar/data/19617/000095010316012649/crt-dp64909_424b2.pdf
|
|
·
|
Prospectus
supplement and prospectus, each dated April 15, 2016:
|
http://www.sec.gov/Archives/edgar/data/19617/000095010316012636/crt_dp64952-424b2.pdf
Our Central Index Key, or CIK, on the SEC website is 1665650,
and JPMorgan Chase & Co.’s CIK is 19617. As used in this pricing supplement, “we,” “us” and “our”
refer to JPMorgan Financial.
Supplemental Terms of the Notes
For purposes of the notes offered by this pricing supplement,
the consequences of a commodity hedging disruption event are described under “General Terms of Notes — Consequences
of a Commodity Hedging Disruption Event — Acceleration of the Notes” in the accompanying product supplement.
The notes are not commodity futures contracts or swaps
and are not regulated under the Commodity Exchange Act of 1936, as amended (the “Commodity Exchange Act”).
The
notes are offered pursuant to an exemption from regulation under the Commodity Exchange Act, commonly known as the hybrid instrument
exemption, that is available to securities that have one or more payments indexed to the value, level or rate of one or more commodities,
as set out in section 2(f) of that statute. Accordingly, you are not afforded any protection provided by the Commodity Exchange
Act or any regulation promulgated by the Commodity Futures Trading Commission.
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JPMorgan Structured Investments —
|
PS-
1
|
|
Auto Callable Yield Notes Linked to the S&P GSCI
®
Crude Oil Index Excess Return
|
|
Selected Purchase Considerations
|
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·
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THE NOTES OFFER A HIGHER INTEREST RATE THAN THE YIELD ON DEBT SECURITIES
OF COMPARABLE MATURITY ISSUED BY US
— The notes will pay interest at the Interest Rate specified on the cover of this
pricing supplement, which is higher than the yield currently available on debt securities of comparable maturity issued by us.
Because the notes are our unsecured and unsubordinated obligations, the payment of which is fully and unconditionally guaranteed
by JPMorgan Chase & Co., payment of any amount on the notes is subject to our ability to pay our obligations as they become
due and JPMorgan Chase & Co.’s ability to pay its obligations as they become due.
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·
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INTEREST PAYMENTS
— The notes
offer monthly interest payments as specified on the cover of this pricing supplement. Interest will be payable to the holders of
record at the close of business on the business day immediately preceding the applicable Interest Payment Date. If an Interest
Payment Date is not a business day, payment will be made on the next business day immediately following such day, but no additional
interest will accrue as a result of the delayed payment.
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·
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POTENTIAL EARLY EXIT AS A RESULT OF THE AUTOMATIC CALL FEATURE
— If the closing level of the Index on any Review Date (other than the Review Date) is greater than or equal to the Initial
Index Level, your notes will be automatically called prior to the Maturity Date. Under these circumstances, you will receive a
cash payment, for each $1,000 principal amount note, equal to (a) $1,000
plus
(b) any accrued and unpaid interest, payable
on the applicable Call Settlement Date. Even in cases where the notes are called before maturity, you are not entitled to any fees
and commissions described on the front cover of this pricing supplement.
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·
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THE NOTES DO NOT GUARANTEE THE RETURN OF YOUR PRINCIPAL IF THE NOTES
HAVE NOT BEEN AUTOMATICALLY CALLED
— If the notes have not been automatically called, we will pay you your principal
back at maturity only if a Trigger Event has not occurred.
However, if the notes have not been automatically called and a Trigger
Event has occurred, you will lose more than 40% of your principal amount at maturity and could lose up to the entire principal
amount of your notes at maturity.
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|
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·
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RETURN LINKED TO THE
S&P
GSCI
TM
Crude Oil Index Excess Return —
The return on the notes is linked to the S&P GSCI
®
Crude Oil Index Excess Return, a sub-index of the S&P GSCI
®
, a composite index of commodity sector returns,
calculated, maintained and published daily by S&P Dow Jones Indices LLC. The S&P GSCI
®
is a world production-weighted
index that is designed to reflect the relative significance of principal non-financial commodities (
i.e.
, physical commodities)
in the world economy. The S&P GSCI
®
represents the return of a portfolio of the futures contracts for the underlying
commodities. The S&P GSCI
®
Crude Oil Index Excess Return references the front-month West Texas Intermediate
(“WTI”) crude oil futures contract (
i.e.
, the WTI crude futures contract generally closest to expiration) traded
on the New York Mercantile Exchange (the “NYMEX”). The S&P GSCI
®
Crude Oil Index Excess Return provides
investors with a publicly available benchmark for investment performance in the crude oil commodity markets. The S&P GSCI
®
Crude Oil Index Excess Return is an excess return index and not a total return index. An excess return index reflects the returns
that are potentially available through an unleveraged investment in the contracts composing the index (which, in the case of the
Index, are the designated crude oil futures contracts). By contrast, a “total return” index, in addition to reflecting
those returns, also reflects interest that could be earned on funds committed to the trading of the underlying futures contracts.
See “Commodity Index Descriptions — The S&P GSCI
®
Indices” in the accompanying underlying supplement.
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·
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TAX TREATMENT
— In determining our reporting responsibilities,
we intend to treat the notes as (i) a Put Option written by you that is terminated if an Automatic Call occurs and that, if not
terminated, in circumstances where the payment due at maturity is less than $1,000 (excluding accrued but unpaid interest), requires
you to pay us an amount equal to $1,000 multiplied by the absolute value of the Index Return and (ii) a Deposit, which is an advance
of $1,000 per $1,000 principal amount note to secure your potential obligation under the Put Option for U.S. federal income tax
purposes, as described in the section entitled “Material U.S. Federal Income Tax Consequences” in this pricing supplement.
However, due to the lack of controlling authority there remain significant uncertainties regarding the tax consequences of owning
and disposing of the notes. You should review carefully the section entitled “Material U.S. Federal Income Tax Consequences”
in this pricing supplement and consult your tax adviser regarding the U.S. federal income tax consequences of an investment in
the notes.
|
|
JPMorgan Structured Investments —
|
PS-
2
|
|
Auto Callable Yield Notes Linked to the S&P GSCI
®
Crude Oil Index Excess Return
|
|
Selected Risk Considerations
An investment in the notes involves significant
risks. Investing in the notes is not equivalent to investing directly in the Index, any of the futures contracts underlying the
Index, the commodity to which those commodity futures contracts relate or any futures contracts or exchange-traded or over-the-counter
instruments based on, or other instruments related to, any of the foregoing. These risks are explained in more detail in the “Risk
Factors” section of the accompanying product supplement and the “Risk Factors” section of the accompanying underlying
supplement.
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|
·
|
YOUR INVESTMENT IN THE NOTES MAY RESULT
IN A LOSS
— The notes do not guarantee any return of principal. If the notes have not been automatically called and a
Trigger Event has occurred, you will lose 1% of your principal amount at maturity for every 1% that the Ending Index Level is less
than the Initial Index Level.
Accordingly, under these circumstances, you will lose more than 40% of your principal amount at
maturity and could lose up to the entire principal amount of your notes at maturity.
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·
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CREDIT RISKS OF JPMORGAN FINANCIAL
AND JPMORGAN CHASE & CO.
— The notes are subject to our and JPMorgan Chase & Co.’s credit risks, and our
and JPMorgan Chase & Co.’s credit ratings and credit spreads may adversely affect the market value of the notes.
Investors are dependent on our and JPMorgan Chase & Co.’s ability to pay all amounts due on the notes. Any actual or
potential change in our or JPMorgan Chase & Co.’s creditworthiness or credit spreads, as determined by the market for
taking that credit risk, is likely to adversely affect the value of the notes. If we and JPMorgan Chase & Co. were to
default on our payment obligations, you may not receive any amounts owed to you under the notes and you could lose your entire
investment.
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|
·
|
AS A FINANCE SUBSIDIARY, JPMORGAN FINANCIAL
HAS NO INDEPENDENT OPERATIONS AND HAS LIMITED ASSETS —
As a finance subsidiary of JPMorgan Chase & Co., we have no
independent operations beyond the issuance and administration of our securities. Aside from the initial capital contribution from
JPMorgan Chase & Co., substantially all of our assets relate to obligations of our affiliates to make payments under loans
made by us or other intercompany agreements. As a result, we are dependent upon payments from our affiliates to meet our obligations
under the notes. If these affiliates do not make payments to us and we fail to make payments on the notes, you may have to seek
payment under the related guarantee by JPMorgan Chase & Co., and that guarantee will rank
pari passu
with all other
unsecured and unsubordinated obligations of JPMorgan Chase & Co.
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|
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·
|
THE AUTOMATIC CALL FEATURE MAY FORCE
A POTENTIAL EARLY EXIT
— If the notes are automatically called, the amount of interest payments made on the notes will
be less than the amount of interest payments payable if the notes were held to maturity, and, for each $1,000 principal amount
note, you will receive on the applicable Call Settlement Date $1,000
plus
any accrued and unpaid interest.
|
|
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·
|
REINVESTMENT RISK
— If your
notes are automatically called, the term of the notes may be reduced to as short as approximately one year and you will not receive
any interest payments after the applicable Call Settlement Date. There is no guarantee that you would be able to reinvest the proceeds
from an investment in the notes at a comparable return and/or with a comparable interest rate for a similar level of risk in the
event the notes are automatically called prior to the Maturity Date.
|
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·
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THE APPRECIATION POTENTIAL OF THE NOTES
IS LIMITED, AND YOU WILL NOT PARTICIPATE IN ANY APPRECIATION IN THE VALUE OF THE INDEX
— The appreciation potential of
the notes is limited to the sum of interest payments paid on the notes, regardless of any appreciation in the value of the Index,
which may be significant. You will not participate in any appreciation in the value of the Index. Accordingly, the return on the
notes may be significantly less than the return on a direct investment in the Index during the term of the notes.
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·
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POTENTIAL CONFLICTS
— We
and our affiliates play a variety of roles in connection with the issuance of the notes, including acting as calculation agent
and as an agent of the offering of the notes, hedging our obligations under the notes and making the assumptions used to determine
the pricing of the notes and the estimated value of the notes when the terms of the notes are set, which we refer to as the estimated
value of the notes. In performing these duties, our and JPMorgan Chase & Co.’s economic interests and the economic interests
of the calculation agent and other affiliates of ours are potentially adverse to your interests as an investor in the notes. In
addition, our and JPMorgan Chase & Co.’s business activities, including hedging and trading activities, could cause our
and JPMorgan Chase & Co.’s economic interests to be adverse to yours and could adversely affect any payment on the notes
and the value of the notes. It is possible that hedging or trading activities of ours or our affiliates in connection with the
notes could result in substantial returns for us or our affiliates while the value of the notes declines. Please refer to “Risk
Factors — Risks Relating to Conflicts of Interest” in the accompanying product supplement for additional information
about these risks.
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·
|
THE BENEFIT PROVIDED BY THE TRIGGER
LEVEL MAY TERMINATE ON THE FINAL REVIEW DATE
— If the Ending Index Level is less than the Trigger Level (
i.e.,
a
Trigger Event occurs) and the notes have not been automatically called, the benefit provided by the Trigger Level will terminate
and you will be fully exposed to any depreciation in the Index.
|
|
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·
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THE ESTIMATED VALUE OF THE NOTES WILL BE LOWER THAN THE ORIGINAL
ISSUE PRICE (PRICE TO PUBLIC) OF THE NOTES
— The estimated value of the notes is only an estimate determined by reference
to several factors. The original issue price of the notes will exceed the estimated value of the notes because costs associated
with selling, structuring and hedging the notes are included in the original issue price of the notes. These costs include the
selling commissions, the projected profits, if any, that our affiliates expect to realize for assuming risks inherent in hedging
our obligations under the notes and the estimated cost of hedging our obligations under the notes. See “The Estimated Value
of the Notes” in this pricing supplement.
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·
|
THE ESTIMATED VALUE OF THE NOTES DOES NOT REPRESENT FUTURE VALUES
OF THE NOTES AND MAY DIFFER FROM OTHERS’ ESTIMATES
— The estimated value of the notes is determined by reference
to internal pricing
|
|
JPMorgan Structured Investments —
|
PS-
3
|
|
Auto Callable Yield Notes Linked to the S&P GSCI
®
Crude Oil Index Excess Return
|
|
models of our affiliates when the terms of the notes
are set. This estimated value of the notes is based on market conditions and other relevant factors existing at that time and assumptions
about market parameters, which can include volatility, interest rates and other factors. Different pricing models and assumptions
could provide valuations for the notes that are greater than or less than the estimated value of the notes. In addition, market
conditions and other relevant factors in the future may change, and any assumptions may prove to be incorrect. On future dates,
the value of the notes could change significantly based on, among other things, changes in market conditions, our or JPMorgan Chase
& Co.’s creditworthiness, interest rate movements and other relevant factors, which may impact the price, if any, at
which JPMS would be willing to buy notes from you in secondary market transactions. See “The Estimated Value of the Notes”
in this pricing supplement.
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·
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THE ESTIMATED VALUE OF THE NOTES IS DERIVED BY REFERENCE TO AN INTERNAL
FUNDING RATE
— The internal funding rate used in the determination of the estimated value of the notes is based on, among
other things, our and our affiliates’ view of the funding value of the notes as well as the higher issuance, operational
and ongoing liability management costs of the notes in comparison to those costs for the conventional fixed-rate debt of JPMorgan
Chase & Co. The use of an internal funding rate and any potential changes to that rate may have an adverse effect on the terms
of the notes and any secondary market prices of the notes. See “The Estimated Value of the Notes” in this pricing supplement.
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·
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THE VALUE OF THE NOTES AS PUBLISHED BY JPMS (AND WHICH MAY BE REFLECTED
ON CUSTOMER ACCOUNT STATEMENTS) MAY BE HIGHER THAN THE THEN-CURRENT ESTIMATED VALUE OF THE NOTES FOR A LIMITED TIME PERIOD
— We generally expect that some of the costs included in the original issue price of the notes will be partially paid back
to you in connection with any repurchases of your notes by JPMS in an amount that will decline to zero over an initial predetermined
period. These costs can include projected hedging profits, if any, and, in some circumstances, estimated hedging costs and our
internal secondary market funding rates for structured debt issuances. See “Secondary Market Prices of the Notes” in
this pricing supplement for additional information relating to this initial period. Accordingly, the estimated value of your notes
during this initial period may be lower than the value of the notes as published by JPMS (and which may be shown on your customer
account statements).
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·
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SECONDARY MARKET PRICES OF THE NOTES WILL LIKELY BE LOWER THAN THE
ORIGINAL ISSUE PRICE OF THE NOTES
— Any secondary market prices of the notes will likely be lower than the original issue
price of the notes because, among other things, secondary market prices take into account our internal secondary market funding
rates for structured debt issuances and, also, because secondary market prices (a) exclude selling commissions and (b) may exclude
projected hedging profits, if any, and estimated hedging costs that are included in the original issue price of the notes. As a
result, the price, if any, at which JPMS will be willing to buy notes from you in secondary market transactions, if at all, is
likely to be lower than the original issue price. Any sale by you prior to the Maturity Date could result in a substantial loss
to you. See the immediately following risk consideration for information about additional factors that will impact any secondary
market prices of the notes.
|
The notes are not designed to be short-term
trading instruments. Accordingly, you should be able and willing to hold your notes to maturity. See “— Lack of Liquidity”
below.
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|
·
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SECONDARY MARKET PRICES OF THE NOTES WILL BE IMPACTED BY MANY ECONOMIC
AND MARKET FACTORS
— The secondary market price of the notes during their term will be impacted by a number of economic
and market factors, which may either offset or magnify each other, aside from the selling commissions, projected hedging profits,
if any, estimated hedging costs and the level of the Index, including:
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·
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any actual or potential change in our or JPMorgan Chase & Co.’s
creditworthiness or credit spreads;
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·
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customary bid-ask spreads for similarly sized trades;
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·
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our internal secondary market funding rates for structured debt issuances;
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·
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the actual and expected volatility of the Index;
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·
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the time to maturity of the notes;
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·
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supply and demand trends for the commodity upon which the futures contracts
that compose the Index are based or the exchange-traded futures contracts on that commodity;
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·
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the market price of the commodity upon which the futures contracts that
compose the Index are based or the exchange-traded futures contracts on that commodity;
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·
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whether a Trigger Event is expected to occur;
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·
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the likelihood of an automatic call being triggered;
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·
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interest and yield rates in the market generally; and
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·
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a variety of other economic, financial, political, regulatory, geographical,
meteorological and judicial events.
|
Additionally, independent pricing
vendors and/or third party broker-dealers may publish a price for the notes, which may also be reflected on customer account statements.
This price may be different (higher or lower) than the price of the notes, if any, at which JPMS may be willing to purchase your
notes in the secondary market.
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·
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WE MAY ACCELERATE YOUR NOTES IF A COMMODITY HEDGING DISRUPTION EVENT
OCCURS
— If we or our affiliates are unable to effect transactions necessary to hedge our obligations under the notes
due to a commodity hedging disruption event, we may, in our sole and absolute discretion, accelerate the payment on your notes
and pay you an amount determined in good faith and in a commercially reasonable manner by the calculation agent. If the payment
on your notes is accelerated, your investment may result in a loss and you may not be able to reinvest your money in a comparable
investment. Please see “General Terms of Notes — Consequences of a Commodity Hedging Disruption Event — Acceleration
of the Notes” in the accompanying product supplement for more information.
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·
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COMMODITY FUTURES CONTRACTS ARE SUBJECT TO UNCERTAIN LEGAL AND REGULATORY
REGIMES
— The commodity futures contracts that underlie the Index are subject to legal and regulatory regimes that may
change in
|
|
JPMorgan Structured Investments —
|
PS-
4
|
|
Auto Callable Yield Notes Linked to the S&P GSCI
®
Crude Oil Index Excess Return
|
|
ways that could adversely affect our ability to hedge
our obligations under the notes and affect the level of the Index. Any future regulatory changes, including but not limited
to changes resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), may
have a substantial adverse effect on the value of your notes. Additionally, under authority provided by the Dodd-Frank Act,
the U.S. Commodity Futures Trading Commission on November 5, 2013 proposed rules to establish position limits that will apply to
28 agricultural, metals and energy futures contracts and futures, options and swaps that are economically equivalent to those futures
contracts. The limits will apply to a person’s combined position in futures, options and swaps on the same underlying
commodity. The rules also would set new aggregation standards for purposes of these position limits and would specify the requirements
for designated contract markets and swap execution facilitates to impose position limits on contracts traded on those markets.
The rules, if enacted in their proposed form, may reduce liquidity in the exchange-traded market for those commodity-based futures
contracts, which may, in turn, have an adverse effect on any payments on the notes. Furthermore, we or our affiliates may
be unable as a result of those restrictions to effect transactions necessary to hedge our obligations under the notes resulting
in a commodity hedging disruption event, in which case we may, in our sole and absolute discretion, accelerate the payment on your
notes. See “ — We May Accelerate Your Notes If a Commodity Hedging Disruption Event Occurs” above.
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·
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PRICES OF COMMODITY FUTURES CONTRACTS ARE CHARACTERIZED BY HIGH AND
UNPREDICTABLE VOLATILITY, WHICH COULD LEAD TO HIGH AND UNPREDICTABLE VOLATILITY IN THE INDEX
— Market prices of the commodity
futures contracts included in the Index tend to be highly volatile and may fluctuate rapidly based on numerous factors, including
the factors that affect the price of the commodity underlying the commodity futures contracts included in the Index. See “
— The Market Price of WTI Crude Oil Will Affect the Value of the Notes” below. The prices of commodities and commodity
futures contracts are subject to variables that may be less significant to the values of traditional securities, such as stocks
and bonds. These variables may create additional investment risks that cause the value of the notes to be more volatile than the
values of traditional securities. As a general matter, the risk of low liquidity or volatile pricing around the maturity date of
a commodity futures contract is greater than in the case of other futures contracts because (among other factors) a number of market
participants take physical delivery of the underlying commodities. Many commodities are also highly cyclical. The high volatility
and cyclical nature of commodity markets may render such an investment inappropriate as the focus of an investment portfolio.
|
|
|
·
|
THE MARKET PRICE OF WTI CRUDE OIL WILL AFFECT THE VALUE OF THE NOTES
— Because the notes are linked to the performance of the Index, which is composed of futures contracts on WTI crude oil,
we expect that generally the market value of the notes will depend in part on the market price of WTI crude oil. The price of WTI
crude oil is primarily affected by the global demand for and supply of crude oil, but is also influenced significantly from time
to time by speculative actions and by currency exchange rates. Crude oil prices are volatile and subject to dislocation. Demand
for refined petroleum products by consumers, as well as the agricultural, manufacturing and transportation industries, affects
the price of crude oil. Crude oil’s end-use as a refined product is often as transport fuel, industrial fuel and in-home
heating fuel. Potential for substitution in most areas exists, although considerations, including relative cost, often limit substitution
levels. Because the precursors of demand for petroleum products are linked to economic activity, demand will tend to reflect economic
conditions. Demand is also influenced by government regulations, such as environmental or consumption policies. In addition to
general economic activity and demand, prices for crude oil are affected by political events, labor activity and, in particular,
direct government intervention (such as embargos) or supply disruptions in major oil producing regions of the world. Such events
tend to affect oil prices worldwide, regardless of the location of the event. Supply for crude oil may increase or decrease depending
on many factors. These include production decisions by the Organization of the Petroleum Exporting Countries (“OPEC”)
and other crude oil producers. Crude oil prices are determined with significant influence by OPEC. OPEC has the potential to influence
oil prices worldwide because its members possess a significant portion of the world’s oil supply. In the event of sudden
disruptions in the supplies of oil, such as those caused by war, natural events, accidents or acts of terrorism, prices of oil
futures contracts could become extremely volatile and unpredictable. Also, sudden and dramatic changes in the futures market may
occur, for example, upon a cessation of hostilities that may exist in countries producing oil, the introduction of new or previously
withheld supplies into the market or the introduction of substitute products or commodities. Crude oil prices may also be affected
by short-term changes in supply and demand because of trading activities in the oil market and seasonality (
e.g.
, weather
conditions such as hurricanes). It is not possible to predict the aggregate effect of all or any combination of these factors.
|
|
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·
|
A DECISION BY THE NYMEX TO INCREASE MARGIN REQUIREMENTS FOR WTI CRUDE
OIL FUTURES CONTRACTS MAY AFFECT THE LEVEL OF THE INDEX
— If the NYMEX increases the amount of collateral required to
be posted to hold positions in the futures contracts on WTI crude oil (
i.e.,
the margin requirements), market participants
who are unwilling or unable to post additional collateral may liquidate their positions, which may cause the level of the Index
to decline significantly.
|
|
|
·
|
THE NOTES DO NOT OFFER DIRECT EXPOSURE TO COMMODITY SPOT PRICES
—
The notes are linked to the Index, which tracks commodity futures contracts, not physical commodities (or their spot prices). The
price of a futures contract reflects the expected value of the commodity upon delivery in the future, whereas the spot price of
a commodity reflects the immediate delivery value of the commodity. A variety of factors can lead to a disparity between the expected
future price of a commodity and the spot price at a given point in time, such as the cost of storing the commodity for the term
of the futures contract, interest charges incurred to finance the purchase of the commodity and expectations concerning supply
and demand for the commodity. The price movements of a futures contract are typically correlated with the movements of the spot
price of the referenced commodity, but the correlation is generally imperfect and price movements in the spot market may not be
reflected in the futures market (and vice versa). Accordingly, the notes may underperform a similar investment that is linked to
commodity spot prices.
|
|
JPMorgan Structured Investments —
|
PS-
5
|
|
Auto Callable Yield Notes Linked to the S&P GSCI
®
Crude Oil Index Excess Return
|
|
|
|
·
|
THE INDEX MAY BE MORE VOLATILE AND MORE SUSCEPTIBLE TO PRICE FLUCTUATIONS
OR COMMODITY FUTURES CONTRACTS THAN A BROADER COMMODITIES INDEX —
The Index may be more volatile and susceptible to price
fluctuations than a broader commodities index, such as the S&P GSCI
®
. In contrast to the S&P GSCI
®
,
which includes contracts on crude oil and non-crude oil commodities, the Index comprises contracts only on crude oil. As a result,
price volatility in the contracts included in the Index will likely have a greater impact on the Index than it would on the broader
S&P GSCI
®
. In addition, because the Index omits principal market sectors composing the S&P GSCI
®
,
it will be less representative of the economy and commodity markets as a whole and will therefore not serve as a reliable benchmark
for commodity market performance generally.
|
|
|
·
|
OWNING THE NOTES IS NOT THE SAME AS OWNING ANY COMMODITIES OR COMMODITY
FUTURES CONTRACTS
— The return on your notes will not reflect the return you would realize if you actually purchased
the futures contracts that compose the Index, the commodities upon which the futures contracts that compose the Index are based,
or other exchange-traded or over-the-counter instruments based on the Index. You will not have any rights that holders of those
assets or instruments have.
|
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·
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HIGHER FUTURES PRICES OF THE COMMODITY FUTURES CONTRACTS UNDERLYING
THE INDEX RELATIVE TO THE CURRENT PRICES OF THOSE CONTRACTS MAY AFFECT THE VALUE OF THE INDEX AND THE VALUE OF THE NOTES
—
The Index is composed of futures contracts on physical commodities. Unlike equities, which typically entitle the holder to a continuing
stake in a corporation, commodity futures contracts normally specify a certain date for delivery of the underlying physical commodity.
As the exchange-traded futures contracts that compose the Index approach expiration, they are replaced by contracts that have a
later expiration. Thus, for example, a contract purchased and held in August may specify an October expiration. As time passes,
the contract expiring in October is replaced with a contract for delivery in November. This process is referred to as “rolling.”
If the market for these contracts is (putting aside other considerations) in “contango,” where the prices are higher
in the distant delivery months than in the nearer delivery months, the purchase of the November contract would take place at a
price that is higher than the price of the October contract, thereby creating a
negative
“roll yield.” Contango
could adversely affect the value of the Index and thus the value of notes linked to the Index. The futures contracts underlying
the Index have historically been in contango.
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·
|
SUSPENSION OR DISRUPTIONS OF MARKET TRADING IN THE COMMODITY MARKETS
AND RELATED FUTURES MARKETS MAY ADVERSELY AFFECT THE LEVEL OF THE INDEX, AND THEREFORE THE VALUE OF THE NOTES
— The commodity
markets are subject to temporary distortions or other disruptions due to various factors, including the lack of liquidity in the
markets, the participation of speculators and government regulation and intervention. In addition, U.S. futures exchanges and some
foreign exchanges have regulations that limit the amount of fluctuation in futures contract prices that may occur during a single
day. These limits are generally referred to as “daily price fluctuation limits” and the maximum or minimum price of
a contract on any given day as a result of these limits is referred to as a “limit price.” Once the limit price has
been reached in a particular contract, no trades may be made at a different price. Limit prices have the effect of precluding trading
in a particular contract or forcing the liquidation of contracts at disadvantageous times or prices. These circumstances could
adversely affect the level of the Index and, therefore, the value of your notes.
|
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·
|
THE NOTES ARE LINKED TO AN EXCESS RETURN INDEX AND NOT A TOTAL RETURN
INDEX
— The notes are linked to an excess return index and not a total return index. An excess return index, such
as the Index, reflects the returns that are potentially available through an unleveraged investment in the contracts composing
that index. By contrast, a “total return” index, in addition to reflecting those returns, also reflects interest
that could be earned on funds committed to the trading of the underlying futures contracts.
|
|
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·
|
LACK OF LIQUIDITY
—
The notes will not be listed on any securities exchange. JPMS intends to offer to purchase the notes in the secondary market but
is not required to do so. Even if there is a secondary market, it may not provide enough liquidity to allow you to trade or sell
the notes easily. Because other dealers are not likely to make a secondary market for the notes, the price at which you may be
able to trade your notes is likely to depend on the price, if any, at which JPMS is willing to buy the notes.
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·
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THE FINAL TERMS AND VALUATION OF THE NOTES WILL BE PROVIDED IN THE
PRICING SUPPLEMENT
— The final terms of the notes will be based on relevant market conditions when the terms of the notes
are set and will be provided in the pricing supplement. In particular, the estimated value of the notes will be provided in the
pricing supplement and may be as low as the minimum for the estimated value of the notes set forth on the cover of this pricing
supplement. Accordingly, you should consider your potential investment in the notes based on the minimum for the estimated value
of the notes.
|
|
JPMorgan Structured Investments —
|
PS-
6
|
|
Auto Callable Yield Notes Linked to the S&P GSCI
®
Crude Oil Index Excess Return
|
|
What Is the Total Return on the Notes
at Maturity or upon Automatic Call, Assuming a Range of Performances for the Index?
The following table and examples illustrate the hypothetical
total return and hypothetical total payment on the notes at maturity or upon automatic call. The “note total return”
as used in this term sheet is the number, expressed as a percentage, that results from comparing the payment at maturity or upon
automatic call
plus
the interest payments received to and including the Maturity Date or the relevant Call Settlement Date,
as applicable, per $1,000 principal amount note. In addition, the following table and examples assume an Initial Index Value of
160, a Trigger Value of 96 (equal to 60% of the hypothetical Initial Index Value) and reflect the Interest Rate of 8.00% per annum
(payable at a rate of 0.66667% per month).
Each hypothetical total return or total payment set forth
below is for illustrative purposes only and may not be the actual total return or total payment applicable to a purchaser of the
notes. The numbers appearing in the following table and examples have been rounded for ease of analysis.
What Is the Total Return on the
Notes at Maturity if the Notes Have Not Been Automatically Called?
The following table and examples illustrate the hypothetical
total return and hypothetical total payments on the notes at maturity if the notes have not been automatically called.
|
Final Index Level
|
Index Return
|
Note Total Return
|
Total Payments Over the Term of the Notes
|
|
288.000
|
80.00%
|
20.00%
|
$1,200.00
|
|
264.000
|
65.00%
|
20.00%
|
$1,200.00
|
|
240.000
|
50.00%
|
20.00%
|
$1,200.00
|
|
224.000
|
40.00%
|
20.00%
|
$1,200.00
|
|
208.000
|
30.00%
|
20.00%
|
$1,200.00
|
|
192.000
|
20.00%
|
20.00%
|
$1,200.00
|
|
176.000
|
10.00%
|
20.00%
|
$1,200.00
|
|
168.000
|
5.00%
|
20.00%
|
$1,200.00
|
|
160.000
|
0.00%
|
20.00%
|
$1,200.00
|
|
152.000
|
-5.00%
|
20.00%
|
$1,200.00
|
|
144.000
|
-10.00%
|
20.00%
|
$1,200.00
|
|
136.000
|
-15.00%
|
20.00%
|
$1,200.00
|
|
128.000
|
-20.00%
|
20.00%
|
$1,200.00
|
|
120.000
|
-25.00%
|
20.00%
|
$1,200.00
|
|
112.000
|
-30.00%
|
20.00%
|
$1,200.00
|
|
104.000
|
-35.00%
|
20.00%
|
$1,200.00
|
|
96.000
|
-40.00%
|
20.00%
|
$1,200.00
|
|
95.984
|
-40.01%
|
-20.01%
|
$799.90
|
|
80.000
|
-50.00%
|
-30.00%
|
$700.00
|
|
64.000
|
-60.00%
|
-40.00%
|
$600.00
|
|
48.000
|
-70.00%
|
-50.00%
|
$500.00
|
|
32.000
|
-80.00%
|
-60.00%
|
$400.00
|
|
16.000
|
-90.00%
|
-70.00%
|
$300.00
|
|
0.000
|
-100.00%
|
-80.00%
|
$200.00
|
The following examples illustrate how payments on
the notes in different hypothetical scenarios are calculated.
Example 1: The notes have not been automatically called
prior to maturity and the level of the Index increases from the Initial Index Level of 160 to a Final Index Level of 168 —
a Trigger Event has not occurred.
Because the notes have not been automatically called prior to maturity and a Trigger Event
has not occurred, the investor receives total payments of $1,200 per $1,000 principal amount note over the term of the notes, consisting
of interest payments of $200 per $1,000 principal amount note over the term of the notes and a payment at maturity of $1,000 per
$1,000 principal amount note.
This represents the maximum total payment an investor may receive over the term of the notes.
Example 2: The notes have not been automatically called
prior to maturity and the level of the Index decreases from the Initial Index Level of 160 to a Final Index Level of 96 —
a Trigger Event has not occurred.
Because the notes have not been automatically called prior to maturity and a Trigger Event
has not occurred, even though the Final Index Level of 96 is less than the Initial Index Level of 160, the investor receives total
payments of $1,200 per $1,000 principal amount note over the term of the notes, consisting of interest payments of $200 per $1,000
principal amount note over the term of the notes and a payment at maturity of $1,000 per $1,000 principal amount note.
This
represents the maximum total payment an investor may receive over the term of the notes.
Example 3: The notes have not been automatically called
prior to maturity and the level of the Index decreases from the Initial Index Level of 160 to a Final Index Level of 80 —
a Trigger Event has occurred.
Because the notes have not been automatically called prior to maturity and a Trigger Event has
occurred, the investor receives total payments
|
JPMorgan Structured Investments —
|
PS-
7
|
|
Auto Callable Yield Notes Linked to the S&P GSCI
®
Crude Oil Index Excess Return
|
|
of $700 per $1,000 principal amount note, consisting
of interest payments of $200 per $1,000 principal amount note over the term of the notes and a payment at maturity of $500 per
$1,000 principal amount note.
Example 4: The notes have not been automatically called
prior to maturity and the level of the Index decreases from the Initial Index Level of 160 to a Final Index Level of 0 —
a Trigger Event has occurred.
Because the notes have not been automatically called prior to maturity and a Trigger Event has
occurred, the investor receives total payments of $200 per $1,000 principal amount note, consisting solely of interest payments
of $200 over the term of the notes.
What Is the Total Return on the
Notes upon Automatic Call if the Notes Are Automatically Called?
The following table and examples illustrate the hypothetical
total return on the notes if the notes are automatically called on a Review Date.
|
Call Settlement Date
|
Note Total Return (1)
|
Total Payments Over the Term of the Notes (1)
|
|
First
|
8.0000%
|
$1,080.0000
|
|
Second
|
8.6667%
|
$1,086.6667
|
|
Third
|
9.3333%
|
$1,093.3333
|
|
Fourth
|
10.0000%
|
$1,100.0000
|
|
Fifth
|
10.6667%
|
$1,106.6667
|
|
Sixth
|
11.3333%
|
$1,113.3333
|
|
Seventh
|
12.0000%
|
$1,120.0000
|
|
Eighth
|
12.6667%
|
$1,126.6667
|
|
Ninth
|
13.3333%
|
$1,133.3333
|
|
Tenth
|
14.0000%
|
$1,140.0000
|
|
Eleventh
|
14.6667%
|
$1,146.6667
|
|
Twelfth
|
15.3333%
|
$1,153.3333
|
|
Thirteenth
|
16.0000%
|
$1,160.0000
|
|
Fourteenth
|
16.6667%
|
$1,166.6667
|
|
Fifteenth
|
17.3333%
|
$1,173.3333
|
|
Sixteenth
|
18.0000%
|
$1,180.0000
|
|
Seventeenth
|
18.6667%
|
$1,186.6667
|
|
Eighteenth
|
19.3333%
|
$1,193.3333
|
(1) If, on any Review Date, the closing level of the Index
is greater than or equal to the Initial Index Level, the notes will be automatically called on that Review Date. If the notes are
automatically called, on the applicable Call Settlement Date, for each $1,000 principal amount note, you will receive $1,000
plus
any accrued and unpaid interest to but excluding that Call Settlement Date.
The following examples illustrate how, if the notes are
automatically called, the total payments on the notes in different hypothetical scenarios are calculated.
Example 1: The closing level of the Index increases
from the Initial Index Level of 160 to a closing level of 168 on the first Review Date.
Because the closing level of the Index
on the first Review Date is greater than the Initial Index Level, the notes are automatically called, and the investor receives
total payments of $1,080 per $1,000 principal amount note, consisting of interest payments of $80 per $1,000 principal amount note
over the shortened term of the notes and a payment upon automatic call of $1,000 per $1,000 principal amount note.
Example 2: The closing level of the Index on each
Review Date prior to the eighteenth Review Date is less than the Initial Index Level of 160, and the level of the Index increases
from the Initial Index Level of 160 to a closing level of 168 on the eighteenth Review Date.
Although the closing level of
the Index on each of the Review Dates prior to the eighteenth Review Date is less than the Initial Index Level of 160, because
the closing level of the Index on the eighteenth Review Date is greater than the Initial Index Level, the notes are automatically
called, and the investor receives total payments of $1,193.3333 per $1,000 principal amount note, consisting of interest payments
of $193.3333 per $1,000 principal amount note over the shortened term of the notes and a payment upon automatic call of $1,000
per $1,000 principal amount note.
The hypothetical returns and hypothetical payments on
the notes shown above apply
only if you hold the notes for their entire term or until automatically called
. These hypotheticals
do not reflect fees or expenses that would be associated with any sale in the secondary market. If these fees and expenses were
included, the hypothetical returns and hypothetical payments shown above would likely be lower.
|
JPMorgan Structured Investments —
|
PS-
8
|
|
Auto Callable Yield Notes Linked to the S&P GSCI
®
Crude Oil Index Excess Return
|
|
Historical
Information
The following graph sets forth the historical performance
of the Index based on the weekly historical closing levels of the Index from January 7, 2011 through August 19, 2016. The closing
level of the Index on August 23, 2016 was 163.4101. We obtained the closing levels of the Index above and below from the Bloomberg
Professional
®
service (“Bloomberg”), without independent verification.
The historical closing levels of the Index should
not be taken as an indication of future performance, and no assurance can be given as to the closing level of the Index on the
Pricing Date or any Review Date. There can be no assurance that the performance of the Index will result in the return of any of
your principal amount.
The Estimated Value of the
Notes
The estimated value of the notes set forth on
the cover of this pricing supplement is equal to the sum of the values of the following hypothetical components: (1) a fixed-income
debt component with the same maturity as the notes, valued using the internal funding rate described below, and (2) the derivative
or derivatives underlying the economic terms of the notes. The estimated value of the notes does not represent a minimum price
at which JPMS would be willing to buy your notes in any secondary market (if any exists) at any time. The internal funding rate
used in the determination of the estimated value of the notes is based on, among other things, our and our affiliates’ view
of the funding value of the notes as well as the higher issuance, operational and ongoing liability management costs of the notes
in comparison to those costs for the conventional fixed-rate debt of JPMorgan Chase & Co. For additional information,
see “Selected Risk Considerations — The Estimated Value of the Notes Is Derived by Reference to an Internal Funding
Rate” in this pricing supplement. The value of the derivative or derivatives underlying the economic terms of the notes is
derived from internal pricing models of our affiliates. These models are dependent on inputs such as the traded market prices of
comparable derivative instruments and on various other inputs, some of which are market-observable, and which can include volatility,
interest rates and other factors, as well as assumptions about future market events and/or environments. Accordingly, the estimated
value of the notes is determined when the terms of the notes are set based on market conditions and other relevant factors and
assumptions existing at that time. See “Selected Risk Considerations — The Estimated Value of the Notes Does Not Represent
Future Values of the Notes and May Differ from Others’ Estimates” in this pricing supplement.
The estimated value of the notes will be lower
than the original issue price of the notes because costs associated with selling, structuring and hedging the notes are included
in the original issue price of the notes. These costs include the selling commissions paid to JPMS and other affiliated or unaffiliated
dealers, the projected profits, if any, that our affiliates expect to realize for assuming risks inherent in hedging our obligations
under the notes and the estimated cost of hedging our obligations under the notes. Because hedging our obligations entails risk
and may be influenced by market forces beyond our control, this hedging may result in a profit that is more or less than expected,
or it may result in a loss. A portion of the profits, if any, realized in hedging our obligations under the notes may be allowed
to other affiliated or unaffiliated dealers, and we or one or more of our affiliates will retain any remaining hedging profits.
See “Selected Risk Considerations — The Estimated Value of the Notes Will Be Lower Than the Original Issue Price (Price
to Public) of the Notes” in this pricing supplement.
Secondary Market Prices of
the Notes
For information about factors that will impact any
secondary market prices of the notes, see “Selected Risk Considerations — Secondary Market Prices of the Notes Will
Be Impacted by Many Economic and Market Factors” in
|
JPMorgan Structured Investments —
|
PS-
9
|
|
Auto Callable Yield Notes Linked to the S&P GSCI
®
Crude Oil Index Excess Return
|
|
this pricing supplement. In addition, we generally
expect that some of the costs included in the original issue price of the notes will be partially paid back to you in connection
with any repurchases of your notes by JPMS in an amount that will decline to zero over an initial predetermined period that is
intended to be the shorter of six months and one-half of the stated term of the notes. The length of any such initial period reflects
the structure of the notes, whether our affiliates expect to earn a profit in connection with our hedging activities, the estimated
costs of hedging the notes and when these costs are incurred, as determined by our affiliates. See “Selected Risk Considerations
— The Value of the Notes as Published by JPMS (and Which May Be Reflected on Customer Account Statements) May Be Higher Than
the Then-Current Estimated Value of the Notes for a Limited Time Period.”
Supplemental Use of Proceeds
The notes are offered to meet investor demand for
products that reflect the risk-return profile and market exposure provided by the notes. See “What Is the Total Return on
the Notes at Maturity or upon Automatic Call, Assuming a Range of Performances for the Index?” in this pricing supplement
for an illustration of the risk-return profile of the notes and “Selected Purchase Considerations — Return Linked to
the S&P GSCI
®
Crude Oil Index Excess Return” in this pricing supplement for a description of the market
exposure provided by the notes.
The original issue price of the notes is equal to
the estimated value of the notes plus the selling commissions paid to JPMS and other affiliated or unaffiliated dealers, plus (minus)
the projected profits (losses) that our affiliates expect to realize for assuming risks inherent in hedging our obligations under
the notes, plus the estimated cost of hedging our obligations under the notes.
|
JPMorgan Structured Investments —
|
PS-
10
|
|
Auto Callable Yield Notes Linked to the S&P GSCI
®
Crude Oil Index Excess Return
|
|
Annex A
MATERIAL
U.S. FEDERAL INCOME TAX CONSEQUENCES
Prospective investors should note that the discussion
under “Material U.S. Federal Income Tax Consequences” in the accompanying product supplement 2-I does not apply to
the notes issued under this pricing supplement and is superseded by the following discussion.
The following is a discussion of
the material U.S. federal income tax consequences of owning and disposing of the notes. It applies to you only if you are an initial
investor who purchases a note for cash equal to its issue price and holds it as a capital asset within the meaning of Section 1221
of the Internal Revenue Code of 1986, as amended (the “Code”).
This discussion does not address
all aspects of U.S. federal income and estate taxation that may be relevant to you in light of your particular circumstances, including
the potential application of the provision of the Code known as the Medicare contribution tax and different consequences that may
apply if you are an investor subject to special treatment under the U.S. federal income tax laws, such as:
|
|
·
|
a
financial institution;
|
|
|
·
|
a
“regulated investment company” as defined in Code Section 851;
|
|
|
·
|
a
tax-exempt entity, including an “individual retirement account” or “Roth IRA” as defined in Code Section
408 or 408A, respectively;
|
|
|
·
|
a
dealer in securities;
|
|
|
·
|
a person holding a note as part of a “straddle”
or conversion transaction or who has entered into a “constructive sale” with respect to a note;
|
|
|
·
|
a
U.S. Holder (as defined below) whose functional currency is not the U.S. dollar;
|
|
|
·
|
a
trader in securities who elects to apply a mark-to-market method of tax accounting; or
|
|
|
·
|
a
partnership or other entity classified as a partnership for U.S. federal income tax purposes.
|
This discussion is based on the
Code, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations as of the date of
this pricing supplement, changes to any of which, subsequent to the date hereof, may affect the tax consequences described herein.
The effects of any applicable state, local or non-U.S. tax laws are not discussed.
You should consult your tax adviser concerning
the application of U.S. federal income and estate tax laws to your particular situation (including the possibility of alternative
treatments of the notes), as well as any tax consequences arising under the laws of state, local or non-U.S. jurisdictions.
Tax Treatment of the Notes
Based on the
advice of Davis Polk & Wardwell LLP, our special tax counsel, and on current market conditions, insofar as we have tax reporting
responsibilities with respect to your notes, we intend to treat them for U.S. federal income tax purposes as units each comprising:
(i) a Put Option written by you that is terminated if an Automatic Call occurs and that, if not terminated, in circumstances where
the payment due at maturity is less than $1,000 (excluding accrued but unpaid interest), requires you to pay us an amount equal
to $1,000 multiplied by the absolute value of the Index Return and (ii) a Deposit, which is an advance of $1,000 per $1,000 principal
amount note to secure your potential obligation under the Put Option. By purchasing the notes, you agree (in the absence of an
administrative determination or judicial ruling to the contrary) to follow this treatment and the allocation described below. Under
this approach, a portion of each interest payment made with respect to the notes (including upon an Automatic Call or at maturity)
will be treated as interest on the Deposit, and the remainder as premium paid to you in consideration of your entry into the Put
Option (“Put Premium”). We will determine the portion of each interest payment that we will allocate to interest on
the Deposit and to Put Premium, respectively, and will provide that allocation in the pricing supplement for the notes. If the
notes had priced on August 23, 2016, and assuming an Interest Rate of 8.00% per annum, we would have allocated approximately 20.63%
of each interest payment as interest on the Deposit and the remainder as Put Premium. The actual allocation that we will determine
for the notes may differ from this hypothetical allocation, and will depend upon a variety of factors, including actual market
conditions and our borrowing costs for debt instruments of comparable maturities on the Pricing Date. No statutory, judicial or
administrative authority directly addresses the treatment of the notes (or similar instruments) for U.S. federal income tax purposes,
and no ruling is being requested from the IRS. While other treatments of the notes could be asserted by the IRS, as discussed below,
the following discussion assumes the treatment and allocation described above are respected, except where otherwise indicated.
Significant
aspects of the U.S. federal income tax consequences of an investment in the notes are uncertain, and the IRS or a court may not
agree with the tax treatment described herein. If you are considering purchasing the notes, you should consult your tax adviser
regarding the application of U.S. federal income and estate tax laws to
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your particular situation (including
the possibility of alternative treatments of the notes) and any tax consequences arising under the laws of state, local or non-U.S.
taxing jurisdictions.
Tax Consequences to U.S. Holders
You are a “U.S. Holder”
if for U.S. federal income tax purposes you are a beneficial owner of a note that is:
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a
citizen or individual resident of the United States;
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a
corporation created or organized in or under the laws of the United States, any state therein or the District of Columbia; or
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an
estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
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Tax Treatment as Units Each
Comprising a Put Option and a Deposit
If the treatment of the notes as
units each comprising a Put Option and a Deposit is respected, the following is a discussion of the material U.S. federal income
tax consequences of owning and disposing of the notes.
Tax Treatment of Interest
Payments.
Interest paid with respect to the Deposit will be taxable to you as ordinary income at the time it accrues
or is received, in accordance with your method of accounting for U.S. federal income tax purposes.
Put Premium will be taken into
account as described below.
Sale or Exchange of a Note.
Upon sale or exchange of a note prior to maturity or Automatic Call, you will be treated as receiving a payment of interest
equal to any accrued but unpaid interest on the Deposit. The Deposit will be treated as sold for its fair market value, excluding
the value of any accrued but unpaid interest. The amount of capital gain or loss on the Deposit will equal the amount realized
that is attributable to the Deposit (excluding any amount attributable to the accrued but unpaid interest on the Deposit, which
will be treated as a payment of interest), minus your tax basis in the Deposit. That gain or loss will be short-term capital gain
or loss unless the note was held for more than one year, in which case the gain or loss will be long-term capital gain or loss.
If the value of the Deposit on
the date of sale or exchange of a note does not exceed the amount realized on the sale or exchange, any amount realized that is
attributable to the Put Option, together with the total Put Premium received over the term of the notes, will be treated as short-term
capital gain or loss.
If the value of the Deposit on the
date of sale or exchange exceeds the amount realized on the sale or exchange, you will be treated as having (i) sold or exchanged
the Deposit for an amount equal to its value on that date and (ii) made a payment to the purchaser of the note equal to the amount
of this excess, in exchange for the purchaser’s assumption of the Put Option. In this case, you will be required to recognize
short-term capital gain or loss in respect of the Put Option equal to the total Put Premium received over the term of the note
minus the amount deemed to be paid by you in exchange for the purchaser’s assumption of the Put Option.
Tax Treatment at Maturity
or Automatic Call
.
If a note is automatically called or held to maturity and the Put Option expires unexercised (
i.e.
,
you receive a cash payment at maturity equal to the amount of the Deposit plus the final interest payment, which will be treated
as described above), you will recognize short-term capital gain equal to the sum of all Put Premium received.
If a note is held to maturity and
the Put Option is exercised (
i.e.
, you receive a cash payment at maturity that is less than the amount of the Deposit (the
“Cash Value”), plus the final interest payment, which will be treated as described above), you will be deemed to have
applied a portion of the Deposit toward the cash settlement of the Put Option. In that case, you will recognize short-term capital
gain or loss in an amount equal to the difference between (i) the Cash Value plus the total Put Premium received and (ii) the Deposit.
Other
Possible Tax Treatments
The IRS might treat the notes as
“contingent payment debt instruments.” In that event, regardless of whether you are an accrual-method or cash-method
taxpayer, (i) in each year that you hold your notes, you will be required to accrue into income original issue discount on your
notes at our “comparable yield” for similar noncontingent debt, determined at the time of the issuance of the notes
and (ii) any income recognized at expiration or upon sale or exchange of your notes (including at maturity or upon an Automatic
Call) generally will be treated as interest income. In addition, you could be subject to special reporting requirements if any
loss exceeded certain thresholds. You should consult your tax adviser regarding these issues.
In 2007 Treasury and the IRS released
a notice requesting comments on the U.S. federal income tax treatment of “prepaid forward contracts” and similar instruments.
The notice focuses on a number of issues, the most relevant of which for U.S. Holders are the timing and character of income or
loss (including whether the Put Premium might be currently included as ordinary income). While it is not clear whether the notes
would be viewed as similar to the typical prepaid forward contract described in the notice, it is possible that any Treasury regulations
or other guidance promulgated after consideration of these issues could materially and adversely affect the tax consequences of
an investment in the notes, possibly with
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retroactive effect. You should
consult your tax adviser regarding the U.S. federal income tax consequences of an investment in the notes, including possible alternative
treatments and the issues presented by this notice.
Tax Consequences to Non-U.S.
Holders
You are a “Non-U.S. Holder”
if for U.S. federal income tax purposes you are a beneficial owner of a note that is:
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nonresident alien individual;
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a
foreign corporation; or
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a
foreign estate or trust.
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You are not a “Non-U.S. Holder”
for purposes of this discussion if you are an individual present in the United States for 183 days or more in the taxable year
of disposition. In this case, you should consult your tax adviser regarding the U.S. federal income tax consequences of the sale
or exchange of a note (including upon an Automatic Call or at maturity).
Subject to the discussion in “FATCA”
below, any income or gain from a note should not be subject to U.S. federal income tax (including withholding tax) if you provide
a properly completed applicable IRS Form W-8 and these amounts are not effectively connected with your conduct of a U.S. trade
or business (and, if an applicable treaty so requires, attributable to a permanent establishment in the United States).
However,
among the issues addressed in the notice described above in “—Tax Consequences to U.S. Holders” is the degree,
if any, to which income with respect to instruments described therein should be subject to U.S. withholding tax. It is possible
that any Treasury regulations or other guidance promulgated after consideration of these issues could materially and adversely
affect the withholding tax consequences of an investment in the notes, possibly with retroactive effect.
If you are engaged in a U.S. trade
or business, and if income or gain from a note is effectively connected with your conduct of that trade or business (and, if an
applicable treaty so requires, attributable to a permanent establishment in the United States), although exempt from the withholding
tax discussed above, you generally will be taxed in the same manner as a U.S. Holder. You will not be subject to withholding if
you provide a properly completed IRS Form W-8ECI. If this paragraph applies to you, you should consult your tax adviser with respect
to other U.S. tax consequences of owning and disposing of notes, including the possible imposition of a 30% branch profits tax
if you are a corporation.
Federal Estate Tax
Individual Non-U.S. Holders, and
entities the property of which is potentially includible in those individuals’ gross estates for U.S. federal estate tax
purposes (for example, a trust funded by such an individual and with respect to which the individual has retained certain interests
or powers), should note that, absent an applicable treaty benefit, a note is likely to be treated as U.S.-situs property, subject
to U.S. federal estate tax. These individuals and entities should consult their tax advisers regarding the U.S. federal estate
tax consequences of investing in a note.
Backup Withholding and Information
Reporting
You may be subject to information
reporting. You may also be subject to backup withholding on payments in respect of your notes unless you provide proof of an applicable
exemption or a correct taxpayer identification number and otherwise comply with applicable requirements of the backup withholding
rules. If you are a Non-U.S. Holder, you will not be subject to backup withholding if you provide a properly completed IRS Form
W-8 appropriate to your circumstances. Amounts withheld under the backup withholding rules are not additional taxes and may be
refunded or credited against your U.S. federal income tax liability, provided the required information is furnished to the IRS.
FATCA
Legislation commonly referred to as “FATCA,”
and regulations promulgated thereunder, generally impose a 30% withholding tax on payments to certain foreign entities (including
financial intermediaries) unless various U.S. information reporting and due diligence requirements have been satisfied. An intergovernmental
agreement between the United States and the foreign entity’s jurisdiction may modify these requirements. This regime
will apply to amounts treated as interest or other “fixed or determinable annual or periodical” income (“FDAP
Income”) for U.S. federal income tax purposes paid with respect to the notes, and (if they are treated, in whole or in part,
as debt instruments) could also apply to payments of gross proceeds of a taxable disposition, including an Automatic Call or redemption
at maturity, of a note. However, under a recent IRS notice, this regime will not apply to payments of gross proceeds (other
than any amount treated as FDAP Income) with respect to dispositions occurring before January 1, 2019. You should consult
your tax adviser regarding the potential application of FATCA to the notes.
THE
TAX CONSEQUENCES TO YOU OF OWNING AND DISPOSING OF NOTES ARE UNCERTAIN. YOU SHOULD CONSULT YOUR TAX ADVISER REGARDING THE TAX CONSEQUENCES
OF OWNING AND DISPOSING OF NOTES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, NON-U.S. AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN U.S. FEDERAL OR OTHER TAX LAWS.
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