Feed to the latest filings at the SEC
Date Filed : May 05, 2021
Accelerated Return Notes® “ARNs®” Linked to One or More Equity Securities
ARNs offered hereunder are not deposit liabilities or other obligations of a bank, are not insured by the Federal Deposit Insurance Corporation (the “FDIC”) or any other governmental agency of the United States, or any other jurisdiction, and carry investment risks, including possible loss of the amount invested due to the credit risk of HSBC. Potential purchasers of ARNs should consider the information in “Risk Factors” beginning on page PS-6 of this product supplement, page S-1 of the accompanying prospectus supplement, and page 2 of the accompanying prospectus. You may lose all or a significant portion of your investment in ARNs.
Neither the U.S. Securities and Exchange Commission (the “SEC”), nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or the adequacy of this product supplement, or the accompanying prospectus supplement or prospectus. Any representation to the contrary is a criminal offense.
TABLE OF CONTENTS
ARNs®and “Accelerated Return Notes®” are registered service marks of Bank of America Corporation, the parent corporationof BofAS.
The information in this “Summary” sectionis qualified in its entirety by the more detailed explanation set forth elsewhere in this product supplement, the prospectus supplement,and the prospectus, as well as the applicable term sheet. Neither we nor BofAS have authorized any other person to provide you withany information different from the information set forth in these documents. If anyone provides you with different or inconsistentinformation about the ARNs, you should not rely on it.
ARNs are senior unsecured debt securities issued by HSBC, and are not guaranteed or insured by the FDIC, and are not, either directly or indirectly, an obligation of any third party. As further described in the accompanying prospectus supplement and prospectus, ARNs will rank on par equally with all of the other unsecured and unsubordinated debt obligations of HSBC. Any payment to be made on ARNs, including any return of principal, depends on HSBC’s credit risk and the ability of HSBC to satisfy its obligations as they become due.
The return on ARNs will be based on the performance of a Market Measure and there is no guaranteed return of principal at maturity. Therefore, you may lose all or a significant portion of your investment if the value of the Market Measure decreases from the Starting Value to the Ending Value.
Each issue of ARNs will mature on the date set forth in the applicable term sheet. We cannot redeem ARNs at any earlier date, except under the limited circumstances as set forth below in the section “Description of ARNs—Anti-Dilution Adjustments—Reorganization Events.” We will not make any payments on ARNs until maturity, and you will not receive any interest payments.
The Underlying Stock of a company other than us, the agents and our respective affiliates (the “Underlying Company”) represented either by a class of common equity securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or by ADRs registered under the Exchange Act.
The Market Measure may consist of a group, or “Basket,” of Underlying Stocks. We refer to each Underlying Stock included in any Basket as a “Basket Stock.” If the Market Measure to which your ARNs are linked is a Basket, the Basket Stocks will be set forth in the applicable term sheet.
The performance of the Market Measure will be measured according to the percentage change of the Market Measure from its Starting Value to its Ending Value.
Unless otherwise specified in the applicable term sheet:
The “Starting Value” will be the price of the Underlying Stock on the date when the ARNs are priced for initial sale to the public (the “pricing date”), determined as set forth in the applicable term sheet.
If the Market Measure consists of a Basket, the Starting Value will be equal to 100. See “Description of ARNs—Basket Market Measures.”
The “Ending Value” will equal the Closing Market Price of the Underlying Stock on the calculation day multiplied by its Price Multiplier on that day (each as defined below).
If the Market Measure consists of a Basket, the Ending Value will be determined as described in “Description of ARNs—Basket Market Measures—Ending Value of the Basket.”
If a Market Disruption Event (as defined below) occurs and is continuing on the scheduled calculation day, or if certain other events occur, the calculation agent will determine the Ending Value as set forth in the section “Description of ARNs—The
At maturity, you will receive a Redemption Amount that is greater than the principal amount if the value of the Market Measure increases from the Starting Value to the Ending Value. However, in no event will the Redemption Amount exceed the Capped Value.If the value of the Market Measure does not change from the Starting Value to the Ending Value, you will receivea Redemption Amount that equals the principal amount. If the value of the Market Measure decreases from the Starting Value to the Ending Value, you will be subject to 1-to-1 downside exposure to that decrease, and will receive a Redemption Amount that is less than the principal amount.
Any paymentsdue on the ARNs, including any repayment of principal, are subject to our credit risk as issuer of ARNs.
The Redemption Amount, denominated in U.S. dollars, will be calculated as follows:
This product supplement relates only to ARNs anddoes not relate to any Underlying Stock described in any applicable term sheet. You should read carefully the entire prospectus, prospectussupplement, and this product supplement, together with the applicable term sheet, to understand fully the terms of your ARNs, as wellas the tax and other considerations important to you in making a decision about whether to invest in any ARNs. In particular, you shouldreview carefully the sections in this product supplement and the accompanying prospectus supplement and prospectus entitled “RiskFactors,” which highlight a number of risks of an investment in ARNs, to determine whether an investment in ARNs is appropriatefor you. Additional risk factors may be set forth in the applicable term sheet. If information in this product supplement is inconsistentwith the prospectus or prospectus supplement, this product supplement will supersede those documents. However, if information in any applicableterm sheet is inconsistent with this product supplement, that term sheet will supersede this product supplement.
None of us, the agents or our respective affiliatesis making an offer to sell ARNs in any jurisdiction where the offer or sale is not permitted. This product supplement and the accompanyingprospectus supplement and prospectus are not an offer to sell the ARNs to anyone and are not soliciting an offer to buy the ARNs fromanyone in any jurisdiction where the offer or sale is not permitted.
Certain capitalized terms used and not definedin this product supplement have the meanings ascribed to them in the prospectus supplement and prospectus. Unless otherwise indicatedor unless the context requires otherwise, all references in this product supplement to “we,” “us,” “our,”or similar references are to HSBC.
You are urged to consult with your own attorneysand business and tax advisors before making a decision to purchase any ARNs.
You will be subject to significant risks notassociated with conventional fixed-rate or floating-rate debt securities. You should understand the risks of investing in ARNs and shouldreach an investment decision only after careful consideration with your advisors with respect to the ARNs in light of your particularfinancial and other circumstances and the information set forth in the applicable term sheet, this product supplement and the accompanyingprospectus supplement and prospectus.
Your investment may result in a loss; thereis no guaranteed return of principal. There is no fixed principal repayment amount on ARNs at maturity. The return on the ARNs willbe based on the performance of a Market Measure and therefore, you may lose all or a significant portion of your investment if the valueof the Market Measure decreases from the Starting Value to the Ending Value.
Your return on the ARNs may be less than theyield on a conventional fixed or floating rate debt security of comparable maturity. There will be no periodic interest payments onARNs as there would be on a conventional fixed-rate or floating-rate debt security having the same maturity. Any return that you receiveon ARNs may be less than the return you would earn if you purchased a conventional debt security with the same maturity date. As a result,your investment in ARNs may not reflect the full opportunity cost to you when you consider factors, such as inflation, that affect thetime value of money.
Your investment return will be limited to thereturn represented by the Capped Value and may be less than a comparable investment directly in the Market Measure. The appreciationpotential of ARNs is limited to the Capped Value. You will not receive a Redemption Amount greater than the Capped Value, regardless ofthe extent of the increase in the value of the Market Measure. In contrast, a direct investment in the Market Measure would allow youto receive the full benefit of any appreciation in the value of the Market Measure.
In addition, unless otherwise set forth in theapplicable term sheet or in the event of an adjustment as described in this product supplement under “Description of ARNs—Anti-DilutionAdjustments,” the Ending Value will not reflect the value of dividends paid, or distributions made, on any Underlying Stock, orany other rights associated with any Underlying Stock. Thus, any return on the ARNs will not reflect the return you would realize if youactually owned shares of an Underlying Stock.
The Redemption Amount will not reflect changesin the value of the Market Measure other than on the calculation day. Changes in the value of the Market Measure during the term ofARNs other than on the calculation day will not be reflected in the calculation of the Redemption Amount. To calculate the RedemptionAmount, the calculation agent will compare only the Ending Value to the Starting Value. No other values of the Market Measure will betaken into account. As a result, even if the value of the Market Measure has increased at certain times during the term of the ARNs, youwill receive a Redemption Amount that is less than the principal amount if the Ending Value is less than the Starting Value.
If your ARNs are linked to a Basket, changesin the prices of one or more of the Basket Stocks may be offset by changes in the prices of one or more of the other Basket Stocks.The Market Measure of your ARNs may be a Basket. In such a case, changes in the prices of one or more of the Basket Stocks may not correlatewith changes in the prices of one or more of the other Basket Stocks. The prices of one or more Basket Stocks may increase, while theprices of one or more of the other Basket Stocks may decrease or not increase as
much. Therefore, in calculating the value of the Market Measure atany time, increases in the price of one Basket Stock may be moderated or wholly offset by decreases or lesser increases in the pricesof one or more of the other Basket Stocks. If the weightings of the applicable Basket Stocks are not equal, adverse changes in the pricesof the Basket Stocks which are more heavily weighted could have a greater impact upon the value of the Market Measure and, consequently,the return on your ARNs.
Payments on ARNs are subject to our credit risk,and actual or perceived changes in our creditworthiness are expected to affect the value of ARNs. The ARNs are senior unsecured debtobligations of the Issuer, and are not, either directly or indirectly, an obligation of any third party. As further described in the accompanyingprospectus supplement and prospectus, the ARNs will rank on par with all of the other unsecured and unsubordinated debt obligations ofHSBC. Any payment to be made on the ARNs, including any return of principal at maturity, depends on the ability of HSBC to satisfy itsobligations as they become due. As a result, the actual and perceived creditworthiness of HSBC may affect the market value of the ARNsand, in the event HSBC were to default on its obligations, you may not receive the amounts owed to you under the terms of the ARNs. Becauseyour return on the ARNs depends upon factors in addition to HSBC’s ability to pay its obligations, such as the value of the applicableMarket Measure, an improvement in HSBC’s credit ratings will not reduce the other investment risks related to the ARNs.
The ARNs are not insured or guaranteed by anygovernmental agency of the United States or any other jurisdiction. The ARNs are not deposit liabilities or other obligations of abank and are not insured or guaranteed by the FDIC or any other governmental agency or program of the United States or any other jurisdiction.An investment in the ARNs is subject to the credit risk of HSBC, and in the event that HSBC is unable to pay its obligations as they becomedue, you may not receive the full payments due on the ARNs.
Valuation- and Market-related Risks
The estimated initial value of the ARNs willbe less than the public offering price and may differ from the market value of the ARNs in the secondary market, if any. We will determinethe estimated initial value of the ARNs, which will be set forth in the applicable term sheet, by reference to our or our affiliates’internal pricing models. These pricing models consider certain assumptions and variables, which can include volatility and interest rates.These pricing models rely in part on certain forecasts about future events, which may prove to be incorrect. Different pricing modelsand assumptions could provide valuations for the ARNs that are different from our estimated initial value. The estimated initial valuewill reflect our internal funding rate, which is the borrowing rate we pay to issue market-linked notes, as well as the mid-market valueof the hedging arrangements related to the ARNs (which may include call options, put options or other derivatives).
Our internal funding rate for the issuance ofthese ARNs is lower than the rate we would use when we issue conventional fixed or floating rate debt securities. This is one of thefactors that may result in the market value of the ARNs being less than their estimated initial value. As a result of the difference betweenour internal funding rate and the rate we would use when we issue conventional fixed or floating rate debt securities, the estimated initialvalue of the ARNs may be lower if it were based on the levels at which our fixed or floating rate debt securities trade in the secondarymarket. In addition, if we were to use the rate we use for our conventional fixed or floating rate debt issuances, we would expect theeconomic terms of the ARNs to be more favorable to you.
The price of your ARNs in the secondary market,if any, immediately after the pricing date will be less than the public offering price. The public offering price takes into accountcertain costs, principally the underwriting discount, the expected hedging costs described in the applicable term sheet, and the costsassociated with issuing the ARNs. The costs associated with issuing the ARNs will be used or retained by us or one of our affiliates.If you were to sell your ARNs in the secondary market, if any, the price you would receive for your ARNs may be less than the price youpaid for them.
The estimated initial value does not representa minimum price at which we, BofAS or any of our respective affiliates would be willing to purchase your ARNs in the secondary market(if any exists) at any time. The price of your ARNs in the secondary market, if any, at any time after issuance will vary based onmany factors, including the value of the Market Measure and changes in market conditions, and cannot be predicted with accuracy. The ARNsare not designed to be short-term trading instruments, and you should, therefore, be able and willing to hold the ARNs to maturity. Anysale of the ARNs prior to maturity could result in a loss to you.
We cannot assure you that there will be a tradingmarket for your ARNs. If a secondary market exists, we cannot predict how the ARNs will trade, or whether that market will be liquidor illiquid. The development of a trading market for the ARNs will depend on various factors, including our financial performance andchanges in the value of the Market Measure. The number of potential buyers of your ARNs in any secondary market may be limited. Thereis no assurance that any party will be willing to purchase your ARNs at any price in any secondary market.
We anticipate that one or more of the agents ortheir affiliates will act as a market-maker for ARNs, but none of them is required to do so and may cease to do so at any time. Any priceat which an agent or its affiliates may bid for, offer, purchase, or sell any ARNs may be higher or lower than the applicable public offeringprice, and that price may differ from the values determined by pricing models that it may use, whether as a result of dealer discounts,mark-ups, or other transaction costs. These bids, offers, or transactions may adversely affect the prices, if any, at which those ARNsmight otherwise trade in the market. In addition, if at any time any entity were to cease acting as a market-maker for any issue of ARNs,it is likely that there would be significantly less liquidity in that secondary market. In such a case, the price at which those ARNscould be sold likely would be lower than if an active market existed.
Unless otherwise stated in the applicable termsheet, we will not list ARNs on any securities exchange. Even if an application were made to list your ARNs, we cannot assure you thatthe application will be approved or that your ARNs will be listed and, if listed, that they will remain listed for their entire term.The listing of ARNs on any securities exchange will not necessarily ensure that a trading market will develop, and if a trading marketdoes develop, that there will be liquidity in the trading market.
If you attempt to sell ARNs prior to maturity,their market value, if any, will be affected by various factors that interrelate in complex ways, and their market value may be less thanthe principal amount. The ARNs are not designed to be short-term trading instruments. You have no right to have your ARNs redeemedprior to maturity. If you wish to liquidate your investment in ARNs prior to maturity, your only option would be to sell them. At thattime, there may be an illiquid market for your ARNs or no market at all. Even if you were able to sell your ARNs, there are many factorsoutside of our control that may affect their market value, some of which, but not all, are stated below. These factors may interact witheach other in complex and unpredictable ways, and the impact of any one factor may be offset or magnified by the effect of another factor.The following paragraphs describe a specific
factor’s expected impact on the market value of ARNs, assumingall other conditions remain constant.
Tradingand hedging activities by us, the agents, and our respective affiliates may affect your return on the ARNsand their market value. We, the agents, and our respective affiliates maybuy or sell shares of an Underlying Stock, futures or options contracts or exchange-tradedinstruments on an Underlying Stock, or other listed or over-the counter derivative instrumentslinked to an Underlying Stock. We, the agents, and our respective affiliates may execute such purchases or sales for our own ortheir own accounts, for business reasons, or in connection with hedging our obligations under theARNs. These transactions could adversely affect the value of an Underlying Stockin a manner that could be adverse to your investment in ARNs. On or before the applicablepricing date, any purchases by us, the agents, and our respective affiliates, or others on our or their behalf (including those for thepurpose of hedging some or all of our anticipated exposure in connection with the ARNs) may increase the value of anUnderlying Stock. Consequently, the value of that Underlying Stock may decreasesubsequent to the pricing date of an issue of ARNs, which may adversely affect themarket value of ARNs.
We, the agents, or one or more of our respectiveaffiliates may also engage in hedging activities that could increase the value of an Underlying Stock on the applicable pricing date.In addition, these activities may decrease the market value of your ARNs prior to maturity, including on the calculation day, and mayreduce the Redemption Amount.
We, the agents, or one or more of our respectiveaffiliates may purchase or otherwise acquire a long or short position in ARNs, and may hold or resell ARNs. For example, the agents mayenter into these transactions in connection with any market making activities in which they engage. We cannot assure you that these activitieswill not adversely affect the price of any Underlying Stock, the market value of your ARNs prior to maturity or the Redemption Amount.
Our trading, hedging and other business activities,and those of the agents or one or more of our respective affiliates, may create conflicts of interest with you. We, the agents, orone or more of our respective affiliates may engage in trading activities related to an Underlying Stock that are not for your accountor on your behalf. We, the agents, or one or more of our respective affiliates also may issue or underwrite other financial instrumentswith returns based upon the applicable Market Measure. These trading and other business activities may present a conflict of interestbetween your interest in ARNs and the interests we, the agents, and our respective affiliates may have in our proprietary accounts, infacilitating transactions, including block trades, for our or their other customers, and in accounts under our or their management. Thesetrading and other business activities, if they influence the value of the Market Measureor secondary trading in your ARNs, could be adverse to your interests as a beneficial owner of ARNs.
We, the agents, and our respective affiliatesexpect to enter into arrangements or adjust or close out existing transactions to hedge our obligations under the ARNs. We, the agents,or our respective affiliates also may enter into hedging transactions relating to other
securities or instruments that we or they issue, some of which mayhave returns calculated in a manner related to that of a particular issue of ARNs. We may enter into such hedging arrangements with oneor more of our subsidiaries or affiliates, or with one or more of the agents or their affiliates. Such a party may enter into additionalhedging transactions with other parties relating to ARNs and an Underlying Stock. This hedging activity is expected to result in a profitto those engaging in the hedging activity, which could be more or less than initially expected, but could also result in a loss. We, theagents, and our respective affiliates will price these hedging transactions with the intent to realize a profit, regardless of whetherthe value of ARNs increases or decreases or whether the Redemption Amount on the ARNs is more or less than the principal amount of theARNs. Any profit in connection with such hedging activities will be in addition to any other compensation that we, the agents, and ourrespective affiliates receive for the sale of ARNs, which creates an additional incentive to sell ARNs to you.
There may be potential conflicts of interestinvolving the calculation agent. We may appoint and remove the calculation agent. We or one of our affiliates may be the calculationagent or act as joint calculation agent for ARNs and, as such, will determine the Starting Value, the Price Multiplier, the Ending Valueand the Redemption Amount. Under some circumstances, these duties could result in a conflict of interest between our status as issuerand our responsibilities as calculation agent. These conflicts could occur, for instance, in connection with the calculation agent’sdetermination as to whether a Market Disruption Event has occurred, or in connection with judgments that the calculation agent would berequired to make if certain corporate events occur with respect to any Underlying Stock. See the sections entitled “Descriptionof ARNs—Market Disruption Events” and “—Anti-Dilution Adjustments.” The calculation agent will be requiredto carry out its duties in good faith and using its reasonable judgment. However, because we may serve as the calculation agent, potentialconflicts of interest could arise. None of us, the agents, or any of our respective affiliates will have any obligation to consider yourinterests as a holder of ARNs in taking any action that might adversely affect the value of ARNs.
In addition, we may appoint BofAS or one of itsaffiliates to act as the calculation agent or as joint calculation agent for the ARNs. As the calculation agent or joint calculation agent,BofAS or one of its affiliates will have discretion in making various determinations that affect your ARNs. The exercise of this discretionby the calculation agent could adversely affect the value of your ARNs and may present the calculation agent with a conflict of interestof the kind described under “—Trading and hedging activities by us, the agents, and our respective affiliates may affect yourreturn on the ARNs and their market value” and “—Our trading, hedging and other business activities, and those of theagents or one or more of our respective affiliates, may create conflicts of interest with you” above.
Market Measure-related Risks
You must rely on your own evaluation of themerits of an investment linked to any applicable Underlying Stock. In the ordinary course of business, we, the agents, and our respectiveaffiliates may have expressed views on expected movements in an Underlying Stock, and may do so in the future. These views or reportsmay be communicated to our clients and clients of these entities. However, these views are subject to change from time to time. Moreover,other professionals who deal in markets relating to an Underlying Stock may at any time have significantly different views from our viewsand the views of these entities. For these reasons, you are encouraged to derive information concerning an Underlying Stock from multiplesources, and you should not rely on our views or the views expressed by these entities.
As a note holder, you will have no rights toreceive any shares of any Underlying Stock, and you will not be entitled to receive dividends or other distributions by any UnderlyingCompany. ARNs are our debt securities. They are not equity instruments, shares of stock, or securities of any other issuer. Investingin ARNs will not make you a holder of any Underlying Stock. You will not have any voting rights, any rights to receive dividends or otherdistributions, or any other rights with respect to any Underlying Stock. As a result, the return on your ARNs may not reflect the returnyou would realize if you actually owned shares of any Underlying Stock and received the dividends paid or other distributions made inconnection with them. Your ARNs will be paid in cash and you have no right to receive any shares of an Underlying Stock.
If shares of an Underlying Company are alsolisted on a foreign exchange, your return may be affected by factors affecting international securities markets. The value of securitiestraded outside of the U.S. may be adversely affected by a variety of factors relating to the relevant securities markets. Factors whichcould affect those markets, and therefore the return on your ARNs, include:
We, the agents and our respective affiliatesdo not control any Underlying Company and have not verified any disclosure made by any Underlying Company. We, the agents, or ourrespective affiliates currently, or in the future, may engage in business with any Underlying Company, and we, the agents, or our respectiveaffiliates may from time to time own securities of any Underlying Company. However, none of us, the agents, or any of our respective affiliateshas the ability to control the actions of any Underlying Company or has undertaken any independent review of, or made any due diligenceinquiry with respect to, any Underlying Stock or any Underlying Company. Any information in the term sheet regarding an Underlying Stock and an Underlying Company is derived from publiclyavailable information.
You should make your own investigation into any Underlying Stock and any Underlying Company.
Our business activities and those of the agentsrelating to any Underlying Company or ARNs may create conflicts of interest with you. We, the agents, and our respective affiliates,at the time of any offering of ARNs or in the future, may engage in business with any Underlying Company, including making loans to, equityinvestments in, or providing investment banking, asset management, or other services to that company, its affiliates, and its competitors.
In connection with these activities, any ofthese entities may receive information about those companies that we will not divulge to you or other third parties. We, the agents,and our respective affiliates have published, and in the future may publish, research reports on one or more of these companies. Theagents may also publish research reports relating to our or our affiliates’ securities, including ARNs. This research ismodified from time to time without notice and may express opinions or provide recommendations that are inconsistent with purchasingor holding your ARNs. Any of these activities may adversely affect the price of any Underlying Stock and, consequently, the marketvalue of your ARNs. None of us, the agents, or our respective affiliates makes any representation to any purchasers of the ARNsregarding any matters whatsoever relating to any Underlying Stock or Underlying Company. Any prospective purchaser of the ARNsshould undertake an independent investigation of an Underlying Stock and an Underlying Company to the extent that, in its judgment,is appropriate to make an informed decision regarding an investment in the ARNs. The selection of an Underlying Stock does notreflect any investment recommendations from us, the agents, or our respective affiliates.
An Underlying Company will not have any obligationsrelating to the ARNs, and none of us, the agents, or our respective affiliates will perform any due diligence procedures with respectto any Underlying Company. An Underlying Company will not have any financial or legal obligation with respect to ARNs or the amountsto be paid to you, including any obligation to take our needs or the needs of noteholders into consideration for any reason, includingtaking any corporate actions that might adversely affect the value of an Underlying Stock or the value of ARNs. An Underlying Companywill not receive any of the proceeds from any offering of ARNs, and will not be responsible for, or participate in, the offering of ARNs.No Underlying Company will be responsible for, or participate in, the determination or calculation of the amount payable on the ARNs.
None of us, the agents, or any of our respectiveaffiliates will conduct any due diligence inquiry with respect to any Underlying Stock in connection with an offering of ARNs. None ofus, the agents, or any of our respective affiliates has made any independent investigation as to the completeness or accuracy of publiclyavailable information regarding any Underlying Stock or any Underlying Company or as to the future performance of any Underlying Stock.Any prospective purchaser of ARNs should undertake such independent investigation of an Underlying Stock and an Underlying Company asin its judgment is appropriate to make an informed decision with respect to an investment in ARNs.
The Redemption Amount will not be adjustedfor all corporate events that could affect an Underlying Company. The Price Multiplier(s), the Ending Value, the Redemption Amount,and other terms of ARNs may be adjusted for the specified corporate events affecting any Underlying Stock, as described in the sectionentitled “Description of ARNs—Anti-Dilution Adjustments.” However, these adjustments do not cover all corporate eventsthat could affect the market price of an Underlying Stock, such as offerings of common shares for cash or in connection with certainacquisition transactions. The occurrence of any event that does not require the calculation agent to adjust the applicable Price Multiplieror the amount payable on the ARNs may adversely affect the Closing Market Price of an Underlying Stock, the Ending Value and the RedemptionAmount, and, as a result, the market value of ARNs.
Risks Relating to Underlying Stocks that AreADRs
The value of an ADR may not accurately trackthe value of the common shares of the related Underlying Company. If an Underlying Stock is an ADR, each ADR will represent sharesof the relevant Underlying Company. Generally, the ADRs are issued under a deposit agreement that sets forth the rights and responsibilitiesof the depositary, the Underlying Company and the holders of the ADRs. The trading patterns of the ADRs will generally reflect the characteristicsand valuations of the underlying common shares; however, the value of the ADRs may not completely track the value of those shares. Thereare important differences between the rights of holders of ADRs and the rights of holders of the underlying common shares. In addition,trading volume and pricing on the applicable non-U.S. exchange may, but will not necessarily, have similar characteristics as the ADRs.For example, certain factors may increase or decrease the public float of the ADRs and, as a result, the ADRs may have less liquidityor lower market value than the underlying common shares.
Exchange rate movements may adversely impactthe value of an Underlying Stock that is an ADR. If an Underlying Stock is an ADR, the market price of the Underlying Stock willgenerally track the U.S. dollar value of the market price of its underlying common shares. Therefore, if the value of the related foreigncurrency in which the underlying common shares are traded decreases relative to the U.S. dollar, the market price of the Underlying Stockmay decrease while the market price of its underlying common shares remains stable or increases, or does not decrease to the same extent.As a result, changes in, and the volatility of, the exchange rates between the U.S. dollar and the relevant non-U.S. currency could havea negative impact on the value of the Underlying Stock and consequently, the value of your ARNs and the amount payable on ARNs.
Adverse trading conditions in the applicablenon-U.S. market may negatively affect the value of an Underlying Stock that is an ADR. Holders of an Underlying Company’s ADRsmay usually surrender the ADRs in order to receive and trade the underlying common shares. This provision permits investors in the ADRsto take advantage of price differentials between markets. However, this provision may also cause the market prices of the applicable UnderlyingStock to more closely correspond with the values of the common shares in the applicable non-U.S. markets. As a result, a market outsideof the United States for the underlying common shares that is not liquid may also result in an illiquid market for the ADRs, which maynegatively impact the value of such ADRs and, consequently, the value of your ARNs.
Delisting of an Underlying Stock that is anADR may adversely affect the value of ARNs. If an Underlying Stock that is an ADR is no longer listed or admitted to trading on aU.S. securities exchange registered under the Exchange Act or included in the Over-The-Counter Bulletin Board Service (the “OTCBulletin Board”) operated by the Financial Industry Regulatory Authority, Inc. (“FINRA”), or if the ADR facilitybetween the Underlying Company and the ADR depositary is terminated for any reason, the applicable Underlying Stock will be deemed tobe the Underlying Company’s common equity securities rather than the ADRs, and the calculation agent will determine the price ofthe Market Measure by reference to those common shares, as described below under “Description of ARNs—Delisting of ADRs orTermination of ADR Facility.” Replacing the original ADRs with the underlying common shares may adversely affect the value of ARNsand the Redemption Amount.
Other Risk Factors Relating to an UnderlyingStock
The applicable term sheet may set forth additionalrisk factors as to an Underlying Stock that you should review prior to purchasing ARNs.
The U.S. federal income tax consequences ofan investment in ARNs are uncertain, and may be adverse to a holder of ARNs. No statutory, judicial, or administrative authority directlyaddresses the characterization of ARNs or securities similar to ARNs for U.S. federal income tax purposes. As a result, significant aspectsof the U.S. federal income tax consequences of an investment in ARNs are not certain. Under the terms of ARNs, you will have agreed withus to treat ARNs as pre-paid executory contracts, as described under “U.S. Federal Income Tax Summary—General.” If theInternal Revenue Service (the “IRS”) were successful in asserting an alternative characterization for ARNs, the timingand character of gain or loss with respect to ARNs may differ. No ruling will be requested from the IRS with respect to ARNs and no assurancecan be given that the IRS will agree with the statements made in the section entitled “U.S. Federal Income Tax Summary.”
YOU ARE URGED TO CONSULT WITH YOUR OWN TAX ADVISORREGARDING ALL ASPECTS OF THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF INVESTING IN THE ARNS.
DESCRIPTION OF ARNS
Each issue of ARNs will be part of a series ofnotes entitled “Notes, Series 1” that will be issued under the Senior Indenture, as amended and supplemented from time totime. The Senior Indenture is described more fully in the prospectus and prospectus supplement. The following description of ARNs supplementsand, to the extent it is inconsistent with, supersedes the description of the general terms and provisions of the notes and debt securitiesset forth under the headings “Description of Notes” in the prospectus supplement and “Description of Debt Securities”in the prospectus. These documents should be read in connection with the applicable term sheet.
The maturity date of the ARNs and the aggregateprincipal amount of each issue of ARNs will be stated in the applicable term sheet. If the scheduled maturity date is not a business day,we will make the required payment on the next business day, and no interest will accrue as a result of such delay.
We will not pay interest on ARNs. The ARNs do notguarantee the return of principal at maturity. The ARNs will be payable only in U.S. dollars.
Prior to the maturity date, the ARNs are not redeemableat our option, except under the limited circumstances as set forth below in the section “—Anti-Dilution Adjustments—ReorganizationEvents,” or repayable at the option of any holder. The ARNs are not subject to any sinking fund.
We will issue ARNs in denominations of whole units.Unless otherwise set forth in the applicable term sheet, each unit will have a principal amount of $10. The CUSIP number for each issueof ARNs will be set forth in the applicable term sheet. You may transfer ARNs only in whole units.
Payment at Maturity
At maturity, subject to our credit risk as issuerof ARNs, you will receive a Redemption Amount, denominated in U.S. dollars. The “Redemption Amount” will be calculatedas follows:
The Redemption Amount will not exceed the “CappedValue” set forth in the applicable term sheet.
The RedemptionAmount will not be less than zero.
Your participation in any upside performance ofthe Market Measure underlying your ARNs will also be impacted by the Participation Rate. The “Participation Rate” willbe 300% for ARNs unless otherwise set forth in the applicable term sheet.
Each applicable term sheet will provide examplesof Redemption Amounts based on a range of hypothetical Ending Values.
The applicable term sheet will set forth informationas to the applicable Market Measure, including information as to the historical prices of the Underlying Stock or Underlying Stocks. However,historical prices of any Underlying Stock are not indicative of its future performance or the performance of your ARNs.
An investment in ARNs does not entitle you to anyownership interest, including any voting rights, in any Underlying Stock, nor dividends paid or other distributions made, by any UnderlyingCompany.
The Starting Value and the Ending Value
The “Starting Value” will bethe price of the Underlying Stock on the pricing date, determined as set forth in the applicable term sheet.
If the Market Measure consists of a Basket, theStarting Value will be equal to 100. See “—Basket Market Measures.”
The “Ending Value” will equalthe Closing Market Price of the Underlying Stock on the calculation day multiplied by its Price Multiplier on that day.
If the Market Measure consists of a Basket, theEnding Value of the Basket will be determined as described in “—Basket Market Measures—Ending Value of the Basket.”
The “calculation day” meansa trading day shortly before the maturity date. The calculation day will be set forth in the applicable term sheet.
A “trading day” means a dayon which trading is generally conducted (or was scheduled to have been generally conducted, but for the occurrence of a Market DisruptionEvent) on the New York Stock Exchange (the “NYSE”), The Nasdaq Stock Market, the Chicago Board Options Exchange, andin the over-the-counter market for equity securities in the United States, or any successor exchange or market, or in the case of a securitytraded on one or more non-U.S. securities exchanges or markets, on the principal non-U.S. securities exchange or market for such security.
The “Closing Market Price” forone share of an Underlying Stock (or one unit of any other security for which a Closing Market Price must be determined) on any tradingday means any of the following:
that day on the principal U.S. securities exchange registeredunder the Exchange Act on which the Underlying Stock (or such other security) is listed or admitted to trading;
If, with respect to an Underlying Stock, (i) thereis a Market Disruption Event on the scheduled calculation day or (ii) the scheduled calculation day is determined by the calculationagent not to be a trading day by reason of an extraordinary event, occurrence, declaration or otherwise, the calculation day will bethe immediately succeeding trading day during which no Market Disruption Event occursor is continuing; provided that the Closing Market Price of the Underlying Stock willbe determined (or, if not determinable, estimated) by the calculation agent in a commercially reasonable manner on a date no later thanthe second scheduled trading day prior to the maturity date, regardless of the occurrenceof a Market Disruption Event or non-trading day on that day.
The initial “Price Multiplier”for an Underlying Stock will be one, unless otherwise set forth in the applicable term sheet. The Price Multiplier for each UnderlyingStock will be subject to adjustment for certain corporate events relating to that Underlying Stock described below under “—Anti-DilutionAdjustments.”
Market Disruption Events
As to any Underlying Stock (or any “successorUnderlying Stock”, which is the common equity securities or the ADRs of a Successor Entity (as defined below)), a “MarketDisruption Event” means one or more of the following events, as determined by the calculation agent in its sole discretion:
For the purpose of determining whether a MarketDisruption Event has occurred:
As to any Underlying Stock (or successor UnderlyingStock), the calculation agent, in its sole discretion, may adjust the Price Multiplier (and as a result, the Ending Value), and any otherterms of ARNs (such as the Starting Value), if an event described below occurs after the pricing date and on or before the calculationday and if the calculation agent determines that such an event has a diluting or concentrative effect on the theoretical value of theshares of the applicable Underlying Stock or successor Underlying Stock.
The Price Multiplier for an Underlying Stock resultingfrom any of the adjustments specified below will be rounded to the eighth decimal place with five one-billionths being rounded upward.No adjustments to the Price Multiplier will be required unless the adjustment would require a change of at least 0.1% in the Price Multiplierthen in effect. Any adjustment that would require a change of less than 0.1% in the Price Multiplier which is not applied at the timeof the event may be reflected at the time of any subsequent adjustment that would require a change of the Price Multiplier. The requiredadjustments specified below do not cover all events that could affect an Underlying Stock.
No adjustments to the Price Multiplier for anyUnderlying Stock or any other terms of ARNs will be required other than those specified below. However, the calculation agent may, atits sole discretion, make additional adjustments or adjustments that differ from those described herein to the Price Multiplier or anyother terms of ARNs to reflect changes to an Underlying Stock if the calculation agent determines that the adjustment is appropriateto ensure an equitable result.
The calculation agent will be solely responsiblefor the determination of any adjustments to the Price Multiplier for an Underlying Stock or any other terms of ARNs and of any relateddeterminations with respect to any distributions of stock, other securities or other property or assets, including cash, in connectionwith any corporate event described below; its determinations and calculations will be conclusive absent a determination of a manifesterror.
No adjustments are required to be made for certainother events, such as offerings of common equity securities by any Underlying Company for cash or in connection with the occurrence ofa partial tender or exchange offer for the Underlying Stock by the Underlying Company.
Followingan event that results in an adjustment to the Price Multiplier for any UnderlyingStock or any of the other terms of ARNs, the calculation agent may (but is not required to)provide holders of ARNs with information about that adjustment as it deems appropriate, depending on the nature of the adjustment. Uponwritten request by any holder of ARNs, the calculation agent will provide that holder with information about such adjustment.
Anti-Dilution Adjustments to Underlying Stocksthat Are Common Equity
The calculation agent, in its sole discretion andas it deems reasonable, may adjust the Price Multiplier for any Underlying Stock and other terms of ARNs, and hence the Ending Value,as a result of certain events related to an Underlying Stock, which include, but are not limited to, the following:
Stock Splits and Reverse Stock Splits. Ifan Underlying Stock is subject to a stock split or reverse stock split, then once such split has become effective, the Price Multiplierfor that Underlying Stock will be adjusted such that the new Price Multiplier will equal the product of:
For example, a two-for-one stock split would ordinarilychange a Price Multiplier of one into a Price Multiplier of two. In contrast, a one-for-two reverse stock split would ordinarily changea Price Multiplier of one into a Price Multiplier of one-half.
Stock Dividends. Ifan Underlying Stock is subject to (i) a stock dividend (i.e., an issuance of additional shares of Underlying Stock) that is given ratablyto all holders of the Underlying Stock or (ii) a distribution of additional shares of the Underlying Stock as a result of the triggeringof any provision of the organizational documents of the Underlying Company, then, once the dividend has become effective and the UnderlyingStock is trading ex-dividend, the Price Multiplier for that Underlying Stock will be adjusted on the ex-dividend date such that the newPrice Multiplier will equal the prior Price Multiplier plus the product of:
provided that no adjustment will be made for a stock dividend for whichthe number of shares of the Underlying Stock paid or distributed is based on a fixed cash equivalent value, unless such distribution isan Extraordinary Dividend (as defined below).
For example,a stock dividend of one new share for each share held would ordinarily change a Price Multiplier of one into a Price Multiplier of two.
Extraordinary Dividends. Therewill be no adjustments to the Price Multiplier of an Underlying Stock to reflect any cash dividends or cash distributions paid with respectto that Underlying Stock other than Extraordinary Dividends, as described below, and distributions described under the section entitled “—Reorganization Events” below.
An “Extraordinary Dividend”means, with respect to a cash dividend or other distribution with respect to an Underlying Stock, a dividend or other distribution thatthe calculation agent determines, in its sole discretion, is not declared or otherwise made according to the Underlying Company’sthen existing policy or practice of paying such dividends on a quarterly or other regular basis. If an Extraordinary Dividend occurs,the Price Multiplier for that Underlying Stock will be adjusted on the ex-dividend date so that the new Price Multiplier will equal theproduct of:
The “Extraordinary Dividend Amount”with respect to an Extraordinary Dividend will equal:
To the extent an Extraordinary Dividend is notpaid in cash, the value of the non-cash component will be determined by the calculation agent, whose determination will be conclusive.A distribution on the applicable Underlying Stock described in the section “—Issuance of Transferable Rights or Warrants”or clause (a), (d) or (e) of the section entitled “—Reorganization Events” below that also constitutes an ExtraordinaryDividend will only cause an adjustment under those respective sections.
Issuance of Transferable Rights or Warrants.If an Underlying Company issues transferable rights or warrants to all holders of record of the UnderlyingStock to subscribe for
orpurchase the Underlying Stock, including new or existing rights to purchase the Underlying Stock under a shareholder rights plan or arrangement,then the Price Multiplier will be adjusted on the trading day immediately following the issuance of those transferable rights or warrantsso that the new Price Multiplier will equal the prior Price Multiplier plus the product of:
The number of shares that can be purchased willbe based on the Closing Market Price of the Underlying Stock on the date the new Price Multiplier is determined. The cash value of thosewarrants or rights, if the warrants or rights are traded on a registered national securities exchange, will equal the closing price ofthat warrant or right. If the warrants or rights are not traded on a registered national securities exchange, the cash value will be determinedby the calculation agent and will equal the average of the bid prices obtained from three dealers at 3:00 p.m., New York time on the datethe new Price Multiplier is determined, provided that if only two of those bid prices are available, then the cash value of those warrantsor rights will equal the average of those bids and if only one of those bids is available, then the cash value of those warrants or rightswill equal that bid.
If after the pricing date and on or prior to thecalculation day, as to any Underlying Stock:
then, on or after the date of the occurrence ofa Reorganization Event, the calculation agent shall, in its sole discretion, make an adjustment to the Price Multiplier, the methodof determining the Redemption Amount or any other terms of ARNs as the calculation agent, in its sole discretion, determinesappropriate to account for the economic effect on ARNs of that Reorganization Event (including adjustments to account for changes involatility, expected dividends, stock loan rate, or liquidity relevant to the Underlying Stock or to ARNs), which may, but need not,be determined by reference to the adjustment(s) made in respect of such Reorganization Event by an options exchange to options onthe relevant Underlying Stock traded on that options exchange and determine the effective date of that adjustment. If thecalculation agent determines that no adjustment that it could make will produce a commercially reasonable result, then thecalculation agent may cause the maturity date of ARNs to be accelerated to the fifth business day following the date of thatdetermination and the Redemption Amount payable on the ARNs will be calculated as though the date of early repayment were the stated maturitydate of ARNs and as though the calculation day were the fifth trading day prior to the date of acceleration.
If the Underlying Company ceases to file thefinancial and other information with the SEC in accordance with Section 13(a) of the Exchange Act, as contemplated by clause (i)above, and the calculation agent determines in its sole discretion that sufficiently similar information is not otherwise availableto you, then the calculation agent may cause the maturity date of ARNs to be accelerated to the fifth business day following thedate of that determination and the Redemption Amount payable on the ARNs will be calculated as though the date of early repaymentwere the stated maturity date of ARNs, and as though the calculation day were the fifth trading day prior to the date ofacceleration. If the calculation agent determines that sufficiently similar information is available to you, the ReorganizationEvent will be deemed to have not occurred.
Alternative Anti-Dilution and Reorganization Adjustments
The calculation agent may elect at itsdiscretion to not make any of the adjustments to the Price Multiplier for any Underlying Stock or to any other terms of ARNs ,including the method of determining the Redemption Amount, described in this section, but may instead make adjustments, in itsdiscretion, to the Price Multiplier for any Underlying Stock or any other terms of ARNs (such as the Starting Value) that willreflect the adjustments to the extent practicable made by the Options Clearing Corporation on options contracts on an UnderlyingStock or any successor common stock. For example, if an Underlying Stock is subject to a two-for-one stock split, and the OptionsClearing Corporation adjusts the strike prices of the options contract on that Underlying Stock by dividing the strike price by two,then the calculation agent may also elect to divide the Starting Value by two. In this case, the Price Multiplier will remain one.This adjustment would have the same economic effect on holders of ARNs as if the Price Multiplier had been adjusted.
Anti-Dilution Adjustments to Underlying Stocksthat Are ADRs
For purposes of the anti-dilution adjustments setforth above, if an Underlying Stock is an ADR (an “Underlying ADR”), the calculation agent will consider the effectof any of the relevant events on the Underlying ADR, and adjustments will be made as if the Underlying ADR was the Underlying Stock describedabove. For example, if the stock represented by the
Underlying ADR is subject to a two-for-one stock split, and assumingan initial Price Multiplier of 1, the Price Multiplier for the Underlying ADR would be adjusted so that it equals two. Unless otherwisespecified in the applicable term sheet, with respect to ARNs linked to an Underlying ADR (or an Underlying Stock issued by a non-U.S.Underlying Company), the term “dividend” means the dividends paid to holders of the Underlying ADR (or the Underlying Stockissued by the non-U.S. Underlying Company), and such dividends may reflect the netting of any applicable foreign withholding or similartaxes that may be due on dividends paid to a U.S. person.
The calculation agent may determine not to makean adjustment if:
If the Underlying Company or the depositary forthe ADRs, in the absence of any of the events described above, elects to adjust the number of common shares of the Underlying Companyrepresented by each share of the Underlying ADR, then the calculation agent may make the appropriate anti-dilution adjustments to reflectsuch change. The depositary for the ADRs may also make adjustments in respect of the ADRs for share distributions, rights distributions,cash distributions and distributions other than shares, rights, and cash. Upon any such adjustment by the depositary, the calculationagent may adjust the Price Multiplier or other terms of ARNs as the calculation agent determines commercially reasonable to account forthat event.
Delisting of ADRs or Termination of ADR Facility
If an Underlying ADR is no longer listed oradmitted to trading on a U.S. securities exchange registered under the Exchange Act or included in the OTC Bulletin Board Serviceoperated by FINRA, or if the ADR facility between the Underlying Company and the ADR depositary is terminated for any reason, then,on and after the date that the Underlying ADR is no longer so listed or admitted to trading or the date of such termination, asapplicable (the “termination date”), the applicable Underlying Stock will be deemed to be the UnderlyingCompany’s common equity securities rather than the Underlying ADR. The calculation agent will determine the price of theUnderlying Stock by reference to those common shares. Under such circumstances, the calculation agent may modify any terms of ARNsas it deems necessary, in its sole discretion, to ensure an equitable result. On and after the termination date, for all purposes,the Closing Market Price of the Underlying Company’s common shares on their primary exchange will be converted to U.S. dollarsusing such exchange rate as the calculation agent, in its sole discretion, determines to be commercially reasonable.
Any information regarding any Underlying Stockor any Underlying Company will be derived from publicly available documents. Any Underlying Stock will be registered under the ExchangeAct. Information provided to or filed with the SEC by any Underlying Company can be located at the SEC’s facilities or throughthe SEC’s website, www.sec.gov. None of us, the
agents, orany of our respective affiliates will have independently verified the accuracy or completeness of any of the information or reports ofan Underlying Company.
The selection of an Underlying Stock is not a recommendationto buy or sell that Underlying Stock. None of us, the agents or any of our respective subsidiaries or affiliates makes any representationto any purchaser of ARNs as to the performance of any Underlying Stock.
Basket Market Measures
If the Market Measure to which your ARNs are linkedis a Basket, the Basket Stocks will be set forth in the applicable term sheet. We will assign each Basket Stock a weighting (the “InitialComponent Weight”) so that each Basket Stock represents a percentage of the Starting Value of the Basket on the pricing date.The Basket Stocks may or may not have equal Initial Component Weights, as set forth in the applicable term sheet.
Determination of the Component Ratio for Each BasketStock
The “Starting Value” of theBasket will be equal to 100. We will set a fixed factor (the “Component Ratio”) for each Basket Stock on the pricingdate, based upon the weighting of that Basket Stock. The Component Ratio for each Basket Stock will equal:
Each Component Ratio will be rounded to eight decimalplaces.
The Component Ratios will be calculated in thisway so that the Starting Value of the Basket will equal 100 on the pricing date. The Component Ratios will not be revised subsequent totheir determination on the pricing date, except that the calculation agent may in its good faith judgment adjust the Component Ratio ofany Basket Stock in the event that Basket Stock is materially changed or modified in a manner that does not, in the opinion of the calculationagent, fairly represent the value of that Basket Stock had those material changes or modifications not been made.
The following table is for illustration purposesonly, and does not reflect the actual composition, Initial Component Weights, or Component Ratios, which will be set forth in the applicableterm sheet.
Example: The hypothetical Basket Stocksare Stock ABC, Stock XYZ, and Stock RST, with their Initial Component Weights being 50.00%, 25.00% and 25.00%, respectively, on a hypotheticalpricing date:
Ending Value of the Basket
The “Ending Value” of the Basketwill be the value of the Basket on the calculation day. The value of the Basket will equal the sum of the products of the Closing MarketPrice of each Basket Stock on a trading day multiplied by its Price Multiplier on that day, and the Component Ratio for each Basket Stock.The value of the Basket will vary based on the increase or decrease in the price of each Basket Stock. Any increase in the price of aBasket Stock (assuming no change in the price of the other Basket Stock or Basket Stocks) will result in an increase in the value of theBasket. Conversely, any decrease in the price of a Basket Stock (assuming no change in the price of the other Basket Stock or Basket Stocks)will result in a decrease in the value of the Basket.
Unless otherwise specified in the applicable termsheet, if, for any Basket Stock (an “Affected Basket Stock”), (i) a Market Disruption Event occurs on the scheduledcalculation day or (ii) the scheduled calculation day is determined by the calculation agent not to be a trading day by reason of an extraordinaryevent, occurrence, declaration or otherwise (any such day in either (i) or (ii) being a “non-calculation day”), thecalculation agent will determine the prices of the Basket Stocks for that non-calculation day, and as a result, the Ending Value, as follows:
For purposes of determining whether a Market DisruptionEvent has occurred as to any Basket Stock, “Market Disruption Event” will have the meaning stated above in “—Market Disruption Events.”
Role of the Calculation Agent
The calculation agent has the sole discretion tomake all determinations regarding ARNs as described in this product supplement, including determinations regarding the Starting Value,the Ending Value, the Price Multiplier, the Closing Market Price, the Redemption Amount, any Market Disruption Events, any anti-dilutionadjustments, a successor Underlying Stock, business days, trading days and non-calculation days. Absent manifest error, all determinationsof the calculation agent will be conclusive for all purposes and final and binding on you and us, without any liability on the part ofthe calculation agent.
We or one of our affiliates may act as the calculationagent, or we may appoint BofAS or one of its affiliates to act as the calculation agent for the ARNs. Alternatively, we and BofAS or oneof its affiliates may act as joint calculation agents for the ARNs. When we refer to a “calculation agent” in this productsupplement or in any applicable term sheet, we are referring to the applicable calculation agent or joint calculation agents, as the casemay be. We may change the calculation agent at any time without notifying you. The identity of the calculation agent will be set forthin the applicable term sheet.
Same-Day Settlement and Payment
ARNs will be delivered in book-entry form onlythrough The Depository Trust Company against payment by purchasers of ARNs in immediately available funds. We will pay the RedemptionAmount in immediately available funds so long as ARNs are maintained in book-entry form.
Events of Default and Acceleration
Events of default are defined in the prospectus.If such an event occurs and is continuing, unless otherwise stated in the applicable term sheet, the amount payable to a holder of ARNsupon any acceleration permitted under the Senior Indenture will be equal to the Redemption Amount described under the caption “—Paymentat Maturity,” determined as if the date of acceleration were the maturity date and as if the fifth trading day prior to the dateof acceleration were the calculation day. If the ARNs have become immediately due and payable following an event of default, you willnot be entitled to any additional payments with respect to the ARNs. For more information, see “Description of Debt Securities—SeniorDebt Securities—Events of Default” in the prospectus.
Unless otherwise specified in the applicable termsheet, ARNs will not be listed on a securities exchange.
SUPPLEMENTAL PLANOF DISTRIBUTION
BofAS and one or more of its affiliates may actas our agents for any offering of the ARNs. The agents may act on either a principal basis or an agency basis, as set forth in the applicableterm sheet. Each agent will be a party to a distribution agreement with us.
Each agent will receive an underwriting discountthat is a percentage of the aggregate principal amount of ARNs sold through its efforts, which will be set forth in the applicable termsheet. You must have an account with the applicable agent in order to purchase ARNs.
None of the agents is acting as your fiduciaryor advisor solely as a result of the making of any offering of the ARNs, and you should not rely upon this product supplement, the applicableterm sheet, or the accompanying prospectus or prospectus supplement as investment advice or a recommendation to purchase any ARNs. Youshould make your own investment decision regarding ARNs after consulting with your legal, tax, and other advisors.
We have agreed to indemnify the agents againstcertain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments made in respect of those liabilities.We have also agreed to reimburse the agents for specified expenses.
BofAS and its affiliates may use this product supplement,the prospectus supplement, and the prospectus, together with the applicable term sheet, in market-making transactions for any ARNs aftertheir initial sale solely for the purpose of providing investors with the description of the terms of the ARNs that were made availableto investors in connection with the initial distribution of the ARNs. Secondary market investors should not, and will not be authorizedto rely on these documents for information regarding HSBC or for any purpose other than that described in the immediately preceding sentence.
The following selling restrictions supplement thoselisted in “Supplemental Plan
of Distribution (Conflicts Of Interest)—Selling Restrictions”in the accompanying
The People’s Republic of China
These offering documentshave not been filed with or approved by the People’s Republic of China (for such purposes, not including Hong Kong and Macau SpecialAdministrative Regions or Taiwan) authorities, and is not an offer of securities (whether public offering or private placement) withinthe meaning of the Securities Law or other pertinent laws and regulations of the People’s Republic of China. These offering documentsshall not be delivered to any party who is not an intended recipient or offered to the general public if used within the People’sRepublic of China, and ARNs so offered cannot be sold to anyone that is not a qualified purchaser of the People’s Republic of China.BofAS has represented, warranted and agreed that ARNs are not being offered or sold and may not be offered or sold, directly or indirectly,in the People’s Republic of China, except under circumstances that will result in compliance with applicable laws and regulations.
The offering documents have not been approved bythe Autorité des marchés financiers (“AMF”).
BofAS has represented and agreed that it has notoffered or sold and will not offer or sell, directly or indirectly, the ARNs to the public in France, and has not distributed or causedto be distributed and will not distribute or cause to be distributed to the public in France this product supplement, the accompanyingprospectus supplement or prospectus, or any other offering material relating to the ARNs, and that such offers, sales and distributionshave been and will be made in France only to (a) providers of the investment service of portfolio management for the account of thirdparties, (b) qualified investors (investisseurs qualifiés) acting for their own account, (c) a restricted group of investors (cerclerestreint d’investisseurs) acting for their own account and/or (d) other investors in circumstances which do not require the publicationby the offeror of a prospectus pursuant to the French Code monétaire et financier and the Règlement généralof the AMF all as defined in, and in accordance with, Articles L.411-2, D.411-1, D.411-4, D.744-1, D.754-1 and D.764-1 of the French Codemonétaire et financier and other applicable regulations. The direct or indirect resale of the ARNs to the public in France maybe made only as provided by, and in accordance with, Articles L.411-1, L.411-2, L.412-1 and L.621-8 to L.621-8-3 of the French Code monétaireet financier.
Each agent has represented and agreed that it hasnot made and will not make an offer of ARNs to the public in the Netherlands other than to qualified investors (gekwalificeerde beleggers),provided that no such offer of ARNs will require us or any agent to publish a prospectus pursuant to Article 3 of the Prospectus Directiveor supplement a prospectus pursuant to Article 16 of the Prospectus Directive.
We do not intend that ARNs be offered for saleor subscription to the public in New Zealand within the meaning of the Securities Act 1978 of New Zealand. Accordingly, no prospectushas been or will be registered, and no investment statement will be prepared, under the Securities Act 1978 of New Zealand.
The ARNs shall not be directly or indirectly offeredfor sale, sold or transferred to any member of the public in New Zealand in breach of the Securities Act 1978 or the Securities Regulations2009 of New Zealand. In particular, but without limitation, in respect of offers of or invitations for the ARNs received in New Zealand,the ARNs may only be offered or transferred either:
In addition, each holder of the ARNs is deemedto represent and agree that it will not distribute, publish, deliver or disseminate this product supplement and the accompanying prospectussupplement or prospectus or any other advertisement (as defined in the Securities Act 1978) in relation to any offer of the ARNs in NewZealand other than to any such persons as referred to in paragraphs (a) to (d) above.
THE ARNs BEING OFFERED OR SOLD HAVE NOT BEEN REGISTEREDWITH THE PHILIPPINES SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES REGULATION CODE. ANY FUTURE OFFER OR SALE THEREOF IS SUBJECTTO REGISTRATION REQUIREMENTS UNDER THE SECURITIES REGULATION CODE UNLESS SUCH OFFER OR SALE QUALIFIES AS AN EXEMPT TRANSACTION.
ARNs may not be offered, sold or advertised directlyor indirectly into or in Switzerland except in a manner which will not result in a public offering within the meaning of article 652aor 1156 of the Swiss Federal Code of Obligations (“CO”). Neither this product supplement and the accompanying prospectussupplement and prospectus nor any other offering or marketing materials relating to ARNs have been prepared with regard to the disclosurestandards for prospectuses under article 652a or 1156 CO, and therefore do not constitute a prospectus within the meaning of article 652aor 1156 CO. Neither this product supplement and the accompanying prospectus supplement and prospectus nor any other offering or marketingmaterials relating to ARNs may be distributed, published or otherwise made available in Switzerland except in a manner which will notconstitute a public offering of ARNs into or in Switzerland.
U.S. FEDERAL INCOMETAX SUMMARY
The following summary of the material U.S. federalincome tax considerations of the acquisition, ownership, and disposition of ARNs is based upon the Internal Revenue Code of 1986, as amended(the “Code”), regulations promulgated under the Code by the U.S. Treasury Department (“Treasury”) (including proposedand temporary regulations), rulings, current administrative interpretations and official pronouncements of the IRS, and judicial decisions,all as currently in effect and all of which are subject to differing interpretations or to change, possibly with retroactive effect. Thefollowing discussion supplements, and to the extent inconsistent supersedes, the discussion under “U.S. Federal Income Tax Considerations”in the accompanying prospectus supplement and is not exhaustive of all possible tax considerations. No assurance can be given that theIRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. This summarydoes not include any description of the tax laws of any state or local governments, or of any foreign government, that may be applicableto a particular holder. If the tax consequences associated with ARNs are different than those described below, they will be describedin the applicable term sheet.
This summary is directed solely to U.S. holdersand non-U.S. holders that, except as otherwise specifically noted, will purchase ARNs upon original issuance and will hold ARNs as capitalassets within the meaning of Section 1221 of the Code, which generally means property held for investment, and that are not excludedfrom the discussion under “U.S. Federal Income Tax Considerations” in the accompanying prospectus supplement. This summarydoes not apply to U.S. holders that are subject to special tax accounting rules under Section 451(b) of the Code.
You should consult your own tax advisor concerningthe U.S. federal income tax consequences to you of acquiring, owning, and disposing of ARNs, as well as any tax consequences arising underthe laws of any state, local, foreign, or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.
Although there is no statutory, judicial, or administrativeauthority directly addressing the characterization of ARNs, we intend to treat ARNs for all tax purposes as pre-paid executory contractswith respect to the Market Measure and under the terms of ARNs, we and every investor in ARNs agree, in the absence of an administrativedetermination or judicial ruling to the contrary, to treat ARNs in accordance with such characterization. In the opinion of our specialU.S. tax counsel, it is reasonable to treat ARNs as pre-paid executory contracts with respect to the Market Measure. This discussion assumesthat ARNs constitute pre-paid executory contracts with respect to the Market Measure for U.S. federal income tax purposes. If ARNs didnot constitute pre-paid executory contracts, the tax consequences described below would be materially different.
This characterization of ARNs is not bindingon the IRS or the courts. No statutory, judicial, or administrative authority directly addresses the characterization of ARNs or any similarinstruments for U.S. federal income tax purposes, and no ruling is being requested from the IRS with respect to their proper characterizationand treatment. Due to the absence of authorities on point, significant aspects of the U.S. federal income tax consequences of an investmentin ARNs are not certain, and no assurance can be given that the IRS or any court will agree with the characterization and tax treatmentdescribed in this product supplement. Accordingly, you are urged to consult your tax advisor regarding all aspects of the U.S. federalincome tax consequences of an investment in ARNs, including possible alternative characterizations.
Unless otherwise stated, the following discussionis based on the characterization described above. The discussion in this section assumes that there is a significant possibility of asignificant loss of principal on an investment in ARNs.
We will not attempt to ascertain whether the issuerof any Underlying Stock would be treated as a “passive foreign investment company” (“PFIC”), within the meaningof Section 1297 of the Code, or a United States real property holding corporation, within the meaning of Section 897(c) of the Code. Ifthe issuer of any Underlying Stock were so treated, certain adverse U.S. federal income tax consequences could possibly apply to a holderof ARNs. You should refer to information filed with the SEC by the issuer of any Underlying Stock and consult your tax advisor regardingthe possible consequences to you, if any, if the issuer of any Underlying Stock is or becomes a PFIC or is or becomes a United Statesreal property holding corporation.
Upon receipt of a cash payment at maturity or upona sale or exchange of ARNs prior to maturity, a U.S. holder generally will recognize capital gain or loss equal to the difference betweenthe amount realized and the U.S. holder’s tax basis in ARNs. A U.S. holder’s tax basis in ARNs will equal the amount paidby that holder to acquire them. This capital gain or loss generally will be long-term capital gain or loss if the U.S. holder held ARNsfor more than one year. The deductibility of capital losses is subject to limitations.
Alternative Tax Treatments. Due to the absenceof authorities that directly address the proper tax treatment of ARNs, prospective investors are urged to consult their tax advisors regardingall possible alternative tax treatments of an investment in ARNs. In particular, if ARNs have a term that exceeds one year, the IRS couldseek to subject ARNs to the Treasury regulations governing contingent payment debt instruments. If the IRS were successful in that regard,the timing and character of income on ARNs would be affected significantly. Among other things, a U.S. holder would be required to accrueoriginal issue discount every year at a “comparable yield” determined at the time of issuance. In addition, any gain realizedby a U.S. holder at maturity, or upon a sale or exchange, of ARNs generally would be treated as ordinary income, and any loss realizedat maturity, or upon a sale or exchange, of ARNs generally would be treated as ordinary loss to the extent of the U.S. holder’sprior accruals of original issue discount, and as capital loss thereafter. If ARNs have a term of one year or less, ARNs would generallybe subject to the rules concerning short-term debt instruments as described in the prospectus supplement under the heading “U.S.Federal Income Tax Considerations — Tax Treatment of U.S. Holders — U.S. Federal Income Tax Treatment of the Notes as Indebtednessfor U.S. Federal Income Tax Purposes — Short-Term Notes.”
The IRS released Notice 2008-2 (“Notice”)which sought comments from the public on the taxation of financial instruments currently taxed as “prepaid forward contracts.”This Notice addresses instruments such as ARNs. According to the Notice, the IRS and Treasury are considering whether a holder of an instrumentsuch as ARNs should be required to accrue ordinary income on a current basis, regardless of whether any payments are made prior to maturity.It is not possible to determine what guidance the IRS and Treasury will ultimately issue, if any. Any such future guidance may affectthe amount, timing and character of income, gain, or loss in respect of ARNs, possibly with retroactive effect.
The IRS and Treasury are also considering additionalissues, including whether additional gain or loss from such instruments should be treated as ordinary or capital, whether foreign holdersof such instruments should be subject to withholding tax on any deemed income accruals, whether Section 1260 of the Code, concerning certain “constructive ownership transactions,” generally applies or should generally apply to such instruments, and whether any ofthese determinations depend on the nature of the underlying asset.
In addition, proposed Treasury regulations requirethe accrual of income on a current basis for contingent payments made under certain notional principal contracts. The preamble to theregulations states that the “wait and see” method of accounting does not properly reflect the economic accrual of income onthose contracts, and requires current accrual of income for some contracts already in existence. While the proposed regulations do notapply to prepaid forward contracts, the preamble to the proposed regulations expresses the view that similar timing issues exist in thecase of prepaid forward contracts. If the IRS or Treasury publishes future guidance requiring current economic accrual for contingentpayments on prepaid forward contracts, it is possible that you could be required to accrue income over the term of ARNs.
Because of the absence of authority regarding theappropriate tax characterization of ARNs, it is also possible that the IRS could seek to characterize ARNs in a manner that results intax consequences that are different from those described above. For example, the IRS could possibly assert that any gain or loss thata holder may recognize at maturity or upon the sale or exchange of ARNs should be treated as ordinary gain or loss.
It is possible that the IRS could assert that aU.S. holder’s holding period in respect of ARNs should end on the applicable calculation day, even though such holder will not receiveany amounts in respect of ARNs prior to the redemption or maturity of ARNs. In such case, if the applicable calculation day is not inexcess of one year from the original issue date, a U.S. holder may be treated as having a holding period in respect of ARNs equal to oneyear or less, in which case any gain or loss such holder recognizes at such time would be treated as short-term capital gain or loss.
Except as provided below, a non-U.S. holder willgenerally not be subject to U.S. federal income or withholding tax on any gain from the sale or exchange of ARNs or their settlement atmaturity, provided that the non-U.S. holder complies with applicable certification requirements and that the payment is not effectivelyconnected with the conduct by the non-U.S. holder of a U.S. trade or business. Notwithstanding the foregoing, gain from the sale or exchangeof ARNs or their settlement at maturity may be subject to U.S. federal income tax if that non-U.S. holder is a non-resident alien individualand is present in the United States for 183 days or more during the taxable year of the settlement at maturity, sale or exchange and certainother conditions are satisfied.
If a non-U.S. holder of ARNs is engaged in theconduct of a trade or business within the United States and if gain realized on the settlement at maturity, sale or exchange of ARNs,is effectively connected with the conduct of such trade or business (and, if certain tax treaties apply, is attributable to a permanentestablishment maintained by the non-U.S. holder in the United States), the non-U.S. holder generally will be subject to U.S. federal incometax on such gain on a net income basis in the same manner as if it were a U.S. holder. Such non-U.S. holders should read the materialunder the heading “—U.S. Holders,” for a description of the U.S. federal income tax consequences of acquiring, owning,and disposing of ARNs. In addition, if such non-U.S. holder is a foreign corporation, it may also be subject to a branch profits tax equalto 30% (or such lower rate provided by any applicable tax treaty) of a portion of its earnings and profits for the taxable year that areeffectively connected with its conduct of a trade or business in the United States, subject to certain adjustments.
A “dividend equivalent” payment istreated as a dividend from sources within the United States and such payments generally would be subject to a 30% U.S. withholding taxif paid to a non-U.S. holder. Under Treasury regulations, payments (including deemed payments) with respect to equity-linked instruments(“ELIs”) that are “specified ELIs” may be treated as
dividend equivalents if such specified ELIs reference an interest inan “underlying security,” which is generally any interest in an entity taxable as a corporation for U.S. federal income taxpurposes if a payment with respect to such interest could give rise to a U.S. source dividend. However, IRS guidance provides that withholdingon dividend equivalent payments will not apply to specified ELIs that are not delta-one instruments and that are issued before January1, 2023. Except as otherwise set forth in any applicable pricing supplement, we expect that the delta of ARNs issued pursuant to thisproduct supplement with respect to the Market Measure will not be one, and therefore, we expect that non-U.S. holders should not be subjectto withholding on dividend equivalent payments, if any, under the ARNs. However, it is possible that ARNs could be treated as deemed reissuedfor U.S. federal income tax purposes upon the occurrence of certain events affecting the Market Measure or the ARNs, and following suchoccurrence the ARNs could be treated as subject to withholding on dividend equivalent payments. Non-U.S. holders that enter, or have entered,into other transactions in respect of the Market Measure or the ARNs should consult their tax advisors as to the application of the dividendequivalent withholding tax in the context of the ARNs and their other transactions. If any payments are treated as dividend equivalentssubject to withholding, we (or the applicable paying agent) would be entitled to withhold taxes without being required to pay any additionalamounts with respect to amounts so withheld.
As discussed above, alternative characterizationsof ARNs for U.S. federal income tax purposes are possible. Should an alternative characterization, by reason of change or clarificationof the law, by regulation or otherwise, cause payments as to ARNs to become subject to withholding tax, tax will be withheld at the applicablestatutory rate. As discussed above, the IRS has indicated in the Notice that it is considering whether income in respect of instrumentssuch as ARNs should be subject to withholding tax. Prospective non-U.S. holders of ARNs should consult their own tax advisors in thisregard.
U.S. Federal Estate Tax. Under current law,while the matter is not entirely clear, individual non-U.S. holders, and entities whose property 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 individualhas retained certain interests or powers), should note that, absent an applicable treaty benefit, ARNs are likely to be treated as U.S.situs property, subject to U.S. federal estate tax. These individuals and entities should consult their own tax advisors regarding theU.S. federal estate tax consequences of investing in ARNs.
Backup Withholding and Information Reporting
Pleasesee the discussion under “U.S. Federal Income Tax Considerations — Information Reporting and Backup Withholding” inthe accompanying prospectus supplement for a description of the applicability of the backup withholding and information reporting rulesto payments made on ARNs.
ERISA AND RELATED CONSIDERATIONS
Subject to the following discussion, the ARNs maybe acquired by an “employee benefit plan” as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,as amended (“ERISA”), that is subject to Title I of ERISA, a “plan” as defined in and subject to Section4975 of the Code, or an entity deemed to hold plan assets of the foregoing (each, a “Benefit Plan Investor”), as wellas by plans subject to laws that are similar to Title I of ERISA or Section 4975 of the Code under applicable federal, state, local orother law (“Similar Law”). Benefit Plan Investors and plans subject to Similar Law should review the discussion under “Certain ERISA and Related Matters” in the accompanying prospectus and “Certain ERISA and Related Considerations”in the prospectus supplement. The following supplements, and to the extent inconsistent supersedes, such discussions in the prospectusand prospectus supplement.
By acquiring an ARN (or interest therein), eachpurchaser and transferee (and if the purchaser or transferee is investing the assets of a Benefit Plan Investor or other plan, its fiduciary)is deemed to represent, warrant and covenant that either (i) it is not and for as long as it holds an ARN (or an interest therein) willnot be a Benefit Plan Investor or plan subject to Similar Law or (ii) its acquisition and holding of such ARN will not, in the case ofa Benefit Plan Investor, give rise to a nonexempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code becausesuch holder or beneficial owner relied on an available prohibited transaction exemption, all of the conditions of which are satisfied,and in the case of a plan subject to Similar Law, result in a violation of any Similar Law.