perceived creditworthiness of UBS may affect the market value of the Warrants and, in the event UBS were to default on its obligations,
you may not receive any amounts owed to you under the terms of the Warrants and you could lose all of your initial investment.
If UBS experiences financial difficulties,
FINMA has the power to open restructuring or liquidation proceedings in respect of, and/or impose protective measures in relation to,
UBS, which proceedings or measures may have a material adverse effect on the terms and market value of the Warrants and/or the ability
of UBS to make payments thereunder.
The Swiss Federal Act on Banks and Savings
Banks of November 8, 1934, as amended (the “Swiss Banking Act”) grants the Swiss Financial Market Supervisory Authority (“FINMA”)
broad powers to take measures and actions in relation to UBS if it concludes that there is justified concern that UBS is over-indebted
or has serious liquidity problems or, after expiry of a deadline, UBS fails to fulfill the applicable capital adequacy requirements (whether
on a standalone or consolidated basis). If one of these pre-requisites is met, FINMA is authorized to open restructuring proceedings or
liquidation (bankruptcy) proceedings in respect of, and/or impose protective measures in relation to, UBS. The Swiss Banking Act grants
significant discretion to FINMA in connection with the aforementioned proceedings and measures. In particular, a broad variety of protective
measures may be imposed by FINMA, including a bank moratorium or a maturity postponement, which measures may be ordered by FINMA either
on a stand-alone basis or in connection with restructuring or liquidation proceedings.
In restructuring proceedings, FINMA,
as resolution authority, is competent to approve the restructuring plan. The restructuring plan may, among other things, provide for (a)
the transfer of all or a portion of UBS’ assets, debts, other liabilities and contracts (which may or may not include the contractual
relationship between UBS and the holders of Warrants) to another entity, (b) a stay (for a maximum of two business days) on the termination
of contracts to which UBS is a party, and/or the exercise of (w) rights to terminate, (x) netting rights, (y) rights to enforce or dispose
of collateral or (z) rights to transfer claims, liabilities or collateral under contracts to which UBS is a party, (c) the partial or
full conversion of UBS’ debt and/or other obligations, including its obligations under the Warrants, into equity (a “debt-to-equity”
swap), and/or (d) the partial or full write-off of obligations owed by UBS (a “write-off”), including its obligations under
the Warrants. Prior to any debt-to-equity swap or write-off with respect to any Warrants, outstanding equity and debt instruments issued
by UBS qualifying as additional tier 1 capital or tier 2 capital must be converted or written-down, as applicable, and cancelled. The
Swiss Banking Act addresses the order in which a debt-to-equity swap or a write-off of debt instruments (other than debt instruments qualifying
as additional tier 1 capital or tier 2 capital) should occur: first, all subordinated obligations not qualifying as regulatory capital;
second, debt instruments for loss absorbency in the course of insolvency measures (Schuldinstrumente zur Verlusttragung im Falle von Insolvenzmassnahmen)
under the Swiss Ordinance concerning Capital Adequacy and Risk Diversification for Banks and Securities Dealers of June 1, 2012, as amended;
third, all other obligations not excluded by law from a debt-to-equity swap or write-off (other than deposits), such as the Warrants;
and fourth, deposits to the extent in excess of the amount privileged by law. However, given the broad discretion granted to FINMA, any
restructuring plan approved by FINMA in connection with restructuring proceedings with respect to UBS could provide that the claims under
or in connection with the Warrants will be fully or partially converted into equity or written-off, while preserving other obligations
of UBS that rank pari passu with UBS’ obligations under the Warrants. Consequently, the exercise by FINMA of any of its statutory
resolution powers or any suggestion of any such exercise could materially adversely affect the rights of holders of the Warrants, the
price or value of their investment in the Warrants and/or the ability of UBS to satisfy its obligations under the Warrants and could lead
to holders losing some or all of their investment in the Warrants.
Once FINMA has opened restructuring proceedings
with respect to UBS, it may consider factors such as the results of operations, financial condition (in particular, the level of indebtedness,
potential future losses and/or restructuring costs), liquidity profile and regulatory capital adequacy of UBS and its subsidiaries, or
any other factors of its choosing, when determining whether to exercise any of its statutory resolution powers with respect to UBS, including,
if it chooses to exercise such powers to order a debt-to- equity swap and/or a write-off, whether to do so in full or in part. The criteria
that FINMA may consider in exercising any statutory resolution power provide it with considerable discretion. Therefore, holders of the
Warrants may not be able to refer to publicly available criteria in order to anticipate a potential exercise of any such power and, consequently,
its potential effects on the Warrants and/or UBS.
If UBS were to be subject to restructuring
proceedings, the creditors whose claims are affected by the restructuring plan would not have a right to vote on, reject, or seek the
suspension of the restructuring plan. In addition, if a restructuring plan with respect to UBS has been approved by FINMA, the rights
of a creditor to challenge the restructuring plan or have the restructuring plan reviewed by a judicial or administrative process or otherwise
(e.g., on the grounds that the plan would unduly prejudice the rights of holders of Warrants or otherwise be in violation of the Swiss
Banking Act) are very limited. Even if any of UBS’ creditors were to successfully challenge the restructuring plan in court, the
court could only require the relevant creditors to be compensated ex post and there is currently no guidance as to on what basis such
compensation would be calculated and how it would be funded. Any such challenge (even if successful) would not suspend, or result in the
suspension of, the implementation of the restructuring plan.
RISKS RELATING TO TAXATION ISSUES
Significant aspects of the tax treatment
of the Warrants are uncertain.
Significant aspects of the tax treatment
of the Warrants are uncertain. We do not plan to request a ruling from the Internal Revenue Service (“IRS”) regarding the
tax treatment of the Warrants, and the IRS or a court may not agree with the tax treatment described in this prospectus supplement. You
should read carefully the section entitled “Material U.S. Federal Income Tax Consequences” herein and should consult your
tax advisor about your tax situation.
In addition, the IRS has announced in IRS
Notice 2008-2 that it and the Treasury Department are considering whether holders of prepaid forward or certain other financial contracts
should be required to accrue income during the term of the transaction, even if such contracts are not otherwise treated as indebtedness
for U.S. federal income tax purposes and solicited comments with respect to the appropriate methodology, scope and other tax issues associated
with such transactions, including appropriate transition and effective dates. Legislation has also been introduced that, if enacted, could
have affected the tax treatment of derivative contracts. Although neither IRS Notice 2008-2 nor proposed legislation would by their terms
apply to contracts that are treated as pre-paid derivative contracts (including options) for U.S. income tax purposes, future legislation
or IRS guidance could change current law treatment of such pre-paid derivative contracts, perhaps retroactively. In the event that any
such treatment is adopted, a U.S. holder may be required to accrue ordinary income over the term of the Warrants.
In 2007, legislation was introduced in
Congress that, if enacted, would have required holders of Warrants purchased after the bill was enacted to accrue interest income over
the term of the Warrants despite the fact that there will be no interest payments over the term of the Warrants. It is not possible to
predict whether a similar or identical bill will be enacted in the future, or whether any such bill would affect the tax treatment of
your Warrants.
Furthermore, in 2013, the House Ways and
Means Committee released in draft form certain proposed legislation relating to financial instruments. If enacted, the effect of this
legislation generally would be to require instruments such as the Warrants to be marked to market on an annual basis with the all gains
and losses to be treated as ordinary, subject to certain exceptions. It is not possible to predict whether a similar or identical bill
will be enacted in the future, or whether any such bill would affect the tax treatment of your Warrants. You are urged to consult your
tax advisor regarding the draft legislation and its possible impact on you.