Filed Pursuant to Rule 424(b)(2)
Registration Statement No. 333-219206
The information in this preliminary pricing supplement is not complete and may be changed. This preliminary pricing supplement is not an offer to sell nor does it seek an
offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion. Dated January 11, 2019.
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GS Finance Corp.
$
Digital Financial Select Sector SPDR® Fund-Linked Notes due
guaranteed by
The Goldman Sachs Group, Inc.
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The notes do not bear interest. The amount that you
will be paid on your notes on the stated maturity date (expected to be January 25, 2022) is based on the performance of the Financial Select Sector SPDR® Fund (ETF) as measured from the trade date (expected to be January 18, 2019) to
and including the determination date (expected to be January 18, 2022).
The return on your notes is linked to the performance of the ETF, and not to that of the Financials Select
Sector Index (index) on which the ETF is based. The performance of the ETF may significantly diverge from that of the index. The ETF was reconstituted in September 2016 to generally remove exposure to companies involved in the real estate
industry. Therefore, there is limited historical information regarding the reconstituted ETF.
If the final ETF level on the determination date is greater than or equal to 80% of the initial ETF level (set on the trade
date), you will receive the threshold settlement amount of $1,300 for each $1,000 face amount of your notes.
If the final ETF level declines by more than 20% from the initial ETF level, the return on your notes will be negative. You could lose your entire investment in the notes.
To determine your payment at maturity, we will calculate the ETF return, which is the percentage increase or decrease in the
final ETF level from the initial ETF level. At maturity, for each $1,000 face amount of your notes, you will receive an amount in cash equal to:
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if the ETF return is greater than or equal to -20% (the final ETF level is greater than or equal to
80% of the initial ETF level), the threshold settlement amount; or
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if the ETF return is negative and is below -20% (the final ETF level is less than the initial ETF level by more than 20%), the sum of (i) $1,000 plus (ii) the product
of (a) $1,000 times (b) the ETF return.
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You should read the disclosure herein to better understand the terms and risks of your investment, including
the credit risk of GS Finance Corp. and The Goldman Sachs Group, Inc. See page PS-12.
The estimated value of your notes at the time the terms of your notes are set on the trade
date is expected to be between $930 and $960 per $1,000 face amount. For a discussion of the estimated value and the price at which Goldman Sachs & Co. LLC would initially buy or sell your notes, if it makes a market in the notes, see the
following page.
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Original issue date:
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expected to be January 28, 2019
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Original issue price:
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100% of the face amount
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Underwriting discount:
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% of the face amount*
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Net proceeds to the issuer:
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% of the face amount
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*In addition to the %, the underwriting discount paid by us also includes a structuring fee of % and a marketing fee of
%, in each case, of the face amount. See “Supplemental Plan of Distribution; Conflicts of Interest” on page PS-32.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of
these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. The notes are not bank deposits and are not insured by the Federal Deposit Insurance Corporation or any other
governmental agency, nor are they obligations of, or guaranteed by, a bank.
Goldman Sachs & Co. LLC
Pricing Supplement No. dated , 2019.
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The issue price, underwriting discount and net proceeds listed above relate to the notes we sell initially. We may decide to sell additional notes after the date of
this pricing supplement, at issue prices and with underwriting discounts and net proceeds that differ from the amounts set forth above. The return (whether positive or negative) on your investment in notes will depend in part on the issue price
you pay for such notes.
GS Finance Corp. may use this prospectus in the initial sale of the notes. In addition, Goldman Sachs & Co. LLC or any other
affiliate of GS Finance Corp. may use this prospectus in a market-making transaction in a note after its initial sale. Unless GS Finance Corp. or its agent
informs the purchaser otherwise in the confirmation of sale, this prospectus is being used in a market-making transaction.
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Estimated Value of Your Notes
The estimated value of your notes at the time the terms of your notes are set on the trade date (as
determined by reference to pricing models used by Goldman Sachs & Co. LLC (GS&Co.) and taking into account our credit spreads) is expected to be between $930 and $960 per $1,000 face amount, which is less than the original issue price. The value of your notes at any time will reflect
many factors and cannot be predicted; however, the price (not including GS&Co.’s customary bid and ask spreads) at which GS&Co. would initially buy or sell notes (if it makes a market, which it is not obligated to do) and the value that GS&Co. will initially use for account statements
and otherwise is equal to approximately the estimated value of your notes at the time of pricing, plus an additional amount (initially equal to $ per $1,000 face amount).
Prior to , the price (not including GS&Co.’s customary bid and ask spreads) at which
GS&Co. would buy or sell your notes (if it makes a market, which it is not obligated to do) will equal approximately the sum of (a) the then-current estimated value of your notes (as determined by reference to GS&Co.’s pricing
models) plus (b) any remaining additional amount (the additional amount will decline to zero on a straight-line basis from the time of pricing through ). On and after , the price (not including GS&Co.’s customary bid
and ask spreads) at which GS&Co. would buy or sell your notes (if it makes a market) will equal approximately the then-current estimated value of your notes determined by reference to such pricing models.
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About Your Prospectus
The notes are part of the Medium-Term Notes, Series
E program of GS Finance Corp. and are fully and unconditionally guaranteed by The Goldman Sachs Group, Inc. This prospectus includes this pricing supplement and the accompanying documents listed below. This pricing supplement
constitutes a supplement to the documents listed below, does not set forth all of the terms of your notes and therefore should be read in conjunction with such documents:
The information in this pricing supplement supersedes any conflicting information in the documents listed above. In addition, some of the
terms or features described in the listed documents may not apply to your notes.
We refer to the notes we are offering by this pricing supplement as the “offered notes” or the “notes”. Each of the offered notes has the
terms described below. Please note that in this pricing supplement, references to “GS Finance Corp.”, “we”, “our” and “us” mean only GS Finance Corp. and do not include its subsidiaries or affiliates, references to “The Goldman Sachs
Group, Inc.”, our parent company, mean only The Goldman Sachs Group, Inc. and do not include its subsidiaries or affiliates and references to “Goldman Sachs” mean The Goldman Sachs Group, Inc. together with its consolidated subsidiaries
and affiliates, including us. The notes will be issued under the senior debt indenture, dated as of October 10, 2008, as supplemented by the First Supplemental Indenture, dated as of February 20, 2015, each among us, as issuer, The
Goldman Sachs Group, Inc., as guarantor, and The Bank of New York Mellon, as trustee. This indenture, as so supplemented and as further supplemented thereafter, is referred to as the “GSFC 2008 indenture” in the accompanying prospectus
supplement. The notes will be issued in book-entry form and represented by a master global note.
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Digital Financial Select
Sector SPDR® Fund-Linked Notes due
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INVESTMENT THESIS
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You should be willing to forgo interest payments and risk losing your entire investment for the potential to earn the threshold
settlement amount of 130% of the face amount if the underlier return is greater than or equal to -20%.
Your maximum return on your notes will not be greater than 30%, and you could lose all or a portion of your investment if the
underlier return is less than -20%.
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DETERMINING THE CASH SETTLEMENT AMOUNT
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At maturity, for each $1,000 face amount, the investor will receive (in each case as a percentage of the face amount):
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if the final underlier level is greater than or equal to 80% of the initial underlier level, the threshold settlement amount of 130%; or
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if the final underlier level is less than 80% of the initial underlier level, 100% minus 1% for every
1% that the final underlier level has declined below 80% of the initial underlier level
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If the final underlier level declines by more than 20% from the initial underlier level, the return on the notes will be negative and the investor could lose their entire investment in the notes.
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KEY TERMS
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Issuer:
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GS Finance Corp.
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Guarantor:
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The Goldman Sachs Group, Inc.
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Underlier:
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The Financial Select Sector SPDR® Fund (current Bloomberg symbol: “XLF UP Equity”)
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Face Amount:
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$ in the aggregate; each note will have a face amount equal to $1,000
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Trade Date:
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Expected to be January 18, 2019
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Settlement Date:
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Expected to be January 28, 2019
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Determination Date:
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Expected to be January 18, 2022
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Stated Maturity Date:
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Expected to be January 25, 2022
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Initial Underlier Level:
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To be determined on the trade date
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Final Underlier Level:
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The closing level of the underlier on the determination date
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Underlier Return:
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The quotient of (i) the final underlier level minus the initial underlier level divided by (ii) the initial underlier level,
expressed as a positive or negative percentage
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Threshold Level:
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80% of the initial underlier level
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Threshold Settlement Amount:
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$1,300
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CUSIP/ISIN:
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40056ETP3/US40056ETP33
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HYPOTHETICAL PAYMENT AT MATURITY
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Hypothetical Final
Underlier Level (as
Percentage of Initial
Underlier Level)
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Hypothetical Cash
Settlement Amount (as
Percentage of Face
Amount)
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200.000%
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130.000%
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175.000%
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130.000%
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150.000%
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130.000%
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125.000%
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130.000%
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100.000%
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130.000%
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90.000%
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130.000%
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80.000%
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130.000%
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79.999%
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79.999%
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75.000%
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75.000%
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50.000%
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50.000%
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25.000%
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25.000%
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0.000%
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0.000%
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RISKS
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Please read the section entitled “Additional Risk Factors Specific to Your Notes” of this pricing supplement as well as the risks and
considerations described in the accompanying prospectus dated July 10, 2017, in the accompanying prospectus supplement dated July 10, 2017, and under “Additional Risk Factors Specific to the Notes” in the accompanying general terms supplement no.
1,734 dated July 10, 2017.
(Terms From Pricing Supplement No. Incorporated Into Master Note No. 2)
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These terms and conditions relate to pricing supplement no. dated , 2019 of GS Finance Corp. and
The Goldman Sachs Group, Inc. with respect to the issuance by GS Finance Corp. of its Digital Financial Select Sector SPDR® Fund-Linked Notes due and the guarantee thereof by The Goldman Sachs Group, Inc.
The provisions below are hereby incorporated into master note no. 2, dated August 22, 2018. References herein to “this
note” shall be deemed to refer to “this security” in such master note no. 2, dated August 22, 2018. Certain defined terms may not be capitalized in these terms and conditions even if they are capitalized in master note no. 2, dated August
22, 2018. Defined terms that are not defined in these terms and conditions shall have the meanings indicated in such master note no. 2, dated August 22, 2018, unless the context otherwise requires.
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CUSIP / ISIN: 40056ETP3/US40056ETP33
Company (Issuer): GS Finance Corp.
Guarantor: The Goldman Sachs Group, Inc.
Underlier: the Financial Select Sector SPDR®
Fund (current Bloomberg symbol: “XLF UP Equity”), or any successor underlier, as it may be modified, replaced or adjusted from time to time as provided herein
Underlying index: the Financials Select Sector Index
Face amount: $ in the aggregate on the original issue date; the aggregate face amount may be increased if the company, at its sole option, decides to sell an additional amount on a date subsequent to the trade date.
Authorized denominations: $1,000 or any integral multiple of $1,000 in
excess thereof
Principal amount: On the stated maturity date, the company will pay,
for each $1,000 of the outstanding face amount, an amount, if any, in cash equal to the cash settlement amount.
Cash settlement amount:
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if the final underlier level is greater than or equal to the threshold level, the threshold settlement amount; or
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if the final underlier level is less than the threshold level, the sum of (1) $1,000 plus (2) the product of (i) $1,000 times (ii) the underlier return
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Initial underlier level (set on the trade date):
Final underlier level: the closing level of the underlier on the determination date, subject to adjustment as provided in “— Consequences of a market disruption event or non-trading day” and “— Discontinuance
or modification of the underlier” below
Threshold level: 80% of the initial underlier level
Threshold settlement amount: $1,300
Underlier return: the quotient of (1) the final
underlier level minus the initial underlier level divided by (2) the initial underlier level, expressed as a percentage
Trade date: expected to be January 18, 2019
Original issue date (set on the trade date): expected to be January 28, 2019
Determination date (set on the trade date): expected to be January 18,
2022, unless the calculation agent determines that a market disruption event occurs or is continuing on such day or such day is not a trading day. In that event, the determination date
will be the first following trading day on which the calculation agent determines that a market disruption event does not occur and is not continuing. However, the determination date will not be postponed to a date later than the originally
scheduled stated maturity date or, if the originally scheduled stated maturity date is not a business day, later than the first business day after the originally scheduled stated maturity date. If a market disruption event occurs or is continuing on the day that is the last possible determination date or such last possible day is not a trading day, that day will nevertheless be the determination date.
Stated maturity date (set on the trade date): expected to be January 25, 2022, unless that
day is not a business day, in which case the stated maturity date will be postponed to the next following business day. The stated maturity date will also be postponed
if the determination date is postponed as described under “— Determination date” above. In such a case, the stated maturity date will be postponed by the same number of business day(s) from but excluding the originally scheduled determination
date to and including the actual determination date.
Closing level: for any given trading day, the closing sale price or last reported sale price, regular way, for the underlier, on a per-share or other unit basis:
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on the principal national securities exchange on which that underlier is listed for trading
on that day, or
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if the underlier is not listed on any national securities exchange on that day, on any other
U.S. national market system that is the primary market for the trading of that underlier.
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If the underlier is not listed or traded as described
above, then the closing level for the underlier on any day will be the average, as determined by the calculation agent, of the bid prices for the underlier obtained from as many dealers in the underlier selected by the calculation agent as will
make those bid prices available to the calculation agent. The number of dealers need not exceed three and may include the calculation agent or any of its or the company’s affiliates.
The closing level is subject to adjustment as described
under “— Anti-dilution adjustments” below.
Trading day: a day on which (i) the exchange on which the underlier has its primary listing is open for trading and (ii) the price of one share of the underlier is quoted by
the exchange on which such underlier has its primary listing
Successor underlier: any substitute underlier approved by the calculation agent as a successor underlier as provided under “— Discontinuance or modification of the underlier” below
Underlier investment advisor: at any time, the person or entity, including any successor investment advisor, that serves as an investment advisor to the underlier as then in effect
Underlier stocks: at any time, the stocks that comprise the underlier as then in effect, after giving effect to any additions, deletions or substitutions
Market disruption event: With respect to any given trading day, any of the following will be a market disruption event with respect to the underlier:
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a suspension, absence or material limitation of trading in the underlier on its primary
market for more than two consecutive hours of trading or during the one-half hour before the close of trading in that market, as determined by the calculation agent in its sole discretion,
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a suspension, absence or material limitation of trading in option or futures contracts
relating to the underlier in the primary market for those contracts for more than two consecutive hours of trading or during the one-half hour before the close of trading in that market, as determined by the calculation agent in its
sole discretion, or
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the underlier does not trade on what was the primary market for the underlier, as determined
by the calculation agent in its sole discretion,
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and, in the case of any of these events, the calculation
agent determines in its sole discretion that the event could materially interfere with the ability of the company or any of its affiliates or a similarly situated person to unwind all or a material portion of a hedge that could be effected with
respect to this note.
The following events will not be market disruption events:
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a limitation on the hours or numbers of days of trading, but only if the limitation results
from an announced change in the regular business hours of the relevant market, and
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a decision to permanently discontinue trading in option or futures contracts relating to the
underlier.
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For this purpose, an “absence of trading” in the primary
securities market on which shares of the underlier are traded, or on which option or futures contracts, if available, relating to the underlier are traded, will not include any time when that market is itself closed for trading under ordinary
circumstances. In contrast, a suspension or limitation of trading in shares of the underlier or in option or futures contracts, if available, relating to the underlier in the primary market for the underlier or those contracts, by reason of:
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a price change exceeding limits set by that market,
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an imbalance of orders relating to the shares of the underlier or those contracts, or
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a disparity in bid and ask quotes relating to the shares of the underlier or those contracts,
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will constitute a suspension or material limitation of trading in shares of the
underlier or those contracts in that market.
Consequences of a market disruption
event or a non-trading day: If a market disruption event occurs or is continuing on a day that would otherwise be the determination date or such day is not a trading day, then the
determination date will be postponed as described under “— Determination date” above.
If the calculation agent determines that the closing level
of the underlier that must be used to determine the cash settlement amount is not available on the postponed determination date because of a market disruption event, a non-trading day or for any other reason (except as described under “—
Discontinuance or modification of the underlier” below), the calculation agent will nevertheless determine the closing level of the underlier based on its assessment, made in its sole discretion, of the level of the underlier on that day.
Discontinuance or modification of the
underlier: If the underlier is delisted from the exchange on which the underlier has its primary listing and the underlier investment advisor or
anyone else publishes a substitute underlier that the calculation agent determines is comparable to the underlier and approves as a successor underlier, or if the calculation agent designates a substitute underlier, then the calculation agent
will determine the amount payable on the stated maturity date by reference to such successor underlier.
If the calculation agent determines that the underlier is
delisted or withdrawn from the exchange on which the underlier has its primary listing and there is no successor underlier, the calculation agent will determine the amount payable on the stated maturity date by a computation methodology that
the calculation agent determines will as closely as reasonably possible replicate the underlier.
If the calculation agent determines that the underlier, the
underlier stocks or the method of calculating the underlier is changed at any time in any respect — including any split or reverse split of the underlier, a material change in the investment objective of the underlier and any addition, deletion
or substitution and any reweighting or rebalancing of the underlier and whether the change is made by the underlier investment advisor under its existing policies or following a modification of those policies, is due to the publication of a
successor underlier, is due to events affecting one or more of the underlier stocks or their issuers or is due to any other reason — then the calculation agent will be permitted (but not required) to make such adjustments in the underlier or
the method of its calculation as it believes are appropriate to ensure that the final underlier level, used to determine the amount payable on the stated maturity date, is equitable.
All determinations and adjustments to be made by the
calculation agent with respect to the underlier may be made by the calculation agent in its sole discretion. The calculation agent is not obligated to make any such adjustments.
Anti-dilution adjustments: The calculation agent will have discretion to adjust the closing level of the underlier if certain events occur (including those described above under “—
Discontinuance or modification of the underlier”). In the event that any event other than a delisting or withdrawal from the relevant exchange occurs, the calculation agent shall determine whether and to what extent an adjustment should be made
to the level of the underlier or any other term. The calculation agent shall have no obligation to make an adjustment for any such event.
Calculation agent: Goldman Sachs & Co. LLC (“GS&Co.”)
Tax characterization: The holder, on behalf of itself and any other person having a beneficial interest in this note, hereby agrees with the company (in the absence of a change in
law, an administrative determination or a judicial ruling to the contrary) to characterize this note for all U.S. federal income tax purposes as a pre-paid derivative contract in respect of the underlier.
Overdue principal rate: the effective Federal Funds rate
The following examples are provided for purposes of illustration only. They should not be taken as an indication or prediction of
future investment results and merely are intended to illustrate the impact that the various hypothetical underlier levels on the determination date could have on the cash settlement amount at maturity assuming all other variables remain constant.
The examples below are based on a range of final underlier levels that are entirely hypothetical; the underlier level on any day
throughout the life of the notes, including the final underlier level on the determination date, cannot be predicted. The underlier has been highly volatile in the past — meaning that the underlier level has changed considerably in relatively
short periods — and its performance cannot be predicted for any future period.
The information in the following examples reflects hypothetical rates of return on the offered notes assuming that they are
purchased on the original issue date at the face amount and held to the stated maturity date. If you sell your notes in a secondary market prior to the stated maturity date, your return will depend upon the market value of your notes at the time
of sale, which may be affected by a number of factors that are not reflected in the table below, such as interest rates, the volatility of the underlier, the creditworthiness of GS Finance Corp., as issuer, and the creditworthiness of The Goldman
Sachs Group, Inc., as guarantor. In addition, the estimated value of your notes at the time the terms of your notes are set on the trade date (as determined by reference to pricing models used by GS&Co.) is less than the original issue price
of your notes. For more information on the estimated value of your notes, see “Additional Risk Factors Specific to Your Notes — The Estimated Value of Your Notes At the Time the Terms of Your Notes Are Set On the Trade Date (as Determined By
Reference to Pricing Models Used By GS&Co.) Is Less Than the Original Issue Price Of Your Notes” on page PS-12 of this pricing supplement. The information in the examples also reflects the key terms and assumptions in the box below.
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Key Terms and Assumptions
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Face amount
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$1,000
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Threshold settlement amount
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$1,300
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Threshold level
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80% of the initial underlier level
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Neither a market disruption event nor a non-trading day occurs on the originally scheduled determination date
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No change in or affecting the underlier, any of the underlier stocks or the policies of the underlier’s investment advisor or the method by which the underlying
index sponsor calculates the underlying index
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Notes purchased on original issue date at the face amount and held to the stated maturity date
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Moreover, we have not yet set the initial underlier level that will serve as the baseline for determining the underlier return and
the amount that we will pay on your notes, if any, at maturity. We will not do so until the trade date. As a result, the actual initial underlier level may differ substantially from the underlier level prior to the trade date.
For these reasons, the actual performance of the underlier over the life of your notes, as well as the amount payable at maturity,
if any, may bear little relation to the hypothetical examples shown below or to the historical underlier levels shown elsewhere in this pricing supplement. For information about the historical levels of the underlier during recent periods, see
“The Underlier — Historical Closing Levels of the Underlier” below. Before investing in the offered notes, you should consult publicly available information to determine the levels of the underlier between the date of this pricing supplement and
the date of your purchase of the offered notes.
Also, the hypothetical examples shown below do not take into account the effects of applicable taxes. Because of the U.S. tax
treatment applicable to your notes, tax liabilities could affect the after-tax rate of return on your notes to a comparatively greater extent than the after-tax return on the underlier stocks.
The levels in the left column of the table below represent hypothetical final underlier levels and are expressed as percentages of the initial
underlier level. The amounts in the right column represent the hypothetical cash settlement amounts, based on the corresponding hypothetical final underlier level, and are expressed as percentages of the face amount of a note (rounded to the
nearest one-thousandth of a percent). Thus, a hypothetical cash settlement amount of 100.000% means that the value of the cash payment that we would deliver for each $1,000 of the outstanding face amount of the offered notes on the stated
maturity date would equal 100.000% of the face amount of a note, based on the corresponding hypothetical final underlier level and the assumptions noted above.
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Hypothetical Final Underlier Level
(as Percentage of Initial Underlier Level)
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Hypothetical Cash Settlement Amount
(as Percentage of Face Amount)
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200.000%
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130.000%
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175.000%
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130.000%
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150.000%
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130.000%
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125.000%
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130.000%
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100.000%
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130.000%
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90.000%
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130.000%
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80.000%
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130.000%
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79.999%
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79.999%
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75.000%
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75.000%
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50.000%
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50.000%
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25.000%
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25.000%
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0.000%
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0.000%
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If, for example, the final underlier level were determined to be 25.000% of the initial underlier level, the cash settlement amount
that we would deliver on your notes at maturity would be 25.000% of the face amount of your notes, as shown in the table above. As a result, if you purchased your notes on the original issue date at the face amount and held them to the stated
maturity date, you would lose 75.000% of your investment (if you purchased your notes at a premium to face amount you would lose a correspondingly higher percentage of your investment). In addition, if the final underlier level were determined to
be 200.000% of the initial underlier level, the cash settlement amount that we would deliver on your notes at maturity would be capped at the threshold settlement amount, or 130.000% of each $1,000 face amount of your notes, as shown in the table
above. As a result, if you held your notes to the stated maturity date, you would not benefit from any increase in the final underlier level over 80.000% of the initial underlier level.
The following chart shows a graphical illustration of the hypothetical cash settlement amounts that we would pay on your notes on the stated
maturity date, if the final underlier level were any of the hypothetical levels shown on the horizontal axis. The hypothetical cash settlement amounts in the chart are expressed as percentages of the face amount of your notes and the hypothetical
final underlier levels are expressed as percentages of the initial underlier level. The chart shows that any hypothetical final underlier level of less than 80.000% (the section left of the 80.000% marker on the horizontal axis) would result in a
hypothetical cash settlement amount of less than 100.000% of the face amount of your notes (the section below the 100.000% marker on the vertical axis) and, accordingly, in a loss of principal to the holder of the notes. The chart also shows that
any hypothetical final underlier level of greater than or equal to 80.000% (the section right of the 80.000% marker on the horizontal axis) would result in a capped return on your investment.
The cash settlement amounts shown above are entirely hypothetical; they are based on market prices for the underlier stocks that
may not be achieved on the determination date and on assumptions that may prove to be erroneous. The actual market value of your notes on the stated maturity date or at any other time, including any time you may wish to sell your notes, may bear
little relation to the hypothetical cash settlement amounts shown above, and these amounts should not be viewed as an indication of the financial return on an investment in the offered notes. The hypothetical cash settlement amounts on notes held
to the stated maturity date in the examples above assume you purchased your notes at their face amount and have not been adjusted to reflect the actual issue price you pay for your notes. The return on your investment (whether positive or
negative) in your notes will be affected by the amount you pay for your notes. If you purchase your notes for a price other than the face amount, the return on your investment will differ from, and may be significantly lower than, the
hypothetical returns suggested by the above examples. Please read “Additional Risk Factors Specific to the Notes — The Market Value of Your Notes May Be Influenced by Many Unpredictable Factors” on page S-3 of the accompanying general terms
supplement no. 1,734.
Payments on the notes are economically equivalent to the amounts that would be paid on a combination of other instruments. For example, payments on
the notes are economically equivalent to a combination of an interest-bearing bond bought by the holder and one or more options entered into between the holder and us (with one or more implicit option premiums paid over time). The discussion in
this paragraph does not modify or affect the terms of the notes or the U.S. federal income tax treatment of the notes, as described elsewhere in this pricing supplement.
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We cannot predict the actual final underlier level or what the market
value of your notes will be on any particular trading day, nor can we predict the relationship between the underlier level and the market value of your notes
at any time prior to the stated maturity date. The actual amount that you will receive, if any, at maturity and the rate of return on the offered notes will depend on the actual initial underlier level, which we will set on the trade
date, and the actual final underlier level determined by the calculation agent as described above. Moreover, the assumptions on which the hypothetical returns are based may turn out to be inaccurate. Consequently, the amount of cash to
be paid in respect of your notes, if any, on the stated maturity date may be very different from the information reflected in the examples above.
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An investment in your notes is subject to the risks described below, as
well as the risks and considerations described in the accompanying prospectus, in the accompanying prospectus supplement and under “Additional Risk Factors Specific to the Notes” in the accompanying general terms supplement no. 1,734. You should carefully review these risks and considerations as well as the terms of the notes
described herein and in the accompanying prospectus, the accompanying prospectus supplement and the accompanying general terms supplement no. 1,734. Your notes are a riskier investment than ordinary debt securities. Also, your notes are
not equivalent to investing directly in the underlier stocks, i.e., the stocks comprising the underlier to which your notes are linked. You should carefully consider whether the offered notes are suited to your particular circumstances.
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The Estimated Value of Your Notes At the Time the Terms of Your Notes Are Set On the Trade Date (as Determined By Reference to
Pricing Models Used By GS&Co.) Is Less Than the Original Issue Price Of Your Notes
The original issue price for your notes exceeds the estimated value of your notes as of the time the terms of your notes are set on
the trade date, as determined by reference to GS&Co.’s pricing models and taking into account our credit spreads. Such estimated value on the trade date is set forth above under “Estimated Value of Your Notes”; after the trade date, the estimated value as determined by reference to these models will be affected by changes in market conditions, the creditworthiness of GS Finance Corp., as issuer, the
creditworthiness of The Goldman Sachs Group, Inc., as guarantor, and other relevant factors. The price at which GS&Co. would initially buy or sell your notes (if
GS&Co. makes a market, which it is not obligated to do), and the value that GS&Co. will initially use for account statements and otherwise, also exceeds the estimated value of your notes as determined by reference to these models. As
agreed by GS&Co. and the distribution participants, this excess (i.e., the additional amount described under “Estimated Value of Your Notes”) will decline to zero on a straight line basis over the period from the date hereof through the
applicable date set forth above under “Estimated Value of Your Notes”. Thereafter, if GS&Co. buys or sells your notes it will do so at prices that reflect the estimated value determined by reference to such pricing models at that time. The
price at which GS&Co. will buy or sell your notes at any time also will reflect its then current bid and ask spread for similar sized trades of structured notes.
In estimating the value of your notes as of the time the terms of your notes are set on the trade date, as disclosed above under
“Estimated Value of Your Notes”, GS&Co.’s pricing models consider certain variables, including principally our credit spreads, interest rates (forecasted, current
and historical rates), volatility, price-sensitivity analysis and the time to maturity of the notes. These pricing models are proprietary and rely in part on certain assumptions about future events, which may prove to be incorrect. As a result,
the actual value you would receive if you sold your notes in the secondary market, if any, to others may differ, perhaps materially, from the estimated value of your notes determined by reference to our models due to, among other things, any
differences in pricing models or assumptions used by others. See “Additional Risk Factors Specific to the Notes — The Market Value of Your Notes May Be Influenced by Many Unpredictable Factors” on page S-3 of the accompanying general terms
supplement no. 1,734.
The difference between the estimated value of your notes as of the time the terms of your notes are set on the trade date and the
original issue price is a result of certain factors, including principally the underwriting discount and commissions, the expenses incurred in creating, documenting and marketing the notes, and an estimate of the difference between the amounts we
pay to GS&Co. and the amounts GS&Co. pays to us in connection with your notes. We pay to GS&Co. amounts based on what we would pay to holders of a non-structured note with a similar maturity. In return for such payment, GS&Co.
pays to us the amounts we owe under your notes.
In addition to the factors discussed above, the value and quoted price of your notes at any time will reflect many factors and
cannot be predicted. If GS&Co. makes a market in the notes, the price quoted by GS&Co. would reflect any changes in market conditions and other relevant factors, including any deterioration in our creditworthiness or perceived
creditworthiness or the creditworthiness or perceived creditworthiness of The Goldman Sachs Group, Inc. These changes may adversely affect the value of your notes, including the price you may receive for your notes in any market making
transaction. To the extent that GS&Co. makes a market in the notes, the quoted price will reflect the estimated value determined by reference to GS&Co.’s pricing models at that time, plus or minus its then current bid and ask spread for
similar sized trades of structured notes (and subject to the declining excess amount described above).
Furthermore, if you sell your notes, you will likely be charged a commission for secondary market transactions, or the price will likely reflect a
dealer discount. This commission or discount will further reduce the proceeds you would receive for your notes in a secondary market sale.
There is no assurance that GS&Co. or any other party will be willing to purchase your notes at any price and, in this regard, GS&Co. is not
obligated to make a market in the notes. See “Your Notes May Not Have an Active Trading Market” below.
The Underwriting Discount and Commissions, Including the Structuring Fee and Marketing Fee, and Other
Expenses, Result in Less Favorable Economic Terms of the Notes and Could Adversely Affect Any Secondary Market Price for the Notes
The economic terms of the notes, as well as the difference between the estimated value of your notes as of the time the terms of
your notes are set on the trade date and the original issue price, take into consideration, among other expenses, the underwriting discount and commissions, including the structuring fee and marketing fee, paid in connection with the notes.
Therefore, the economic terms of the notes are less favorable to you than they would have been if these expenses had not been paid or had been lower. Further, the price, if any, at which GS&Co. will buy or sell your notes (if GS&Co. makes
a market, which it is not obligated to do) at any time will reflect, among other things, the economic terms of the notes. Therefore, the secondary market price for the notes could also be adversely affected by the underwriting discount and
commissions, including the structuring fee and marketing fee, and other expenses paid in connection with the notes. See “The Estimated Value of Your Notes At the Time the Terms of Your Notes Are Set On the Trade Date (as Determined By Reference
to Pricing Models Used By GS&Co.) Is Less Than the Original Issue Price Of Your Notes” above.
The Notes Are Subject to the Credit Risk of the Issuer and the Guarantor
Although the return on the notes will be based on the performance of the underlier, the payment of any amount due on the notes is
subject to the credit risk of GS Finance Corp., as issuer of the notes, and the credit risk of The Goldman Sachs Group, Inc. as guarantor of the notes. The notes are our unsecured obligations. Investors are dependent on our ability to pay all
amounts due on the notes, and therefore investors are subject to our credit risk and to changes in the market’s view of our creditworthiness. Similarly, investors are dependent on the ability of The Goldman Sachs Group, Inc., as guarantor of the
notes, to pay all amounts due on the notes, and therefore are also subject to its credit risk and to changes in the market’s view of its creditworthiness. See “Description of the Notes We May Offer — Information About Our Medium-Term Notes,
Series E Program — How the Notes Rank Against Other Debt” on page S-4 of the accompanying prospectus supplement and “Description of Debt Securities We May Offer — Guarantee by The Goldman Sachs Group, Inc.” on page 42 of the accompanying
prospectus.
The Amount Payable on Your Notes Is Not Linked to the Level of the Underlier at Any Time Other Than the Determination Date
The final underlier level will be based on the closing level of the underlier on the determination date (subject to adjustment as
described elsewhere in this pricing supplement). Therefore, if the closing level of the underlier dropped precipitously on the determination date, the cash settlement amount for your notes may be significantly less than it would have been had the
cash settlement amount been linked to the closing level of the underlier prior to such drop in the level of the underlier. Although the actual level of the underlier on the stated maturity date or at other times during the life of your notes may
be higher than the final underlier level, you will not benefit from the closing level of the underlier at any time other than on the determination date.
You May Lose Your Entire Investment in the Notes
You can lose your entire investment in the notes. The cash payment on your notes, if any, on the stated maturity date will be based
on the performance of the underlier as measured from the initial underlier level set on the trade date to the closing level on the determination date. If the final underlier level is less than the threshold level, you will have a loss for each $1,000 of the face amount of your notes equal to the product of the underlier return times $1,000. Thus, you may lose your entire investment in the notes, which would include any premium to face amount you paid when you purchased the notes.
Also, the market price of your notes prior to the stated maturity date may be significantly lower than the purchase price you pay
for your notes. Consequently, if you sell your notes before the stated maturity date, you may receive far less than the amount of your investment in the notes.
The Return on Your Notes May Change Significantly Despite Only a Small Change in the Underlier Level
If the final underlier level is less than the threshold level, you will receive less than the face amount of your notes and you could lose all or a
substantial portion of your investment in the notes. This means that while a decrease in the final underlier level to the threshold level will not result in a loss of principal on the notes, a decrease in the final underlier level to less than the threshold level will result in a loss of a significant portion of the face amount of the notes despite only a small change
in the level of the underlier.
Your Notes Do Not Bear Interest
You will not receive any interest payments on your notes. As a result, even if the cash settlement amount payable for your notes on
the stated maturity date exceeds the face amount of your notes, the overall return you earn on your notes may be less than you would have earned by investing in a non-indexed debt security of comparable maturity that bears interest at a
prevailing market rate.
The Potential for the Value of Your Notes to Increase Will Be Limited
Your ability to participate in any change in the value of the underlier over the life of your notes will be limited because of the
threshold settlement amount. The threshold settlement amount will limit the cash settlement amount you may receive for each of your notes at maturity, no matter how much the level of the underlier may rise beyond the initial underlier level over
the life of your notes. Accordingly, the amount payable for each of your notes may be significantly less than it would have been had you invested directly in the underlier.
Except to the
Extent The Goldman Sachs Group, Inc. is One of the Companies Whose Common Stock Comprises the Financials Select Sector Index and the Underlier, and Except to the Extent GS&Co. and One or More of Our Other Affiliates Act as Authorized
Participants in the Distribution of, and, at Any Time, May Hold, Shares of the Underlier, There Is No Affiliation Between the Underlier Stock Issuers, the Underlier’s Underlying Index Sponsor or the Underlier Investment Advisor and Us
The common stock of The Goldman Sachs Group, Inc. is one of
the underlier stocks comprising the Financials Select Sector Index, and is one of the common stocks currently held by the underlier. In addition, GS&Co. and one or more of our other affiliates may act, from time to time, as authorized participants in the distribution of shares of the underlier, and, at any time, may hold shares of the underlier. We are not otherwise affiliated with the issuers of the underlier stocks, the underlier investment advisor or the underlier’s underlying index sponsor. As we
have told you above, however, we or our affiliates may currently or from time to time in the future own securities of, or engage in business with the underlier stock issuers, the underlier investment advisor and the underlier’s underlying index
sponsor. Neither we nor any of our affiliates have participated in the preparation of any publicly available information or made any “due diligence” investigation or inquiry with respect to the underlier or any of the other underlier stock
issuers. You, as an investor in your notes, should make your own investigation into the underlier and the underlier stock issuers. See “The Underlier” below for additional information about the underlier.
Neither the underlier investment advisor, the underlying
index sponsor nor any of the other underlier stock issuers are involved in the offering of your notes in any way and none of them have any obligation of any sort with respect to your notes. Thus, neither the underlier investment advisor, the
underlying index sponsor nor any of the other underlier stock issuers have any obligation to take your interests into consideration for any reason, including in taking any corporate actions that might affect the market value of your notes.
The Policies of the Underlier’s Investment Advisor, SSGA Funds Management, Inc., and the Sponsor of the Underlying Index,
S&P Dow Jones Indices LLC, Could Affect the Amount Payable on Your Notes and Their Market Value
The underlier’s investment advisor, SSGA Funds Management, Inc. (“SSGA” or the “underlier investment advisor”), may from time to
time be called upon to make certain policy decisions or judgments with respect to the implementation of policies of the underlier investment advisor concerning the calculation of the net asset value of the underlier, additions, deletions or
substitutions of securities in the underlier and the manner in which changes affecting the underlying index are reflected in the underlier that could affect the market price of the shares of the underlier, and therefore, the amount payable on
your notes on the stated maturity date. The amount payable on your notes and their market value could also be affected if the underlier investment advisor changes these policies, for example, by changing the manner in which it calculates the net
asset value of the underlier, or if the underlier investment advisor discontinues or suspends calculation or publication of the net asset value of the underlier, in which case it may become difficult or inappropriate to determine the market value
of your notes.
If events such as these occur, the calculation agent — which initially will be GS&Co. — may determine the closing level of the
underlier on the determination date — and thus the amount payable on the stated maturity date — in a manner, in its sole discretion, it considers appropriate. We describe the discretion that the calculation agent will have in determining the
closing level of the underlier on the determination date and the amount payable on your notes more fully under “Supplemental Terms of the Notes — Discontinuance or Modification of an Underlier” on page S-27 of the accompanying general terms
supplement no. 1,734.
In addition, S&P Dow Jones Indices LLC (the “underlying index sponsor”) owns the underlying index and is responsible for the design and
maintenance of the underlying index. The policies of the underlying index sponsor concerning the calculation of the underlying index, including decisions regarding the addition, deletion or substitution of the equity securities included in the
underlying index, could affect the level of the underlying index
and, consequently, could affect the market prices of shares of the underlier and, therefore, the amount payable on your notes and
their market value.
There Are Risks Associated with the Underlier
Although the underlier’s shares are listed for trading on NYSE Arca, Inc. (the “NYSE Arca”) and a number of similar products have
been traded on the NYSE Arca or other securities exchanges for varying periods of time, there is no assurance that an active trading market will continue for the shares of the underlier or that there will be liquidity in the trading market.
In addition, the underlier is subject to management risk, which is the risk that the underlier investment advisor’s investment
strategy, the implementation of which is subject to a number of constraints, may not produce the intended results. For example, the underlier investment advisor may select up to 10% of the underlier’s assets to be invested in shares of equity
securities that are not included in the underlying index. The underlier is also not actively managed and may be affected by a general decline in market segments relating to the underlying index. The underlier investment advisor invests in
securities included in, or representative of, the underlying index regardless of their investment merits. The underlier investment advisor does not attempt to take defensive positions in declining markets.
In addition, the underlier is subject to custody risk, which refers to the risks in the process of clearing and settling trades and
to the holding of securities by local banks, agent and depositories.
Further, under continuous listing standards adopted by the NYSE Arca, the underlier will be required to confirm on an ongoing basis
that the components of the underlying index satisfy the applicable listing requirements. In the event that its underlying index does not comply with the applicable listing requirements, the underlier would be required to rectify such
non-compliance by requesting that the underlying index sponsor modify such underlying index, adopting a new underlying index or obtaining relief from the Securities and Exchange Commission. There can be no assurance that the underlying index
sponsor would so modify the underlying index or that relief would be obtained from the Securities and Exchange Commission and, therefore, non-compliance with the continuous listing standards may result in the underlier being delisted by the NYSE
Arca.
The Underlier and its Underlying Index are Different and the Performance of the Underlier May Not Correlate
with the Performance of its Underlying Index
The underlier will generally invest in substantially all of the securities included in its underlying index. There may, however, be
instances where the underlier may choose to overweight one or more securities in the underlying index, purchase securities not included in the underlying index or utilize various combinations of other available investment techniques in seeking to
track its underlying index. Although the underlier seeks to track the performance of its underlying index as closely as possible, the underlier’s return may not match or achieve a high degree of correlation with the return of its underlying index
due to, among other things, operating expenses, transaction costs, cash flows, regulatory requirements and operational inefficiencies. In addition, corporate actions with respect to the securities included in the underlying index, such as mergers
and spin-offs, may impact the variance between the underlier and its underlying index. For example, SSGA anticipates that it may take several business days for additions and deletions to the underlying index to be reflected in the portfolio
composition of the underlier. Finally, as the shares of the underlier are traded on the NYSE Arca and are affected by market forces such as supply and demand, economic conditions and other factors, the trading prices of one share of the underlier
generally differ from (and may deviate significantly during periods of market volatility from) the daily net asset value per share of the underlier. For these reasons, the performance of the underlier may not correlate with the performance of its
underlying index.
The Underlier Was Reconstituted in September 2016 and No Longer Provides Exposure to the Real Estate Sector
Effective as of the close of business on September 16, 2016, the Financials Select Sector Index (“underlying index”) was
reconstituted to eliminate the stocks of companies involved in the real estate industry (other than mortgage real estate investment trusts) (“real estate stocks”). In order to facilitate an efficient transition to the reconstituted underlying
index, the underlier exchanged its real estate stocks for shares of the Real Estate Select Sector SPDR® Fund and then distributed those shares to its holders as a special share distribution with an ex-date of September 19, 2016. The
underlier now tracks the performance of only those financial company stocks that remain in the underlying index following its reconstitution, which exclude real estate stocks. Consequently, the underlier is less diversified than it was before
this change to its portfolio. For more information, please see “The underlier Is Concentrated in the Financial Sector and Does Not Provide Diversified Exposure” below.
The distributed shares of the Real Estate Select Sector SPDR® Fund represented a significant percentage (approximately 18.8%) of the net
asset value of the underlier as of September 16, 2016 and the reconstitution of the
underlier could adversely affect the performance of the underlier and the return on the notes. In addition, because the
reconstituted underlier has no historical closing levels prior to September 19, 2016, limited historical information regarding the reconstituted underlier will be available for you to consider in making an independent investigation of the
underlier performance, which may make it difficult for you to make an informed decision with respect to the notes.
Moreover, the historical performance of the underlier prior to its reconstitution might have been meaningfully different had the
underlier not held real estate stocks at that time. Please see “The Underlier — Historical Closing Levels of the Underlier — Hypothetical Adjusted End of Month Closing Levels of the Financials Select Sector Index, the Underlying Index for the
Underlier, Through August 31, 2016” below for hypothetical performance information for the underlying index.
The Underlier is Concentrated in the Financial Sector and Does Not Provide Diversified Exposure
The underlier is not diversified. The underlier’s assets are concentrated in the Financials sector, which means that the underlier
is more likely to be more adversely affected by any negative performance of the Financials sector than an underlier that has more diversified holdings across a number of sectors. Companies in the Financials sector can be affected by, among other
things, business cycle fluctuations, competition, government regulation, a change in interest rates, and a change in a company’s credit rating. In addition, effective on September 16, 2016, the underlying index was reconstituted to eliminate real
estate stocks, which reduced the diversification of the underlier’s assets. It is possible that the real estate stocks eliminated from the underlying index will perform better than the reconstituted underlying index, in which case the performance
of your notes will be less than if the underlying index (and the underlier) had not been reconstituted.
The Underlier May Be Disproportionately Affected By the Performance of a Small Number of Stocks
Although the underlier holds 68 stocks as of January 9, 2019, 40% of the underlier is invested in just 4 stocks – Berkshire
Hathaway Inc. Class B, JPMorgan Chase & Co., Bank of America Corporation and Wells Fargo & Company. As a result, a decline in the prices of one or more of these stocks, including as a result of events negatively affecting one or more of
these companies, may have the effect of significantly lowering the level of the underlier even if none of the other stocks held by the underlier are affected by such events. Because of the weighting of the holdings of the underlier, the amount
you receive at maturity could be less than the cash settlement amount you would have received if you had invested in a product linked to an underlier that capped the maximum weight of any one stock to a low amount or that equally weighted all
stocks held by such underlier.
The Return on Your Notes Will Not Reflect Any Dividends Paid on the Underlier or the Underlier Stocks
The return on your notes will not reflect the return you would realize if you actually owned the underlier and received the distributions paid on
the shares of the underlier. You will not receive any dividends that may be paid on any of the underlier stocks by the underlier stock issuers or the shares of the underlier. See “— You Have No Shareholder Rights or Rights to Receive Any Shares
of the Underlier or Any Underlier Stock” below for additional information.
You Have No Shareholder Rights or
Rights to Receive Any Shares of the Underlier or Any Underlier Stock
Investing in your notes will not make you
a holder of any shares of the underlier or any underlier stocks. Neither you nor any other holder or owner of your notes will have any rights with respect to the underlier or underlier stocks, including any voting rights, any right to receive
dividends or other distributions, any rights to make a claim against the underlier or the underlier stocks or any other rights of a holder of any shares of the underlier or the underlier stocks. Your notes will be paid in cash and you will have
no right to receive delivery of any shares of any underlier or any underlier stocks.
We May Sell an Additional Aggregate Face Amount of the Notes at a Different Issue Price
At our sole option, we may decide to sell an additional aggregate face amount of the notes subsequent to the date of this pricing
supplement. The issue price of the notes in the subsequent sale may differ substantially (higher or lower) from the original issue price you paid as provided on the cover of this pricing supplement.
If You Purchase Your Notes at a Premium to Face Amount, the Return on Your Investment Will Be Lower Than the Return on Notes
Purchased at Face Amount and the Impact of Certain Key Terms of the Notes Will Be Negatively Affected
The cash settlement amount will not be adjusted based on the issue price you pay for the notes. If you purchase notes at a price that differs from
the face amount of the notes, then the return on your investment in such notes held to the stated maturity date will differ from, and may be substantially less than, the return on notes purchased at face amount. If you purchase your notes at a
premium to face amount and hold them to the stated maturity date, the
return on your investment in the notes will be lower than it would have been had you purchased the notes at face amount or a
discount to face amount. In addition, the impact of the threshold level and the threshold settlement amount on the return on your investment will depend upon the price you pay for your notes relative to face amount. For example, if you purchase
your notes at a premium to face amount, the threshold settlement amount will permit a lower positive return on your investment in the notes than would have been the case for notes purchased at face amount or a discount to face amount. Similarly,
if the final underlier level is less than the threshold level, you will incur a greater percentage decrease in your investment in the notes than would have been the case for notes purchased at face amount or a discount to face amount.
Your Notes May Be Subject to an Adverse Change in Tax Treatment in the Future
The tax consequences of an investment in your notes are uncertain, both as to the timing and character of any inclusion in income
in respect of your notes.
The Internal Revenue Service announced on December 7, 2007 that it is considering issuing guidance regarding the tax treatment of
an instrument such as your notes, and any such guidance could adversely affect the value and the tax treatment of your notes. Among other things, the Internal Revenue Service may decide to require the holders to accrue ordinary income on a
current basis and recognize ordinary income on payment at maturity, and could subject non-U.S. investors to withholding tax. Furthermore, in 2007, legislation was introduced in Congress that, if enacted, would have required holders that acquired
instruments such as your notes after the bill was enacted to accrue interest income over the term of such instruments even though there will be no interest payments over the term of such instruments. 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 notes. We describe these developments in more detail under “Supplemental Discussion of U.S. Federal Income Tax Consequences
– United States Holders – Possible Change in Law” below. You should consult your tax advisor about this matter. Except to the extent otherwise provided by law, GS Finance Corp. intends to continue treating the notes for U.S. federal income tax
purposes in accordance with the treatment described under “Supplemental Discussion of U.S. Federal Income Tax Consequences” on page PS-28 below unless and until such time as Congress, the Treasury Department or the Internal Revenue Service
determine that some other treatment is more appropriate. Please also consult your tax advisor concerning the U.S. federal income tax and any other applicable tax consequences to you of owning your notes in your particular circumstances.
Your Notes May Be Subject to the Constructive Ownership Rules
There exists a risk that the constructive ownership rules of Section 1260 of the Internal Revenue Code could apply to your notes. If your notes
were subject to the constructive ownership rules, then any long-term capital gain that you realize upon the sale, exchange, or maturity of your notes would be re-characterized as ordinary income (and you would be subject to an interest charge on
deferred tax liability with respect to such recharacterized capital gain) to the extent that such capital gain exceeds the amount of “net underlying long-term capital gain” (as defined in Section 1260 of the Internal Revenue Code). Because the
application of the constructive ownership rules is unclear you are strongly urged to consult your tax advisor with respect to the possible application of the constructive ownership rules to your investment in the notes.
Foreign Account Tax Compliance Act (FATCA) Withholding May Apply to Payments on Your Notes, Including as a
Result of the Failure of the Bank or Broker Through Which You Hold the Notes to Provide Information to Tax Authorities
Please see the discussion under “United States Taxation — Taxation of Debt Securities — Foreign Account Tax Compliance Act (FATCA) Withholding” in
the accompanying prospectus for a description of the applicability of FATCA to payments made on your notes.
The shares of the Financial Select Sector SPDR® Fund (the “ETF”) are issued by a series of the Select Sector SPDR® Trust, a
registered investment company. The ETF seeks investment results that correspond generally to the price and yield performance, before expenses, of the Financials Select Sector Index (“the underlying index”). The ETF trades on the NYSE Arca under
the ticker symbol “XLF”. SSGA Funds Management, Inc. (“SSGA”) currently serves as the investment advisor to the ETF. SSGA employs a replication strategy in seeking to track the underlying index as described under “Replication Strategy” below.
We obtained the following fee information from the SPDR® website, without independent verification. The investment advisor is entitled
to receive a management fee from the ETF based on a percentage of the ETF’s average daily net assets, at an annual rate of 0.03%. In addition, the ETF has adopted a Distribution and Service Plan pursuant to which payments of up to 0.04% of
average daily net assets may be made. The ETF also incurs other operating expenses up to an annual rate of 0.06%. As of December 31, 2018, the gross expense ratio of the ETF was 0.13% per annum.
For additional information regarding the Select Sector SPDR® Trust or SSGA, please consult the reports (including the Annual Report to
Shareholders on Form N−CSR for the fiscal year ended September 30, 2018) and other information SPDR® Series Trust files with the SEC. Information provided to or filed with the SEC can be inspected and copied at the public reference
facilities maintained by the SEC or through the SEC’s website at sec.gov. In addition, information regarding the ETF, including its top portfolio holdings, may be obtained from other sources including, but not limited to, press releases,
newspaper articles, other publicly available documents, and the SPDR® website at spdrs.com. We are not incorporating by reference the website, the sources listed above or any material they include in this pricing supplement. We have
obtained all information about the ETF from the SPDR® website without independent verification.
Investment Objective and Strategy
The ETF seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of publicly traded equity
securities of companies in the Financials Select Sector Index, which is comprised of companies in the Financials sector. SSGA uses a replication strategy to try to achieve the ETF’s investment objective, which means that the ETF generally invests
in substantially all of the securities represented in the underlying index it tracks in approximately the same proportions as the underlying index. In certain situations or market conditions, the ETF may temporarily depart from its normal
investment policies and strategies provided that the alternative is consistent with the ETF’s investment objective and is in the best interest of the ETF. For example, if the ETF is unable to invest directly in a component security or if a
derivative investment may provide higher liquidity than other types of investments, it may make larger than normal investments in derivatives to maintain exposure to the underlying index that it tracks. Consequently, under such circumstances,
such ETF may invest in a different mix of investments than it would under normal circumstances. The ETF is managed with an indexing investment strategy, attempting to track the performance of an unmanaged index of securities, regardless of the
current or projected performance of the underlying index or of the actual securities comprising the underlying index. This differs from an actively managed ETF, which typically seeks to outperform a benchmark index. The ETF’s performance may be
less favorable than that of a portfolio managed using an active investment strategy. The structure and composition of the underlying index will affect the performance, volatility and risk of the underlying index and consequently, the performance,
volatility and risk of the ETF.
As discussed in more detail in “The Underlying Index” below, effective as of the close of business on September 16, 2016 (the “rebalance date”), the
underlying index was reconstituted by eliminating the stocks of companies involved in the real estate industry other than mortgage real estate investment trusts (“Mortgage REITs”). In order to facilitate an efficient transition to the
reconstituted index, the ETF exchanged its real estate stocks for shares of the Real Estate Select Sector SPDR® Fund (“XLRE”) in advance of the underlying index reconstitution. On the rebalance date, the ETF declared an in-kind distribution of 0.139146 shares of
XLRE per share of the ETF to shareholders of the ETF. Following the distribution, the ETF holds only the stocks included in the rebalanced index which does not include stocks in the Real Estate industry group (other than Mortgage REITs, which has
since moved to the Diversified Financials industry group).
The ETF’s investment strategy and other policies may be changed without shareholder approval.
Notwithstanding the ETF’s investment objective, the return on your notes will not reflect any dividends paid on the ETF shares, on the securities
purchased by the ETF or on the securities that comprise the underlying index.
The following table displays the top holdings of the ETF. We obtained the information in the tables below from the SPDR® website, without independent
verification.
Financial Select Sector SPDR® Fund Top Holdings as of January 9, 2019:
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Name:
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Percentage (%)
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Berkshire Hathaway Inc. Class B
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13.25%
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JPMorgan Chase & Co.
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11.58%
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Bank of America Corp.
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8.15%
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Wells Fargo & Co.
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7.02%
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Citigroup Inc.
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4.77%
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U.S. Bancorp
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2.50%
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American Express Company
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2.40%
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CME Group Inc. Class A
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2.22%
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The Goldman Sachs Group, Inc.
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2.12%
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Chubb Limited
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2.04%
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Holdings with Weights Equal to or in Excess of 5% of the Financial Select Sector SPDR®
Fund as of January 9, 2019
Berkshire Hathaway Inc., JPMorgan Chase & Co., Bank of America Corporation and Wells Fargo & Company are registered under
the Exchange Act. Companies with securities registered under the Exchange Act are required to file financial and other information specified by the U.S. Securities and Exchange Commission (“SEC”) periodically. Information filed with the SEC can
be inspected and copied at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330.
In addition, information filed by these ETF stock issuers with the SEC electronically can be reviewed through a web site maintained by the SEC. The address of the SEC’s web site is sec.gov. Information filed with the SEC by each of the
above-referenced ETF stock issuers under the Exchange Act can be located by referencing its SEC file number specified below.
The graphs below show the daily historical closing levels of Berkshire Hathaway Inc. Class B, JPMorgan Chase & Co., Bank of America Corporation
and Wells Fargo & Company from January 9, 2009 through January 9, 2019. We obtained the prices in the graphs below using data from Bloomberg Financial Services, without independent
verification. We have taken the descriptions of the ETF stock issuers set forth below from publicly available information without independent verification.
According to publicly available information, Berkshire Hathaway Inc. is a holding company. Information filed with the SEC by the ETF stock issuer
under the Exchange Act can be located by referencing its SEC file number 001-14905. The graph below shows daily historical closing levels for Berkshire Hathaway Inc.’s Class B common stock.
Historical Performance of Berkshire Hathaway Inc. Class B
According to publicly available information, JPMorgan Chase & Co. is a financial services firm. Information filed with the SEC by the ETF
stock issuer under the Exchange Act can be located by referencing its SEC file number 001-05805.
Historical Performance of JPMorgan Chase & Co.
According to publicly available information, Bank of America Corporation is a bank holding company and financial holding company. Information filed with the SEC by the ETF stock issuer under the Exchange Act can be located by referencing its SEC file number 001-06523.
Historical Performance of Bank of America Corporation
According to publicly available information, Wells Fargo & Company is a bank holding company and financial holding company. Information filed
with the SEC by the ETF stock issuer under the Exchange Act can be located by referencing its SEC file number 001-02979.
Historical Performance of Wells Fargo & Company
Replication Strategy
The ETF uses a replication strategy to attempt to track the performance of the underlying index. This strategy involves investing in substantially
all of the securities represented in the underlying index in approximately the same proportions as the underlying index. Under normal market conditions, the ETF generally invests substantially all, but at least 95%, of its total assets in the
securities comprising the underlying index. The ETF will provide shareholders with at least 60 days notice prior to any material change in this 95% investment policy.
Correlation
Although SSGA seeks to track the performance of the underlying index (i.e., achieve a high degree of correlation with the return of the underlying index), the ETF’s
return may not match the return of the underlying index. The ETF incurs a number of operating expenses not applicable to the underlying index and incurs costs in buying and selling securities. In addition, the ETF may not be fully invested at
times, generally as a result of cash flows into or out of the ETF or reserves of cash held by the ETF to meet redemptions. The following table displays information about the relative performance of the ETF’s shares before taxes and the underlying
index (from which the tracking error
can be derived), in each case as of December 31, 2018. We obtained the information in the tables below from the SPDR® website, without
independent verification.
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Period
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Underlying
Index
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ETF
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Year to Date
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-13.03%
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-13.11%
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1 Year
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-13.03%
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-13.11%
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3 Years
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9.28%
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9.19%
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5 Years
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8.16%
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8.06%
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10 Years
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10.93%
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10.78%
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Since Inception
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3.60%
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3.44%
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Industry Concentration Policy
The ETF’s assets will generally be concentrated in an industry or group of industries to the extent that the underlying index concentrates in a
particular industry or group of industries. By concentrating its assets in a single industry or group of industries, the ETF is subject to the risk that financial, economic, business or other conditions that have a negative effect on that
industry or group of industries will negatively impact the ETF to a greater extent than if the ETF’s assets were invested in a wider variety of industries.
The ETF is non-diversified and may invest a larger percentage of its assets in securities of a few issuers or a single issuer than a diversified
ETF. As a result, the ETF’s performance may be disproportionately impacted by the performance of relatively few securities.
Creation Units
Prior to trading in the secondary market, shares of the ETF are issued at net asset value to certain institutional investors (typically market
makers or other broker-dealers) only in block-size units, known as creation units, of 50,000 shares or multiples thereof. As a practical matter, only institutions, market makers or large investors purchase or redeem creation units. The
principal consideration for a specified number of creation units (which may be revised at any time without notice) is a basket of securities and/or cash that constitutes a substantial replication, or a representation, of the securities included
in the underlying index. Except when aggregated in creation units (or upon the liquidation of the ETF), shares of the ETF are not redeemable securities. There can be no assurance that there will be sufficient liquidity in the public trading
market at any time to permit assembly of a creation unit.
Share Prices and the Secondary Market
The trading prices of the ETF’s shares will fluctuate continuously throughout trading hours based on market supply and demand rather than the ETF’s
net asset value, which is calculated at the end of each business day. The trading price of the ETF’s shares may deviate significantly from its net asset value during periods of market volatility. The New York Stock Exchange disseminates an
indicative optimized portfolio value of the ETF every fifteen seconds throughout the trading day. The indicative optimized portfolio value calculations are estimates of the values of the ETF’s net asset value per share using market data.
The Underlying Index
The Financials Select Sector Index (Bloomberg symbol, “IXM Index”), which we refer to as the underlying index, is comprised of the constituents of
the S&P 500® Index that are assigned to the Global Industry Classification Standard (“GICS®”) Financials sector. The S&P 500® Index includes a representative sample of 500 companies in leading industries
of the U.S. economy. The underlying index and the S&P 500® Index are calculated, maintained and published by S&P Dow Jones Indices LLC (“S&P”). Additional information about the Financials Select Sector Index and the S&P
500® Index is available on the following websites: us.spindices.com/indices/equity/financial-select-sector-index and us.spindices.com/indices/equity/sp-500. We are not incorporating by reference the websites or any material they
include in this pricing supplement. We have obtained all information about the underlying index from the S&P website without independent verification.
S&P and MSCI Inc. (“MSCI”) jointly developed the GICS® in 1999 to establish a global standard for categorizing companies into sectors and industries. The
GICS® classifies companies into four levels of detail: 11 sectors, 24 industry groups, 69 industries and 158 sub-industries. The eleven GICS® sectors are: Communication Services, Consumer Discretionary, Consumer Staples,
Energy, Financials, Health Care, Industrials, Information Technology,
Materials, Real Estate and Utilities. GICS® was designed to classify a company according to its principal business activity. To make this
determination, S&P and MSCI use revenues as a key measure of a company’s business activity. Earnings and market perception, however, are also recognized as important and relevant information for classification purposes and are taken into
account during the review process. A company’s classification is reviewed annually at a minimum, and companies are under constant surveillance for corporate actions. The GICS® methodology itself is reviewed annually for changes or
additions to the four classification levels.
Previously, the underlying index included companies in the Banks, Diversified Financials, Real Estate and Insurance industry groups. However,
effective after the close of business on August 31, 2016, the Real Estate industry group within the Financials sector was elevated to a separate sector, and the Real Estate industry group, with the exception of the Mortgage REIT industry which
remained in the Financials sector, was no longer included in the Financials sector. In order to implement this change to the GICS® Financial sector, effective after the close of business on September 16, 2016, all companies no longer
included in the GICS® Financial sector were dropped from the underlying index.
As of January 9, 2019, the top ten constituents of the underlying index and their relative weight in the underlying index were as follows: Berkshire
Hathaway Inc. Class B (13.26%), JPMorgan Chase & Co. (11.59%), Bank of America Corp (8.16%), Wells Fargo & Company (7.03%), Citigroup Inc. (4.78%), U.S. Bancorp (2.50%), American Express Company (2.40%), CME Group Inc. Class A (2.22%),
The Goldman Sachs Group, Inc. (2.12%) and Chubb Limited (2.05%).
S&P rebalances the underlying index quarterly after the close of business on the third Friday of March, June, September and December (each, a
“rebalancing effective date”). With prices reflected on the second Friday of March, June, September and December, and membership, shares outstanding and investable weight factors as of the rebalancing effective date, each company is weighted by
float-adjusted market capitalization. Modifications to the float-adjusted market capitalization of constituent stocks are made as follows.
If any company has a weight greater than 24%, S&P caps that company’s float-adjusted market capitalization weight at 23%. S&P sets the cap
to 23% to allow for a 2% buffer to ensure that no stock exceeds 25% as of the rebalancing effective date. S&P redistributes all excess weight equally to all uncapped stocks within the underlying index. After this redistribution, if the
float-adjusted market capitalization weight of any other stock(s) then breaches 23%, S&P repeats the process iteratively until no stock breaches the 23% weight cap. The sum of the stocks with weight greater than 4.8% cannot exceed 50% of the
total index weight. If the rule in the preceding sentence is breached, then S&P ranks all the stocks in descending order of their float-adjusted market capitalization weights and the first stock that causes the 50% limit to be breached is
identified. S&P then reduces the weight of that stock to 4.5%. S&P then redistributes the excess weight proportionally to all stocks with weights below 4.5% and the process is repeated iteratively until the 50% test above is satisfied. As
part of the rebalancing process, S&P assigns index share amounts to each constituent stock to arrive at the weights calculated above. Since index shares are assigned based on prices one week prior to rebalancing, the actual weight of each
stock at the rebalancing differs somewhat from these weights due to market movements. If necessary, the reweighting process may take place more than once prior to the close on the last business day of March, June, September or December to ensure
the underlying index conforms to all diversification requirements.
Except for the rebalancing process described above and the total return process described below, the underlying index is calculated and maintained
on the same basis as the S&P 500® Index, which is described beginning on page S-40 of the accompanying general terms supplement no. 1,734.
The ETF tracks the performance of the total return version of the underlying index. A total return index represents the total return earned in a
portfolio that tracks the price index and reinvests dividend income in the overall index, not in the specific stock paying the dividend. The difference between the price return calculation and the total return calculation is that, with respect to
the price return calculation, changes in the index level reflect changes in stock prices, whereas with respect to the total return calculation of the index, changes in the index level reflect both movements in stock prices and the reinvestment of
dividend income. Notwithstanding the ETF’s investment objective, the return on your notes will not reflect any dividends paid on the ETF shares, on the securities purchased by the ETF or on the securities that comprise the underlying index.
Once the price return index has been calculated, the total return index is calculated. First, the total daily dividend for each stock in the underlying index is
calculated by multiplying the per share dividend by the number of shares included in the underlying index. Then the index dividend is calculated by aggregating the total daily dividends for each of the index stocks (which may be zero for some
stocks) and dividing by the divisor for that day. Next the daily total return of the underlying index is calculated as a fraction minus 1, the numerator of which is the sum of the index level plus the index dividend and the denominator of which
is the index level on the previous day. Finally, the
total return index for that day is calculated as the product of the value of the total return index on the previous day times the sum of 1 plus the
index daily total return for that day.
In addition to the criteria for additions to the S&P® 500 Index set forth in the accompanying general terms supplement no. 1,734, as
of July 31, 2017, companies with multiple share class lines are no longer eligible for inclusion in the S&P 500® Index. Constituents of the S&P 500® Index prior to July 31, 2017 with multiple share class lines will
be grandfathered in and continue to be included in the S&P 500® Index. If a constituent company of the S&P 500® Index reorganizes into a multiple share class line structure, that company will remain in the S&P
500® Index at the discretion of the S&P Index Committee in order to minimize turnover. Also as of July 31, 2017, the criteria employed by S&P for purposes of making additions to the S&P 500® Index were changed as
follows:
| ● |
with respect to the “U.S. company” criterion, (i) the IEX was added as an “eligible exchange” for the primary listing of the relevant company’s common stock and (ii) the former
“corporate governance structure consistent with U.S. practice” requirement was removed; and
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| ● |
with respect to constituents of the S&P MidCap 400® Index and the S&P SmallCap 600® Index that are being considered for addition to the S&P 500®
Index, the financial viability, public float and/or liquidity eligibility criteria no longer need to be met if the S&P Index Committee decides that such an addition will enhance the representativeness of the S&P 500®
Index as a market benchmark.
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Historical Closing Levels of the Underlier
Hypothetical Adjusted End of Month Closing Levels of the Financials Select Sector Index, the Underlying Index for the Underlier,
Through August 31, 2016
As discussed above under “The Underlier”, the Financials Select Sector Index was recently reconstituted to
eliminate the stocks of companies involved in the real estate industry (other than mortgage real estate investment trusts). Therefore, unadjusted historical closing levels
have not been included in the graph below.
The blue line (“weight-adjusted IXM close”) in the graph below shows hypothetical weight-adjusted month-end
closing levels of the Financials Select Sector Index from January 31, 2011 through August 31, 2016. The hypothetical weight-adjusted IXM month-end closing data is produced on any such day by retroactively removing real estate stocks from the
constituents of the Financials Select Sector Index on such day and adjusting the historical level of the underlying index based upon the percentage weight represented by all non-real estate constituents on such day. This hypothetical
weight-adjusted approach is intended to simulate the performance of the Financials Select Sector Index had the underlying index not held real estate stocks prior to the reconstitution on September 16, 2016 discussed above under “The Underlier —
The Underlying Index”, while accounting for the dynamic nature of the underlying index as constituent weightings change over time. To create this hypothetical weight-adjusted performance data, historical weights and constituents as of the last
calendar day of each month through August 31, 2016 were obtained from S&P Dow Jones Indices LLC, without independent verification.
For comparative purposes, the green line (“static factor-adjusted IXM close”) in the graph below shows
hypothetical static factor-adjusted month-end closing levels of the Financials Select Sector Index using a static adjustment factor of 0.812017. The static adjustment factor was obtained from Bloomberg Financial Services for use with historical
prices of the underlier and was applied retroactively by us to the historical month-end closing levels of the Financials Select Sector Index through August 31, 2016. This static adjustment factor reflects the relative value of the components of
the underlier immediately after the removal of real estate stocks from the constituents of the underlier on September 16, 2016 as compared to the value of the components of the underlier prior to such removal.
We provide both the hypothetical weight-adjusted month-end closing levels and the hypothetical static
factor-adjusted month-end closing levels to help gauge whether application of the static adjustment factor (used by Bloomberg for the historical underlier closing levels) is a reasonable estimate of historical Financials Select Sector Index
levels and historical underlier closing levels with real estate stocks removed. Neither the hypothetical weight-adjusted month-end closing levels reflected below nor the hypothetical static factor-adjusted month-end closing levels reflected below
are indicative of the future performance of the Financials Select Sector Index.
Although the underlier seeks to track
the performance of the Financials Select Sector Index as closely as possible, the underlier’s return may not match or achieve a high degree of
correlation with the return of the Financials Select Sector Index due to, among other things, operating expenses, transaction costs, cash flows,
regulatory requirements and operational inefficiencies. For a discussion of these reasons, please see “Additional Risk Factors Specific to Your Notes — The Underlier and its Underlying Index are Different and the Performance of the Underlier May Not Correlate with the Performance of the Underlying Index” above. Please also see “The Underlier— Investment Objective and Strategy” above for a table containing relative performance data of the underlier’s shares
before taxes and the underlying index (from which the tracking error can be derived) on S-22. You should not take the graph, or the weight-adjusted hypothetical performance data or static factor-adjusted hypothetical performance data used to
create the graph, as an indication of the future performance of the Financials Select Sector Index or the underlier.
Hypothetical and Historical Closing Levels of the Underlier
The closing level of the underlier has fluctuated in the past and may, in the future, experience significant fluctuations. Any
historical upward or downward trend in the closing level of the underlier during any period shown below is not an indication that the underlier is more or less likely to increase or decrease at any time during the life of your notes.
You should not take the hypothetical or historical closing
levels of the underlier as an indication of the future performance of the underlier. As
discussed above under “— Hypothetical Adjusted End of Month Closing Levels of the Financials Select Sector
Index, the Underlying Index for the ETF, Through August 31, 2016”, the performance of the underlier prior to its reconstitution on September 16, 2016 might have been
meaningfully different had the underlier not held real estate stocks at that time. We cannot give you any assurance that the future performance of the
underlier or its underlying stocks will result in your receiving an amount greater than the outstanding face amount of your notes on the stated maturity date.
Neither we nor any of our affiliates make any representation to you as to the performance of the underlier. The actual
performance of the underlier over the life of the offered notes, as well as the cash settlement amount, if any, may bear little relation to the historical underlier closing levels shown below.
The graph below shows the daily hypothetical and historical closing levels of the underlier from January 9, 2009 through January 9, 2019, adjusted
for corporate events, if applicable. We obtained the closing levels of the underlier in the graph below from Bloomberg Financial Services, without independent verification. In the graph, historical closing levels after the underlier was
reconstituted as of the close of business on September 16, 2016 can be found to the right of the vertical solid line marker. Closing levels to the left of the vertical solid line marker reflect the underlier closing levels before the underlier
was reconstituted as of the close of business on September 16, 2016. These closing levels have been adjusted by Bloomberg Financial Services using the static adjustment factor of 0.812017 described above under “— Hypothetical Adjusted End of
Month Closing Levels of the Financials Select Sector Index, the Underlying Index for the underlier, Through August 31, 2016”. Investors may want to consider using the hypothetical Bloomberg-adjusted data as a proxy for how the underlier would
have performed had the underlier not held real estate stocks prior to September 19, 2016; however, we have not independently verified the process Bloomberg Financial Services used in deriving the static adjustment factor nor that the underlier’s
constituents and weights used to calculate the static adjustment factor are representative of the underlier’s constituents and weights on any date prior to September 19, 2016.
Historical Performance of the Financial Select Sector SPDR® Fund
The following section supplements the discussion of U.S. federal income taxation in the accompanying prospectus supplement.
The following section is the opinion of Sidley Austin llp,
counsel to GS Finance Corp. and The Goldman Sachs Group, Inc. In addition, it is the opinion of Sidley Austin llp that the characterization of the notes for U.S.
federal income tax purposes that will be required under the terms of the notes, as discussed below, is a reasonable interpretation of current law.
This section does not apply to you if you are a member of a class of holders subject to special rules, such as:
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a dealer in securities or currencies;
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a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings;
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a bank;
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a life insurance company;
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a tax exempt organization;
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| • |
a regulated investment company;
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an accrual method taxpayer subject to special tax accounting rules as a result of its use of financial statements;
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a partnership;
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| • |
a person that owns a note as a hedge or that is hedged against interest rate risks;
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| • |
a person that owns a note as part of a straddle or conversion transaction for tax purposes; or
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a United States holder (as defined below) whose functional currency for tax purposes is not the U.S. dollar.
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Although this section is based on the U.S. Internal Revenue Code of 1986, as amended, its legislative history, existing and
proposed regulations under the Internal Revenue Code, published rulings and court decisions, all as currently in effect, no statutory, judicial or administrative authority directly addresses how your notes should be treated for U.S. federal
income tax purposes, and as a result, the U.S. federal income tax consequences of your investment in your notes are uncertain. Moreover, these laws are subject to change, possibly on a retroactive basis.
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You should consult your tax advisor concerning the U.S. federal income tax and any other applicable tax consequences of
your investments in the notes, including the application of state, local or other tax laws and the possible effects of changes in federal or other tax laws.
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United States Holders
This section applies to you only if you are a United States holder that holds your notes as a capital asset for tax purposes. You
are a United States holder if you are a beneficial owner of each of your notes and you are:
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a citizen or resident of the United States;
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| • |
a domestic corporation;
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an estate whose income is subject to U.S. federal income tax regardless of its source; or
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a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial
decisions of the trust.
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Tax Treatment. You will be obligated pursuant to the
terms of the notes – in the absence of a change in law, an administrative determination or a judicial ruling to the contrary – to characterize each note for all tax purposes as a pre-paid derivative contract in respect of the underlier. Except as
otherwise stated below, the discussion herein assumes that the notes will be so treated.
Upon the sale, exchange or maturity of your notes, you should recognize capital gain or loss equal to the difference, if any, between the amount
of cash you receive at such time and your tax basis in your notes. Your tax basis in the notes will generally be equal to the amount that you paid for the notes. If you hold your notes for more than one year, the gain or loss generally will be
long-term capital gain or loss. If you hold your notes for one year or less, the gain or loss generally will be short-term capital gain or loss. Short-term capital gains are generally subject to tax at the marginal tax rates applicable to
ordinary income.
In addition, the constructive ownership rules of Section 1260 of the Internal Revenue Code could apply to your notes. If your notes were subject to the
constructive ownership rules, then any long-term capital gain that you realize upon the sale, exchange or maturity of your notes would be re-characterized as ordinary income (and you would be subject to an interest charge on deferred tax
liability with respect to such re-characterized capital gain) to the extent that such capital gain exceeds the amount of “net underlying long-term capital gain” (as defined in Section 1260 of the Internal Revenue Code). Because the application of
the constructive ownership rules is unclear you are strongly urged to consult your tax advisor with respect to the possible application of the constructive ownership rules to your investment in the notes.
No statutory, judicial or administrative authority directly
discusses how your notes should be treated for U.S. federal income tax purposes. As a result, the U.S. federal income tax consequences of your investment in the notes are uncertain and alternative characterizations are possible. Accordingly, we
urge you to consult your tax advisor in determining the tax consequences of an investment in your notes in your particular circumstances, including the application of state, local or other tax laws and the possible effects of changes in federal
or other tax laws.
Alternative Treatments. There is no judicial or
administrative authority discussing how your notes should be treated for U.S. federal income tax purposes. Therefore, the Internal Revenue Service might assert that a treatment other than that described above is more appropriate. For example, the
Internal Revenue Service could treat your notes as a single debt instrument subject to special rules governing contingent payment debt instruments. Under those rules, the amount of interest you are required to take into account for each accrual
period would be determined by constructing a projected payment schedule for the notes and applying rules similar to those for accruing original issue discount on a hypothetical noncontingent debt instrument with that projected payment schedule.
This method is applied by first determining the comparable yield – i.e., the yield at which we would issue a noncontingent fixed rate debt instrument with terms and conditions similar to your notes – and then determining a payment schedule as of
the issue date that would produce the comparable yield. These rules may have the effect of requiring you to include interest in income in respect of your notes prior to your receipt of cash attributable to that income.
If the rules governing contingent payment debt instruments apply, any income you recognize upon the sale, exchange or maturity of
your notes would be treated as ordinary interest income. Any loss you recognize at that time would be treated as ordinary loss to the extent of interest you included as income in the current or previous taxable years in respect of your notes,
and, thereafter, as capital loss.
If the rules governing contingent payment debt instruments apply, special rules would apply to a person who purchases notes at a
price other than the adjusted issue price as determined for tax purposes.
It is also possible that your notes could be treated in the manner described above, except that any gain or loss that you recognize
at maturity would be treated as ordinary gain or loss. You should consult your tax advisor as to the tax consequences of such characterization and any possible alternative characterizations of your notes for U.S. federal income tax purposes.
It is possible that the Internal Revenue Service could seek to characterize your notes in a manner that results in tax consequences
to you different from those described above and you should consult your tax advisor with respect to the tax treatment of the notes.
Possible Change in Law
On December 7, 2007, the Internal Revenue Service released a notice stating that the Internal Revenue Service and the Treasury Department are actively considering
issuing guidance regarding the proper U.S. federal income tax treatment of an instrument such as your notes, including whether the holder of an instrument such as your notes should be required to accrue ordinary income on a current basis and
whether gain or loss should be ordinary or capital. It is not possible to determine what guidance they will ultimately issue, if any. It is possible, however, that under such guidance, holders of the notes will ultimately be required to accrue
income currently and this could be applied on a retroactive basis. The Internal Revenue Service and the Treasury Department are also considering other relevant issues, including whether foreign holders of such instruments should be subject to
withholding tax on any deemed income accruals, and whether the special “constructive ownership rules” of Section 1260 of the Internal Revenue Code might be applied to such instruments. Holders are urged to consult their tax advisors concerning
the significance, and the potential impact, of the above considerations. Except to the extent otherwise provided by law, GS Finance Corp. intends to continue treating the notes for U.S. federal income tax purposes in accordance with the treatment
described above under “Tax Treatment” unless and until such time as Congress, the Treasury Department or the Internal Revenue Service determine that some other treatment is more appropriate. You are urged to consult your tax advisor as to the
possibility that any legislative or administrative action may adversely affect the tax treatment and the value of your notes.
Furthermore, in 2007, legislation was introduced in Congress that, if enacted, would have required holders that acquired
instruments such as your notes after the bill was enacted to accrue interest income over the term of such instruments even though there will be no interest payments over the term of such instruments. 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 notes.
It is impossible to predict what any such legislation or administrative or regulatory guidance might provide, and whether the effective date of any
legislation or guidance will affect notes that were issued before the date that such
legislation or guidance is issued. You are urged to consult your tax advisor as to the possibility that any legislative or
administrative action may adversely affect the tax treatment of your notes.
Backup Withholding and Information Reporting
Please see the discussion under “United States Taxation — Taxation of Debt Securities — Backup Withholding and Information
Reporting—United States Holders” in the accompanying prospectus for a description of the applicability of the backup withholding and information reporting rules to payments made on your notes.
United States Alien Holders
This section applies to you only if you are a United States alien holder. You are a United States alien holder if you are the
beneficial owner of notes and are, for U.S. federal income tax purposes:
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a nonresident alien individual;
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a foreign corporation; or
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an estate or trust that in either case is not subject to U.S. federal income tax on a net income basis on income or gain from the notes.
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You will be subject to generally applicable information reporting and backup withholding requirements as discussed in the
accompanying prospectus under “United States Taxation — Taxation of Debt Securities — Backup Withholding and Information Reporting — United States Alien Holders” with respect to payments on your notes at maturity and, notwithstanding that we do
not intend to treat the notes as debt for tax purposes, we intend to backup withhold on such payments with respect to your notes unless you comply with the requirements necessary to avoid backup withholding on debt instruments (in which case you
will not be subject to such backup withholding) as set forth under “United States Taxation — Taxation of Debt Securities — United States Alien Holders” in the accompanying prospectus.
As discussed above, alternative characterizations of the notes for U.S. federal income tax purposes are possible. Should an
alternative characterization of the notes, by reason of a change or clarification of the law, by regulation or otherwise, cause payments at maturity with respect to the notes to become subject to withholding tax, we will withhold tax at the
applicable statutory rate and we will not make payments of any additional amounts. Prospective United States alien holders of the notes should consult their tax advisor in this regard.
Furthermore, on December 7, 2007, the Internal Revenue Service released Notice 2008-2 soliciting comments from the public on
various issues, including whether instruments such as your notes should be subject to withholding. It is therefore possible that rules will be issued in the future, possibly with retroactive effect, that would cause payments on your notes at
maturity to be subject to withholding, even if you comply with certification requirements as to your foreign status.
In addition, the Treasury Department has issued regulations under which amounts paid or deemed paid on certain financial instruments (“871(m)
financial instruments”) that are treated as attributable to U.S.-source dividends could be treated, in whole or in part depending on the circumstances, as a “dividend equivalent” payment that is subject to tax at a rate of 30% (or a lower rate
under an applicable treaty), which in the case of any amounts you receive upon the sale, exchange or maturity of your notes, could be collected via withholding. If these regulations were to apply to the notes, we may be required to withhold such
taxes if any U.S.-source dividends are paid on the underlier during the term of the notes. We could also require you to make certifications (e.g., an applicable Internal Revenue Service Form W-8) prior to the maturity of the notes in order to
avoid or minimize withholding obligations, and we could withhold accordingly (subject to your potential right to claim a refund from the Internal Revenue Service) if such certifications were not received or were not satisfactory. If withholding
was required, we would not be required to pay any additional amounts with respect to amounts so withheld. These regulations generally will apply to 871(m) financial instruments (or a combination of financial instruments treated as having been
entered into in connection with each other) issued (or significantly modified and treated as retired and reissued) on or after January 1, 2021, but will also apply to certain 871(m) financial instruments (or a combination of financial instruments
treated as having been entered into in connection with each other) that have a delta (as defined in the applicable Treasury regulations) of one and are issued (or significantly modified and treated as retired and reissued) on or after January 1,
2017. In addition, these regulations will not apply to financial instruments that reference a “qualified index” (as defined in the regulations). We have determined that, as of the issue date of your notes, your notes will not be subject to
withholding under these rules. In certain limited circumstances, however, you should be aware that it is possible for United States alien holders to be liable for tax under these rules with respect to a combination of transactions treated as
having been entered into in connection with each other even when no withholding is required. You should consult your tax advisor concerning these regulations, subsequent
official guidance and regarding any other possible alternative characterizations of your notes for U.S. federal income tax
purposes.
Foreign Account Tax Compliance Act (FATCA) Withholding
Pursuant to Treasury regulations, Foreign Account Tax Compliance Act (FATCA) withholding (as described in “United States Taxation—Taxation of Debt Securities—Foreign
Account Tax Compliance Act (FATCA) Withholding” in the accompanying prospectus) will generally apply to obligations that are issued on or after July 1, 2014; therefore, the notes will generally be subject to the FATCA withholding rules.
See “Supplemental Plan of Distribution” on page S-96 of the accompanying
general terms supplement no. 1,734 and “Plan of Distribution — Conflicts of Interest” on page 94 of the accompanying prospectus. GS Finance Corp. estimates that its share of the total offering expenses, excluding underwriting discounts and
commissions, will be approximately $ .
GS Finance Corp. will sell to GS&Co.,
and GS&Co. will purchase from GS Finance Corp., the aggregate face amount of the offered notes specified on the front cover of this pricing supplement. GS&Co. proposes initially to offer the notes to the public at the original issue
price set forth on the cover page of this pricing supplement, and to certain securities dealers at such price less a concession not in excess of % of the face amount. In addition to the concession, any such securities dealer will receive
from us a structuring fee of % of the face amount of each such note.
GS&Co. has engaged Incapital LLC to
provide certain marketing services from time to time relating to notes of this series. Incapital LLC will receive a fee of % of the face amount of each note offered hereby from us in connection with such service.
GS&Co. is an affiliate of GS Finance
Corp. and The Goldman Sachs Group, Inc. and, as such, will have a “conflict of interest” in this offering of notes within the meaning of Financial Industry Regulatory Authority, Inc. (FINRA) Rule 5121. Consequently, this offering of notes will
be conducted in compliance with the provisions of FINRA Rule 5121. GS&Co. will not be permitted to sell notes in this offering to an account over which it exercises discretionary authority without the prior specific written approval of the
account holder. GS&Co. will also pay a fee in connection with the distribution of the notes to SIMON Markets LLC, a broker-dealer affiliated with GS Finance Corp.
We expect to deliver the notes against
payment therefor in New York, New York on January 28, 2019. Under Rule 15c6-1 of the Securities Exchange Act of 1934, trades in the secondary market generally are required to settle in two business days, unless the parties to any such trade
expressly agree otherwise. Accordingly, purchasers who wish to trade notes on any date prior to two business days before delivery will be required to specify alternative settlement arrangements to prevent a failed settlement.
We have been advised by GS&Co. that it
intends to make a market in the notes. However, neither GS&Co. nor any of our other affiliates that makes a market is obligated to do so and any of them may stop doing so at any time without notice. No assurance can be given as to the
liquidity or trading market for the notes.
The notes will not be listed on any securities exchange or
interdealer quotation system.
We have not authorized anyone to provide any information or to make any representations other than those contained or incorporated by reference in this pricing
supplement, the accompanying general terms supplement no. 1,734, the accompanying prospectus supplement or the accompanying prospectus. We take no responsibility for, and can provide no assurance as to the reliability of, any other information
that others may give you. This pricing supplement, the accompanying general terms supplement no. 1,734, the accompanying prospectus supplement and the accompanying prospectus is an offer to sell only the notes offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The information contained in this pricing supplement, the accompanying general terms supplement no. 1,734, the accompanying prospectus supplement and the accompanying prospectus is
current only as of the respective dates of such documents.
Pricing Supplement
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Page
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PS-5
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PS-8
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PS-12
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PS-18
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PS-28
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PS-32
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General Terms Supplement No. 1,734 dated July 10, 2017
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Additional Risk Factors Specific to the Notes
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S-1
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Supplemental Terms of the Notes
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S-16
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The Underliers
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S-36
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S&P 500® Index
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S-40
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MSCI Indices
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S-46
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Hang Seng China Enterprises Index
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S-55
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Russell 2000® Index
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S-61
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FTSE®100 Index
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S-69
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EURO STOXX 50® Index
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S-75
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TOPIX
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S-82
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The Dow Jones Industrial Average®
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S-87
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The iShares® MSCI Emerging Markets ETF
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S-91
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Use of Proceeds
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S-94
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Hedging
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S-94
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Employee Retirement Income Security Act
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S-95
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Supplemental Plan of Distribution
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S-96
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Conflicts of Interest
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S-98
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Prospectus Supplement dated July 10, 2017
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Use of Proceeds
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S-2
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Description of Notes We May Offer
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S-3
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Considerations Relating to Indexed Notes
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S-15
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United States Taxation
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S-18
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Employee Retirement Income Security Act
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S-19
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Supplemental Plan of Distribution
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S-20
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Validity of the Notes and Guarantees
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S-21
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Prospectus dated July 10, 2017
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Available Information
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2
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Prospectus Summary
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4
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Risks Relating to Regulatory Resolution Strategies and Long-Term Debt Requirements
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8
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Use of Proceeds
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11
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Description of Debt Securities We May Offer
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12
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Description of Warrants We May Offer
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45
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Description of Units We May Offer
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60
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GS Finance Corp.
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65
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Legal Ownership and Book-Entry Issuance
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67
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Considerations Relating to Floating Rate Debt Securities
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72
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Considerations Relating to Indexed Securities
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73
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Considerations Relating to Securities Denominated or Payable in or Linked to a Non-U.S. Dollar Currency
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74
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United States Taxation
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77
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Plan of Distribution
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92
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Conflicts of Interest
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94
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Employee Retirement Income Security Act
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95
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Validity of the Securities and Guarantees
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95
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Experts
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96
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Review of Unaudited Condensed Consolidated Financial Statements by Independent Registered Public Accounting Firm
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96
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Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995
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96
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$
GS Finance Corp.
Digital Financial Select Sector SPDR® Fund-Linked Notes due
guaranteed by
The Goldman Sachs Group, Inc.
Goldman Sachs & Co. LLC