UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 13D
(Rule 13d-101)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(Amendment No. )*
Velocity Financial, Inc.
(Name of Issuer)
Common Stock, par value $0.01 per share
(Title of Class of Securities)
92262D101
(CUSIP Number)
Pacific Investment Management Company LLC
Attention: Zephram Yowell, Senior Vice President, Senior Counsel
650 Newport Center Drive
Newport Beach, California 92660
(949) 720-6000
(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)
April 5, 2020
(Date of Event Which Requires Filing of This Statement)
If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of §§ 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box. [_]
Note. Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See § 240.13d-7 for other parties to whom copies are to be sent.
| * | The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. |
The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).
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| CUSIP No. 92262D101 |
CUSIP No. 92262D101 |
Page 2 of 8 Pages | |||||||||
| 1. |
NAME OF REPORTING PERSON
Pacific Investment Management Company LLC | |||||||||
| 2. |
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [_] (b) [_] | |||||||||
| 3. |
SEC USE ONLY
| |||||||||
| 4. |
SOURCE OF FUNDS
OO | |||||||||
| 5. |
CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) [_]
| |||||||||
| 6. |
CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware | |||||||||
|
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
|
7. |
SOLE VOTING POWER
4,470,300 shares of Common Stock 25,000 shares of Series A Preferred Stock(1) 1,673,958 Warrants(1) | ||||||||
| 8. |
SHARED VOTING POWER
0 | |||||||||
| 9. |
SOLE DISPOSITIVE POWER
4,470,300 shares of Common Stock(1) 25,000 shares of Series A Preferred Stock(1) 1,673,958 Warrants(1) | |||||||||
| 10. |
SHARED DISPOSITIVE POWER
0 | |||||||||
| 11. |
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
4,470,300 shares of Common Stock(1) 25,000 shares of Series A Preferred Stock(1) 1,673,958 Warrants(1) | |||||||||
| 12. |
CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES ☐
| |||||||||
| 13. |
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
44.7%(2) | |||||||||
| 14. |
TYPE OF REPORTING PERSON
IA, OO | |||||||||
| (1) | The shares reported herein for the Reporting Person represent the securities of the Issuer that are held by TOBI (see Item 2 of this Schedule 13D) (i) 4,470,300 shares of the Issuer’s Common Stock, (ii) 6,493,506 shares of Common Stock that are convertible from 25,000 shares of the Series A Preferred Stock (the “Series A Preferred Shares”), and (iii) 1,673,958 shares of Common Stock that TOBI has the right to acquire through the exercise of Warrants (the “Warrant Shares”). The conversion of the Series A Preferred Shares into, and the exercise of Warrants for, shares of Common Stock are subject to the Issuer’s receipt of Stockholder Approval (see Item 4 of this Schedule 13D). |
(2) The number of shares outstanding
for purposes of this percentage calculation assumes (i) 20,087,494 outstanding shares of the Issuer’s Common Stock as of
April 1, 2020, as provided by the Issuer to the Reporting Person on April 5, 2020, plus (ii) the conversion of the Series A Preferred
Shares and (iii) the exercise of the Warrant Shares.
| CUSIP No. 92262D101 | Page 3 of 8 Pages |
SCHEDULE 13D
| Item 1. | Security and Issuer. |
This Statement on Schedule 13D (this “Schedule 13D”) relates to common stock, par value $0.01 per share (the “Common Stock”), of Velocity Financial, Inc., a Delaware corporation (the “Issuer”), the principal executive offices of which are located at 30699 Russell Ranch Road, Suite 295, Westlake Village, California 91362.
| Item 2. | Identity and Background. |
This Schedule 13D is filed on behalf of Pacific Investment Management Company LLC, a Delaware limited liability company (“PIMCO”).
The address of the principal business office of PIMCO is 650 Newport Center Drive, Newport Beach, California 92660.
TOBI III SPE I LLC, a Delaware limited liability company (“TOBI”), was formed solely for the purpose of investing in the Issuer. TOBI purchased the Series A Preferred Stock and Warrants (each such term is defined in Item 3 below) from the Issuer. LVS III Holding LP, a Delaware limited partnership (“LVS”), is the sole member of TOBI and operates as a pooled investment fund and invests (among other things) in operating companies. PIMCO GP XVII, LLC, a Delaware limited liability company (“PIMCO GP”), is the sole general partner of LVS. PIMCO is the sole managing member of PIMCO GP, retains a pecuniary interest therein, and has the power to make voting and investment decisions regarding the securities of the Issuer held by TOBI. PIMCO is an indirect subsidiary of Allianz SE, a publicly held company in Germany. The principal business of PIMCO is global investment management services for a wide range of investors.
On December 1, 2016, PIMCO entered into a settlement agreement with the SEC relating to disclosures in connection with the PIMCO Total Return Active Exchange-Traded Fund’s performance attribution during the first four months of its existence in 2012 and the valuation of 43 smaller-sized (“odd-lot”) positions of non-agency mortgage-backed securities using third-party vendor prices, as well as PIMCO’s compliance policies and procedures related to these matters. Under the terms of the settlement, PIMCO agreed to pay to the SEC $19.8 million, which includes a penalty, fee disgorgement, and interest. PIMCO has enhanced its pricing and disclosure policies to address the SEC’s findings and, as part of the settlement, retained an independent compliance consultant to review its policies regarding the valuation of smaller-sized positions.
Except as set forth herein, neither the Reporting Person nor, to the best knowledge of the Reporting Person, any of the persons listed in Schedule A has, during the last five years, been convicted in any criminal proceeding (excluding traffic violations or similar misdemeanors) or been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction resulting in his, her or its being subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.
| Item 3. | Source and Amount of Funds or Other Consideration. |
Prior to the Issuer’s initial public offering in January 2020 (the “IPO”), TOBI purchased certain Class D units from the Issuer (prior to its conversion from a Delaware limited liability company to a Delaware corporation) for an aggregate purchase price of approximately $39.5 million. As part of the Issuer’s conversion to a corporation prior to the closing of the IPO, TOBI received 4,470,300 shares of the Issuer’s Common Stock for its Class D units (the “Velocity IPO Shares”).
On April 5, 2020, the Issuer entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with TOBI and certain other investment funds managed by Snow Phipps Group, LLC (“Snow Phipps”), pursuant to which TOBI purchased in a private placement (the “Private Placement”) (i) an aggregate of 25,000 newly issued shares of Series A Convertible Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), and (ii) warrants to purchase an aggregate of 1,673,958 shares of the Issuer’s Common Stock (“Warrants”) in exchange for cash consideration in an aggregate amount of $25.0 million. The Private Placement closed on April 7, 2020 (the “Closing”).
The working capital of TOBI was the source of funds for the purchase of the Velocity IPO Shares, the Series A Preferred Stock and the Warrants.
| CUSIP No. 92262D101 | Page 4 of 8 Pages |
| Item 4. | Purpose of Transaction. |
The information set forth or incorporated in Items 3 and 6 is incorporated herein by reference.
The acquisition by PIMCO of the Issuer’s Common Stock, Series A Preferred Stock and the Warrants was for investment purposes.
The Securities Purchase Agreement provides TOBI with certain rights, including consent rights and board nomination rights, which is in addition to TOBI’s existing rights to nominate a director under the Stockholders Agreement (described in Item 6 below). At or promptly following the time TOBI designates such director pursuant to the Securities Purchase Agreement, the Issuer shall take such action as is necessary to (i) increase the number of directors comprising the Board of Directors (the “Board”) from 6 to 7 and (ii) appoint such person to the Board.
The Series A Preferred Stock is not convertible and the Warrants are not exercisable until the Issuer obtains stockholder approval (“Stockholder Approval”) as required by the listing standards of the New York Stock Exchange (“NYSE”). Concurrently with the execution of the Securities Purchase Agreement, TOBI executed a voting and support agreement (the “Voting and Support Agreement”) in favor of the Issuer pursuant to which TOBI agreed, among other things, to vote all shares of Common Stock (but excluding any shares of Series A Preferred Stock) of the Issuer beneficially owned by TOBI to approve the issuance of shares of Common Stock in connection with any future conversion of the Series A Preferred Stock and any exercise of the Warrants, as required by the listing standards of the NYSE. The Reporting Person understands that Snow Phipps has also separately agreed with the Issuer to vote any shares of Common Stock it holds in favor of the Stockholder Approval.
In connection with the Closing, the Issuer established the rights and preferences of the shares of the Series A Preferred Stock by filing a certificate of designation (the “Series A Certificate of Designation”) with the Secretary of State of the State of Delaware. The Series A Preferred Stock ranks senior to the Common Stock with respect to the payment of dividends and distribution of assets upon liquidation, dissolution and winding up. The Series A Preferred Stock is entitled to receive any dividends or distributions paid in respect of the Common Stock on an as-converted basis. The Series A Preferred Stock has no stated maturity and will remain outstanding indefinitely unless converted into Common Stock or repurchased and cancelled by the Issuer.
The holders of the Series A Preferred Stock (the “Series A Holders”) are entitled to vote, together with the holders of Common Stock, on an as-converted basis, subject to limitations of the rules of the NYSE, on all matters submitted to a vote of the holders of Common Stock, and as a separate class as required by law. The Series A Holders will also have the right to elect two directors to the Board if the Issuer defaults under its obligation to repurchase the Series A Preferred Stock.
The Series A Preferred Stock has a liquidation preference equal to the greater of (i) $2,000 per share from April 7, 2020 to October 7, 2022, which amount increases ratably to $3,000 per share to November 28, 2024 and $3,000 per share from and after November 28, 2024 and (ii) the amount such holder of Series A Preferred Stock would have received if the Series A Preferred Stock had converted into Common Stock immediately prior to such liquidation.
After the Issuer obtains Stockholder Approval, the Series A Preferred Stock is convertible into, with respect to each share of Series A Preferred Stock so converted, the number of shares of Common Stock equal to then applicable conversion rate (plus cash in lieu of fractional shares, if any) at any time, in whole or in part, at the option of TOBI (or a permitted transferee) at an initial conversion price of $3.85 per share of Common Stock. The initial conversion rate for the Series A Preferred Stock is 259.74, and is subject to customary antidilution adjustments. In addition, the Series A Preferred Stock is subject to conversion at the option of the Issuer after October 7, 2021 in accordance with the terms thereof. The Series A Preferred Stock is also subject to repurchase, at the option of TOBI (or a permitted transferee), in accordance with the terms thereof.
After the Issuer obtains Stockholder Approval, the Warrants are exercisable at the warrantholder’s option at any time, in whole or in part, through April 7, 2025, at an exercise price of $2.96 per share of Common Stock, with respect to two-thirds of the Warrants (or the right to purchase 1,115,972 shares of Common Stock), and at an exercise price of $4.94 per share of Common Stock, with respect to the other one-third of the Warrants (or the right to purchase 557,986 shares of Common Stock). The exercise price and the number of shares of Common Stock issuable upon exercise of the Warrants are subject to customary antidilution adjustments. The Issuer is not required to effect an exercise of Warrants, if after giving effect to the issuance of Common Stock upon exercise of such Warrants, such warrantholder together with its affiliates would beneficially own 49% or more of the Issuer’s outstanding Common Stock.
| CUSIP No. 92262D101 | Page 5 of 8 Pages |
In connection with the Closing, the Issuer entered into a registration rights agreement with TOBI and Snow Phipps (the “Registration Rights Agreement”), pursuant to which the Issuer agreed to provide certain registration and other rights with respect to the shares of Common Stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants for the benefit of TOBI and Snow Phipps and certain of their respective transferees. The Issuer will generally be obligated to effect up to four registrations per year, subject to certain limitations, and has granted TOBI and Snow Phipps and their respective transferees certain “piggyback” registration rights allowing them to include shares of Common Stock in registration statements filed by the Issuer. TOBI’s registration rights terminate upon the date on which it (and its permitted transferees) no longer hold registrable securities. The Registration Rights Agreement includes a provision that prohibits the Issuer from granting registration rights that are on parity with or senior to the rights granted to TOBI and Snow Phipps in the Registration Rights Agreement.
The foregoing is a summary of certain material terms of the: (i) Securities Purchase Agreement; (ii) Voting and Support Agreement; (iii) Series A Certificate of Designation; (iv) Warrants; and (v) Registration Rights Agreement. The foregoing descriptions are not, and do not purport to be, complete and, except as otherwise described above, are qualified in their entirety by reference to the full text of the forms of those documents, which have been filed as Exhibits 99.1, 99.2, 99.3, 99.4 and 99.5, respectively, and are incorporated herein by reference.
Mr. Daniel J. Ballen, a Portfolio Manager and Executive Vice President at the Reporting Person, is a member of the Board. Mr. Ballen has agreed to waive any board fees to which he might otherwise have been entitled as a result of his service.
The Reporting Person may acquire additional shares of the Common Stock and other securities of the Issuer from time to time or may dispose of any or all of such shares or other securities held by it at any time. The Reporting Person intends to evaluate on an ongoing basis its investment in the Issuer and its options with respect to such investment.
Except as set forth herein, the Reporting Person has no plans or proposals relating to any matters specified in paragraphs (a) through (j) of Item 4 of Schedule 13D. However, the Reporting Person reserves the right to adopt such plans or proposals in the future, subject to applicable regulatory requirements, if any. Depending on market conditions, an evaluation of the business and the prospects of the Issuer and other factors, the Reporting Person may, in its sole discretion, purchase additional shares of Common Stock, or other securities convertible into or exchangeable for shares of Common Stock, or dispose of shares of Common Stock from time to time in the open market, in privately negotiated transactions or otherwise, subject to market conditions and other factors.
| Item 5. | Interest in Securities of the Issuer. |
(a) and (b)
Items 7-11 of the cover pages of this Schedule 13D are incorporated herein by reference.
The securities reported in this Schedule 13D are held by investment advisory clients or discretionary accounts of which PIMCO is the investment adviser, as described in Item 2. When an investment management contract (including a sub-advisory agreement) delegates to PIMCO investment discretion or voting power over the securities held in the investment advisory accounts that are subject to that agreement, PIMCO considers the agreement to grant it sole investment discretion or voting authority, as the case may be, unless the agreement specifies otherwise. Accordingly, PIMCO reports on Schedule 13D that it has sole investment discretion and voting authority over the securities covered by any such investment management agreement and may be deemed to beneficially own the securities held by its clients or accounts within the meaning of rule 13d-3 under the Act.
In accordance with SEC Release No. 34-39538 (January 12, 1998), this Schedule 13D reports the securities beneficially owned or deemed to be beneficially owned by PIMCO. It does not include securities, if any, beneficially owned by PIMCO’s affiliates, whose ownership of securities is disaggregated from that of PIMCO in accordance with that release.
(c) Except as set forth in Item 3, the Reporting Person has not engaged in any transactions in the Issuer’s Common Stock during the past sixty days.
(d) TOBI is the direct holder of the Issuer’s Common Stock, the Series A Preferred Stock and the Warrants and has the right to receive or the power to direct the receipt of dividends from, or proceeds from the sale of, greater than five percent of the outstanding shares of Common Stock of the Issuer.
(e) Not applicable.
| CUSIP No. 92262D101 | Page 6 of 8 Pages |
| Item 6. | Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer. |
The responses set forth in Item 4 are incorporated herein by reference in their entirety.
In connection with the IPO, TOBI, Snow Phipps, and Christopher D. Farrar entered into a stockholders agreement dated January 16, 2020 with the Issuer (the “Stockholders Agreement”). Pursuant to the terms of the Stockholders Agreement, TOBI has the right to nominate one director for so long as TOBI and its affiliates together with their permitted transferees hold at least 7.5% of the number of shares of the Issuer’s Common Stock outstanding immediately following the consummation of the IPO. In addition, the Stockholders Agreement provides that for so long as TOBI is entitled to nominate at least one member to the Issuer’s Board, TOBI is entitled to have one of its director nominees appointed to each of the Issuer’s Compensation Committee and Nominating/Corporate Governance Committee, subject to qualification under applicable NYSE rules.
In addition, in connection with the IPO, TOBI also entered into an agreement dated January 6, 2020 (the “Lock-Up Agreement”) with Wells Fargo Securities, LLC, Citigroup Global Markets Inc. and JMP Securities LLC, as representatives of a group of underwriters (collectively, the “IPO Underwriters”), pursuant to which TOBI agreed, for a period of 180 days after January 16, 2020, that it will not, without the prior written consent of the IPO Underwriters, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or preferred stock or other capital stock, or any securities convertible into or exchangeable or exercisable for shares of Common Stock or other capital stock, or (2) enter into any swap or other agreement, arrangement or transaction that transfers to another, in whole or in part, directly or indirectly, any shares of Common Stock or preferred stock or other capital stock, or any securities convertible into or exchangeable or exercisable for shares of Common Stock or other capital stock, subject to specified exceptions.
In connection with the IPO, the Issuer also entered into a registration rights agreement dated January 16, 2020 with TOBI and Snow Phipps (the “IPO Registration Rights Agreement”), pursuant to which the Issuer agreed to provide certain registration and other rights with respect to the shares of Common Stock held by them for resale. The Issuer is obligated to effect up to four registrations initiated by Snow Phipps and one registration initiated by TOBI per year, subject to certain limitations, and has granted TOBI and Snow Phipps and their respective transferees certain “piggyback” registration rights allowing them to include shares of Common Stock in registration statements filed by the Issuer. TOBI’s registration rights terminate upon the date on which it (and its permitted transferees) no longer hold registrable securities.
The foregoing is a summary of certain material terms of the: (i) Stockholders Agreement; (ii) Lock-Up Agreement; and IPO Registration Rights Agreement. The foregoing descriptions are not, and do not purport to be, complete and, except as otherwise described above, are qualified in their entirety by reference to the full text of the forms of those documents, which have been filed as Exhibits 99.6, 99.7 and 99.8, respectively, and are incorporated herein by reference.
Except as otherwise described in this Schedule 13D, there are no contracts, arrangements, understandings or relationships between the Reporting Person and any other person with respect to any securities of the Issuer.
| Item 7. | Material to be Filed as Exhibits. |
| Exhibit 99.1 | Securities Purchase Agreement, dated April 5, 2020, by and among the Issuer, TOBI, and the purchasers set forth in Schedule A thereto (incorporated by reference to Exhibit 10.1 to the Issuer’s Current Report on Form 8-K, filed with the SEC on April 6, 2020). |
| Exhibit 99.2 | Voting and Support Agreement, dated as of April 5, 2020, by and between the Issuer and TOBI (incorporated by reference to Exhibit 10.3 to the Issuer’s Current Report on Form 8-K, filed with the SEC on April 7, 2020). |
| Exhibit 99.3 | Certificate of Designation of Series A Convertible Preferred Stock of the Issuer (incorporated by reference to Exhibit 3.1 to the Issuer’s Current Report on Form 8-K, filed with the SEC on April 7, 2020). |
| Exhibit 99.4 | Form of Warrant (incorporated by reference to Exhibit 4.1 to the Issuer’s Current Report on Form 8-K, filed with the SEC on April 7, 2020). |
| Exhibit 99.5 | Registration Rights Agreement, dated as of April 7, 2020, by and among the Issuer, TOBI, and the other parties thereto (incorporated by reference to Exhibit 10.1 to the Issuer’s Current Report on Form 8-K, filed with the SEC on April 7, 2020). |
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| CUSIP No. 92262D101 | Page 7 of 8 Pages |
| Exhibit 99.6 | Stockholders Agreement dated as of January 16, 2020, by and among the Issuer, TOBI, and the other parties thereto (incorporated by reference to Exhibit 10.1 to the Issuer’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with SEC on April 7, 2020). |
| Exhibit 99.7 | Form of Lock-Up Agreement, by and between the IPO Underwriters and TOBI. |
| Exhibit 99.8 | IPO Registration Rights Agreement, dated as of January 16, 2020, by and among the Issuer, TOBI, and the other parties thereto (incorporated by reference to Exhibit 10.2 to the Issuer’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on April 7, 2020). |
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| CUSIP No. 92262D101 | Page 8 of 8 Pages |
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.
Dated: April 14, 2020
| PACIFIC INVESTMENT MANAGEMENT COMPANY LLC | ||
| By: |
/s/ Harin de Silva | |
|
Name: Harin de Silva Title: Executive Vice President | ||
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| CUSIP No. 92262D101 |
SCHEDULE A
The name and present principal occupation of each Executive Committee Member and Chief Investment Officer of PIMCO is set forth below. Unless otherwise noted the business address of each person listed below is c/o Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, California 92660.
EXECTUVE
COMMITTEE MEMBERS AND CHIEF INVESTMENT OFFICERS OF
PACIFIC INVESTMENT MANAGEMENT COMPANY LLC
| Name and Business Address | Present Principal Occupation | Citizenship |
| Andrew Balls | Managing Director – Chief Investment Officer (Global Fixed Income) | United States |
| Craig A. Dawson | Managing Director – Executive Committee, Head of PIMCO Europe, Middle East and Africa | United States |
| Daniel J. Ivascyn | Managing Director – Executive Committee, Group Chief Investment Officer | United States |
| Mark R. Kiesel | Managing Director, Chief Investment Officer (Global Credit) | United States |
| Scott A. Mather | Managing Director, Chief Investment Officer (U.S. Core Strategies) | United States |
| Eric Mogelof | Managing Director – Executive Committee, Head of U.S. Global Wealth Management | United States |
| Thomas J. Otterbein | Managing Director – Executive Committee, Head of Institutional Client Management, Americas | United States |
| Emmanuel Roman | Managing Director – Executive Committee and Chief Executive Officer | United States |
| Jerome Schneider | Managing Director – Executive Committee | United States |
| Marc P. Seidner | Managing Director – Executive Committee, Chief Investment Officer (Non-traditional Strategies) | United States |
| Candice Stack | Managing Director – Executive Committee, Head of Institutional Client Management, U.S. | United States |
| Kimberley Stafford | Managing Director – Executive Committee, Head of PIMCO Asia-Pacific | United States |
| Christian Stracke | Managing Director – Executive Committee, Global Head of Credit Research | United States |
| Eve Tournier | Managing Director – Executive Committee | French |
FORM OF LOCK-UP AGREEMENT
Velocity Financial, Inc.
Public Offering of Common Stock
Dated as of ____________________, 2020
Wells Fargo Securities, LLC
Citigroup Global Markets Inc.
JMP Securities LLC
As Representatives of the several Underwriters
c/o Wells Fargo Securities, LLC
375 Park Avenue
New York, New York 10152
c/o Citigroup Global Markets Inc.
388 Greenwich Avenue
New York, New York 10013
c/o JMP Securities LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
This agreement is being delivered to you in connection with the proposed Underwriting Agreement (the “Underwriting Agreement”) among Velocity Financial, Inc., a Delaware corporation (the “Company”), Wells Fargo Securities, LLC (“Wells Fargo”), Citibank Global Markets Inc. (“Citi”) and JMP Securities LLC (“JMP”), as representatives of a group of underwriters (the “Underwriters”) and the other parties thereto (if any), relating to a proposed underwritten public offering of common stock (the “Common Stock”) of the Company (the “Offering”).
In order to induce you and the other Underwriters to enter into the Underwriting Agreement, and in light of the benefits that the offering of the Common Stock will confer upon the undersigned in its capacity as a securityholder and/or an officer or director of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each Underwriter that, during the period beginning on and including the date of the Underwriting Agreement through and including the date that is the 180th day after the date of the Underwriting Agreement (such period, the “Lock-Up Period”), the undersigned will not, without the prior written consent of Wells Fargo, Citi and JMP, directly or indirectly:
(i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of any shares of the Company’s Common Stock or preferred stock or other capital stock (collectively, “capital stock”) or any securities convertible into or exercisable or exchangeable for Common Stock or other capital stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or
(ii) enter into any swap or other agreement, arrangement or transaction that transfers to another, in whole or in part, directly or indirectly, any of the economic consequence of ownership of any Common Stock or other capital stock or any securities convertible into or exercisable or exchangeable for any Common Stock or other capital stock,
whether any transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock, other capital stock, other securities, in cash or otherwise, or publicly announce any intention to do any of the foregoing.
Notwithstanding the provisions set forth in the immediately preceding paragraph, the undersigned may, without the prior written consent of Wells Fargo, Citi and JMP, transfer any Common Stock or other capital stock or any securities convertible into or exchangeable or exercisable for Common Stock or other capital stock:
(1) as a bona fide gift or gifts or by will, by intestate succession or pursuant to a so-called “living trust” or other revocable trust established to provide for the disposition of property on the undersigned’s death, in each case to any member of the immediate family (as defined below) of the undersigned or to a trust the beneficiaries of which are exclusively the undersigned or members of the undersigned’s immediate family, or as a bona fide gift or gifts to a charity or educational institution; provided that if the undersigned is required to file a report under Section 16(a) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), reporting a reduction in beneficial ownership of shares of Common Stock or other capital stock or any securities convertible into or exercisable or exchangeable for Common Stock or other capital stock by the undersigned during the Lock-Up Period, the undersigned shall include a statement in such report to the effect that such transfer is not a transfer for value and that such transfer is being made as a gift, by will or intestate succession or pursuant to a so-called “living trust” or other revocable trust established to provide for the disposition of property on the undersigned’s death, as the case may be,
(2) if the undersigned is a corporation, partnership, a limited liability company, a trust or other business entity, to (i) a partner, member, stockholder or holder of another equity interest, as the case may be, of the undersigned (including, for the avoidance of doubt, any dividend or distribution-in-kind of the Common Stock to such persons) if, in any such case, such transfer is not for value (ii) another corporation, partnership, limited liability company, trust or other business entity that is a direct or indirect affiliate (as defined under Rule 12b-2 of the 1934 Act) of the undersigned,
(3) if the undersigned is a trust, to the beneficiary of such trust;
(4) to the undersigned’s affiliates or any investment fund or other entity controlled or managed by the undersigned
(5) to a nominee or custodian of a person or entity to whom a disposition or transfer would be permissible under clauses (1) through (4);
(6) to the Company (i) pursuant to the exercise, in each case on a “cashless” or “net exercise” basis, of any option to purchase Common Stock granted by the Company pursuant to any employee benefit plans or arrangements described in or filed as an exhibit to the registration statement with respect to the Offering, where any Common Stock received by the undersigned upon any such exercise will be subject to the terms of this lock-up agreement, or (ii) for the purpose of satisfying any withholding taxes (including estimated taxes) due as a result of the exercise of any option to purchase Common Stock or the vesting of any restricted stock awards granted by the Company pursuant to employee benefit plans or arrangements described in or filed as an exhibit to the registration statement with respect to the Offering, in each case on a “cashless” or “net exercise” basis, where any Common Stock received by the undersigned upon any such exercise or vesting will be subject to the terms of this lock-up agreement; provided that any filing under Section 16(a) of the 1934 Act in connection with such transfer shall indicate, to the extent permitted by such Section and the related rules and regulations, the reason for such disposition and that such transfer of Common Stock was solely to the Company;
(7) by operation of law pursuant to an order of a court or regulatory agency (for purposes of this letter agreement, a “court or regulatory agency” means any domestic or foreign, federal, state or local government, including any political subdivision thereof, any governmental or quasi-governmental authority, department, agency or official, any court or administrative body, and any national securities exchange or similar self-regulatory body or organization, in each case of competent jurisdiction) or divorce settlement; provided that any filing under Section 16(a) of the 1934 Act in connection with such transfer shall indicate, to the extent permitted by such Section and the related rules and regulations, that such transfer is by operation of law pursuant to an order of court or regulatory agency or divorce settlement;
(8) to the Company pursuant to any put or call provisions of existing employment agreements and equity grant documents; provided that any filing under Section 16(a) of the 1934 Act in connection with such transfer shall indicate, to the extent permitted by such Section and the related rules and regulations, the reason for such disposition and that such transfer of Common Stock or capital stock was solely to the Company;
(9) from an executive officer to the Company upon death, disability or termination of employment, in each case, of such executive officer;
(10) acquired in the Offering or in open-market or privately negotiated transactions after the completion of the Offering;
(11) in response to a bona fide third party tender offer, merger, consolidation or other similar transaction made to or with all holders of capital stock involving a “change of control” (as defined below) of the Company occurring after the consummation of the Offering, that has been approved by the board of directors of the Company, provided that in the event that the tender offer, merger, consolidation or other such transaction is not completed, the undersigned’s Common Stock shall remain subject to the terms of this agreement; for purposes of this clause (11), “change of control” means the consummation of any bona fide third party tender offer, merger, consolidation or other similar transaction the result of which is that any “person” (as defined in Section 13(d)(3) of the 1934 Act), or group of persons, other than the Company, becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 of the 1934 Act) of at more than 50% of total voting power of the voting stock of the Company;
(12) if the undersigned is an entity, the pledge, hypothecation or other granting of a security interest in Common Stock or securities convertible into or exchangeable for Common Stock to one or more lending institutions as collateral or security for any loan, advance or extension of credit and any transfer upon foreclosure upon such Common Stock or such securities, provided, that the undersigned or the Company, as the case may be, shall provide Wells Fargo, Citi and JMP prior written notice informing them of any public filing, report or announcement with respect to such pledge, hypothecation or other grant of a security interest;
(13) the entry into a trading plan established in accordance with Rule 10b5-1 under the 1934 Act, provided that, in the case of this clause (13), (i) sales under any such trading plan may not occur during the Lock-Up Period and (ii) to the extent a public announcement or filing under the 1934 Act, if any, is required of or voluntarily made by or on behalf of the undersigned or the Company regarding the establishment or amendment of such plan, such announcement or filing shall include a statement to the effect that no transfer of shares of Common Stock may be made under such plan during the Lock-Up Period;
(14)to the undersigned’s direct or indirect general partner or managing member or to certain officers or members thereof in connection with such officers’ or members’ donation to charitable organizations, family foundations or donor-advised funds at sponsoring organizations; provided that if any reports under the 1934 Act are required to be filed as a result of such transfer, such reports shall include a statement to the effect that such filing relates to a transfer in connection with a donation to a charitable organization, family foundation or donor-advised fund at a sponsoring organization;
(15) to the Underwriters pursuant to the Underwriting Agreement;
(16) any transfer of equity interests in Velocity Financial LLC for equity interests in the Company in connection with the conversion of Velocity Financial, LLC into a corporation in connection with the Offering, it being understood that any shares of Common Stock received by the undersigned upon such transfer shall be subject to this agreement;
provided, however, that (A) in the case of any transfer described in clause (1) through (5) above, it shall be a condition to the transfer that the transferee executes and delivers to Wells Fargo, Citi and JMP, acting on behalf of the Underwriters, not later than one business day prior to such transfer, a written agreement, in substantially the form of this agreement (it being understood that any references to “immediate family” in the agreement executed by such transferee shall expressly refer only to the immediate family of the undersigned and not to the immediate family of the transferee) and otherwise satisfactory in form and substance to Wells Fargo, Citi and JMP, (B) in the case of a transfer pursuant to clause (2) above, no filing under Section 16(a) of the 1934 Act reporting a reduction in beneficial ownership of shares of Common Stock or other capital stock or any securities convertible into or exercisable or exchangeable for Common Stock or other capital stock shall be required to be made during the Lock-Up Period and (C) in the case of a transfer pursuant to clauses (1) through (5), (9), (10) (13) and (14) above, no voluntary filing with the Securities and Exchange Commission or other voluntary public report, filing or announcement shall be made in respect of such transfer during this Lock-Up Period. For purposes of this paragraph, “immediate family” shall mean any relationship by blood, marriage or adoption not more remote than the first cousin.
If a lock-up agreement signed by any Significant Holder (as defined below) of the Company relating to the Offering is waived or released by the Underwriters, a percentage of the capital stock of the Company held by the undersigned together with its affiliates, taken as a whole, and that is subject to this agreement that is equal to the percentage of the total number of shares of Common Stock (on an as exercised or as-converted basis) subject to the restrictions of such lock-up agreement beneficially owned by such Significant Holder that are the subject of such waiver or release shall be immediately and fully released on the same terms from the applicable prohibition(s) set forth herein; provided, however, that in the case of an early release from the restrictions described herein prior to
the termination of this agreement in connection with an underwritten public offering, whether or not such offering
or sale is wholly or partially a secondary offering of the Company’s Common Stock (an “Underwritten Sale”), such
early release shall only apply with respect to the undersigned and its affiliates participating in such Underwritten
Sale. For the purposes of the foregoing, a “Significant Holder” shall mean any person or entity that beneficially
owns 1% or more of the Fully Diluted Capitalization (as defined below). Notwithstanding any other provisions of
this agreement, the provisions of this paragraph will not apply if the release or waiver is effected solely to permit a
transfer not involving a disposition for value and the transferee agrees in writing to be bound by the same terms
described in this lock-up agreement (or the lock-up agreement signed by such Significant Holder) to the extent and
for the duration of the Lock-Up Period. For the purposes of the foregoing, the “Fully Diluted Capitalization” shall
mean the total number of issued and outstanding shares of Common Stock plus the number of shares issuable upon
exercise or conversion of any option, warrant or other security exercisable for or convertible into Common Stock.
The Underwriters shall notify the undersigned in advance of any such release. Further, if a lock-up agreement in
respect of shares of Common Stock is executed between any stockholder of the Company, on the one hand, and any
of the Underwriters, on the other hand, with terms that are more favorable to such stockholder than the terms of
this agreement, then the Underwriters shall advise the undersigned of such terms in writing and this agreement shall be deemed to have been amended to incorporate such terms.
Prior to engaging in any transaction or taking any other action that is subject to the restrictions imposed by this agreement at any time during the period from and including the date of this agreement, the undersigned will give notice thereof to the Company and will not consummate such transaction or take any such action unless it has received written confirmation from the Company that the Lock-Up Period has expired.
The undersigned further agrees that (i) it will not, during the Lock-Up Period, make any demand for or exercise any right with respect to the registration under the Securities Act of 1933, as amended (the “1933 Act”), of any shares of Common Stock or other capital stock or any securities convertible into or exercisable or exchangeable for Common Stock or other capital stock, if such demand would require the Company during the Lock-Up Period to publicly file, or make a public announcement of its intention to file, a registration statement, and (ii) the Company may, with respect to any Common Stock or other capital stock or any securities convertible into or exercisable or exchangeable for Common Stock or other capital stock owned or held (of record or beneficially) by the undersigned, cause the transfer agent or other registrar to enter stop transfer instructions and implement stop transfer procedures with respect to such securities during the Lock-Up Period.
The undersigned hereby waives any and all notice requirements and rights with respect to the registration of any securities pursuant to any agreement, instrument, understanding or otherwise, including any registration rights agreement or similar agreement, to which the undersigned is a party or under which the undersigned is entitled to any right or benefit and any tag-along rights, co-sale rights or other rights to have any securities (debt or equity) included in the offering contemplated by this agreement or sold in connection with the sale of Securities pursuant to the Underwriting Agreement (except in each case insofar as any such rights pertain to the sale of shares of Common Stock by the undersigned to the Underwriters pursuant to the Underwriting Agreement), provided that such waiver shall apply only to the public offering of Common Stock pursuant to the Underwriting Agreement and each registration statement filed under the 1933 Act in connection therewith.
If the undersigned is an officer or director of the Company, (1) Wells Fargo, Citi and JMP agree that, at least three business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of shares of the Common Stock or other securities, they will notify the Company of the impending release or waiver, and (2) the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two business days before the effective date of the release or waiver. Any release or waiver granted by Wells Fargo, Citi and JMP to any such officer or director shall only be effective two business days after the publication date of such press release. The provisions of this paragraph will not apply if (i) the release or waiver is effected solely to permit a transfer not for consideration and (ii) the transferee has agreed in writing to be bound by the same terms described in this agreement to the extent and for the duration that such terms remain in effect at the time of the transfer. The undersigned acknowledges and agrees that Wells Fargo, Citi and JMP may elect whether or not to grant any such release or waiver in its sole and absolute discretion.
The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this agreement and that this agreement has been duly authorized (if applicable), executed and delivered by the undersigned and is a valid and binding agreement of the undersigned. This agreement and all authority herein conferred are irrevocable and shall survive the death or incapacity of the undersigned (if a natural person) and shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned.
If for any reason (1) Underwriting Agreement is not executed by the parties thereto prior to _________, 2020, (2) the Underwriting Agreement is terminated (other than the provisions thereof which survive termination) after execution prior to the Closing Date (as defined in the Underwriting Agreement), or (3) the Company notifies Wells Fargo, Citi and JMP in writing prior to the execution of the Underwriting Agreement that it does not intend to proceed with the Offering, this agreement shall automatically be terminated and become null and void.
The undersigned acknowledges and agrees that whether or not any public offering of Common Stock actually occurs depends on a number of factors, including market conditions.
THE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
[Signature Page Immediately Follows]
IN WITNESS WHEREOF, the undersigned has executed and delivered this agreement as of the date first set forth above.
Yours very truly,
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