This is a confidential draft submission to the U.S. Securities and Exchange Commission on January 21, 2022
and is not being filed under the Securities Act of 1933, as amended.
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM F-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PAGAYA TECHNOLOGIES LTD.
(Exact name of registrant as specified in its charter)
State of Israel | | | 7389 | | | Not applicable |
(State or other jurisdiction of incorporation or organization) | | | (Primary Standard Industrial Classification Code Number) | | | (I.R.S. Employer Identification Number) |
Azrieli Sarona Bldg, 54th Floor
121 Derech Menachem Begin
Tel-Aviv 6701203, Israel
+972 (3) 715 0920
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Pagaya US Holding Company LLC
90 Park Ave
New York, NY 10016
646-710-7714
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies of all correspondence to:
Jeffrey A. Brill Maxim O. Mayer-Cesiano Andrea L. Nicolás B. Chase Wink Skadden, Arps, Slate, Meagher & Flom LLP One Manhattan West New York, NY 10001 Tel: 212-735-3000 | | | Aaron M. Lampert Sharon Gazit Goldfarb Seligman & Co. 98 Yigal Alon Street Tel Aviv 6789141 Israel Tel: 972-3-608-9999 | | | Mark A. Brod Jonathan Corsico Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, NY 10017 Tel: 212-455-2000 | | | Ory Nacht Michal Herzfeld Herzog Fox & Neeman 6 Yitzhak Sadeh St. Herzog Tower Tel Aviv 6777506 Israel Tel: 972-3-692-2020 |
Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the effective date of this registration statement provided that all other conditions to the proposed merger described herein have been satisfied or waived.
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:
Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) ☐
Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) ☐
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act.
Emerging growth company ☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered | | | Amount to be Registered(1)(2) | | | Proposed Maximum Offering Price per Security | | | Proposed Maximum Aggregate Offering Price | | | Amount of Registration Fee(3) |
Class A ordinary shares, no par value per share(4) | | | | | $(5) | | | $ (5) | | | $ | |
Warrants to purchase Class A ordinary shares, no par value per share(6) | | | | | $(7) | | | $(7) | | | $ | |
Class A ordinary shares, no par value per share, issuable upon exercise of the warrants(8) | | | | | $(9) | | | $(9) | | | $ | |
Total | | | | | $— | | | $ | | | $ |
(1) | All securities being registered will be issued by Pagaya Technologies Ltd. (“Pagaya”), a company organized under the laws of the State of Israel, in connection with the Merger Agreement described in this registration statement and the proxy statement/prospectus included herein, which provides for, among other things, Pagaya to acquire EJF Acquisition Corp. (“EJFA”), a Cayman Islands exempted company through the merger of Rigel Merger Sub Inc. (“Merger Sub”), a Cayman Islands exempted company and a direct, wholly-owned subsidiary of Pagaya, with and into EJFA, with EJFA surviving as a wholly-owned subsidiary of Pagaya (the “Merger”). Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), (i) each unit of EJFA issued in the initial public offering of EJFA (“EJFA Units”) and consisting of one Class A ordinary share of EJFA, par value $0.0001 per share (each, an “EJFA Class A Ordinary Share”) and one-third of one public warrant of EJFA entitling the holder to purchase one EJFA Class A Ordinary Share per warrant (each, an “EJFA Public Warrant”) will be automatically separated into one EJFA Class A Ordinary Share and one-third of one EJFA Public Warrant; provided that no fractional EJFA Public Warrants will be issued in connection with the EJFA Unit separation such that if a holder of EJFA Units would be entitled to receive a fractional EJFA Public Warrant upon the EJFA Unit separation, then the number of EJFA Public Warrants to be issued to such holder upon the EJFA Unit separation will be rounded down to the nearest whole number of EJFA Public Warrants, (ii) each Class B ordinary share of EJFA, par value $0.0001 per share (each, an “EJFA Class B Ordinary Share”, and, together with the EJFA Class A Ordinary Shares, the “EJFA Ordinary Shares”), issued and outstanding immediately prior to the Effective Time (other than all EJFA Ordinary Shares that are owned by EJFA, Merger Sub, Pagaya or any of their respective subsidiaries immediately prior to the Effective Time (collectively, the “Excluded Shares”)), will be converted into the right to receive one Class A ordinary share of Pagaya, no par value (each, a “Pagaya Class A Ordinary Share”), which will carry voting rights in the form of one vote per share of Pagaya, (iii) each EJFA Class A Ordinary Share issued and outstanding immediately prior to the Effective Time (after giving effect to the EJFA Shareholder Redemption (as defined in the accompanying proxy statement/prospectus) and other than Excluded Shares) will be converted into the right to receive one Pagaya Class A Ordinary Share, and (iv) each EJFA Public Warrant and each private placement warrant of EJFA entitling the holder to purchase one EJFA Class A Ordinary Share per warrant (each, an “EJFA Private Placement Warrant” and, together with the EJFA Public Warrants, the “EJFA Warrants”) outstanding immediately prior to the Effective Time will be converted into a warrant to purchase one Pagaya Class A Ordinary Share per warrant (each, a “Converted Pagaya Warrant”). Prior to the Effective Time, subject to receiving the requisite approval of the shareholders of Pagaya (the “Pagaya Shareholders”), Pagaya intends to (i) convert the then outstanding preferred shares of Pagaya into Pagaya Ordinary Shares (as defined below) in accordance with Pagaya’s organizational documents, and (ii) effect a stock split of the Pagaya Ordinary Shares into a number of Pagaya Ordinary Shares calculated in accordance with the terms of the Merger Agreement such that each Pagaya Ordinary Share will have a value of $10.00 per share (with the Founders (as defined in the accompanying proxy statement/prospectus), in their capacity as Pagaya Shareholders, receiving Class B ordinary shares of Pagaya, no par value (“Pagaya Class B Ordinary Shares”, and together with Pagaya Class A Ordinary Shares, “Pagaya Ordinary Shares”), which will carry voting rights in the form of 10 votes per share of Pagaya and the Pagaya Shareholders other than the Founders receiving Pagaya Class A Ordinary Shares) in accordance with Pagaya’s organizational documents (as discussed in more detail in the accompanying proxy statement/prospectus). |
(2) | Pursuant to Rule 416(a) of the Securities Act of 1933, as amended (the “Securities Act”), there are also being registered an indeterminable number of additional securities as may be issued to prevent dilution resulting from stock splits, share dividends or similar transactions. |
(3) | Determined in accordance with Section 6(b) of the Securities Act at a rate equal to $92.70 per $1,000,000 of the proposed maximum aggregate offering price. |
(4) | Represents Pagaya Class A Ordinary Shares issuable to the shareholders of EJFA (the “EJFA Shareholders”) in exchange for outstanding EJFA Ordinary Shares upon the Merger. |
(5) | Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(f)(1) of the Securities Act, based on the average of the high ($ ) and low ($ )prices of the EJFA Class A Ordinary Shares on The Nasdaq Capital Market (“Nasdaq”) on , 2022. |
(6) | Represents Converted Pagaya Warrants, with each whole warrant entitling the holder to purchase one Pagaya Class A Ordinary Share, to be issued in exchange for EJFA Public Warrants upon the Merger. |
(7) | Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(f)(1) and 457(i) of the Securities Act, based on the average of the high ($ ) and low ($ ) prices of the EJFA Public Warrants on Nasdaq on , 2022 (such date being within five business days of the date that this registration statement was first filed with the SEC). |
(8) | Represents Pagaya Class A Ordinary Shares underlying Converted Pagaya Warrants, to be issued in exchange for EJFA Public Warrants upon the Merger, to be issued at an exercise price of $11.50 per share, at any time commencing 30 days after the closing of the Merger. |
(9) | No additional registration fee is payable pursuant to Rule 457(g). |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the SEC, acting pursuant to said Section 8(a), may determine.
The information in this proxy statement/prospectus is not complete and may be changed. Pagaya may not sell these securities until the registration statement filed with the U.S. Securities and Exchange Commission, of which this proxy statement/prospectus is a part, is effective. This proxy statement/prospectus is neither an offer to sell these securities, nor a solicitation of an offer to buy these securities, in any state or jurisdiction where the offer or sale is not permitted. Any representation to the contrary is a criminal offense.
This is a confidential draft submission to the U.S. Securities and Exchange Commission on January 21, 2022 and is not being filed under the Securities Act of 1933, as amended.
PRELIMINARY COPY — SUBJECT TO COMPLETION DATED January 21, 2022
PROXY STATEMENT/PROSPECTUS
The board of directors of EJF Acquisition Corp. (the “EJFA Board”), a Cayman Islands exempted company (“EJFA”), has unanimously approved the Agreement and Plan of Merger (the “Merger Agreement”), dated as of September 15, 2021, by and among EJFA, Pagaya Technologies Ltd. (“Pagaya”), a company organized under the laws of the State of Israel, and Rigel Merger Sub Inc. (“Merger Sub”), a Cayman Islands exempted company and wholly-owned subsidiary of Pagaya. Pursuant to the Merger Agreement, Merger Sub will merge with and into EJFA (the “Merger”), with EJFA surviving the Merger as a wholly-owned subsidiary of Pagaya. As a result of the Merger, and upon consummation of the Merger and the other transactions contemplated by the Merger Agreement (the “Transactions”), the shareholders of EJFA will become shareholders of Pagaya.
Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), (a) each Class B ordinary share of EJFA, par value $0.0001 per share (each, an “EJFA Class B Ordinary Share”), issued and outstanding immediately prior to the Effective Time, will be automatically converted into the right of the holder thereof to receive one Class A ordinary share of Pagaya, no par value (each, a “Pagaya Class A Ordinary Share”), after giving effect to the Capital Restructuring (as defined below), (b) each Class A ordinary share of EJFA, par value $0.0001 per share (each, an “EJFA Class A Ordinary Share” and, together with the EJFA Class B Ordinary Shares, the “EJFA Ordinary Shares”), issued and outstanding immediately prior to the Effective Time, will be automatically converted into the right of the holder thereof to receive one Pagaya Class A Ordinary Share after giving effect to the Capital Restructuring and (c) issued and outstanding warrants of EJFA sold to the public in connection with the public offering of EJFA Units and to Wilson Boulevard LLC (the “Sponsor”), a Delaware limited liability company, in a private placement in connection with EJFA’s initial public offering will automatically and irrevocably be assumed by Pagaya and converted into a corresponding warrant exercisable for Pagaya Class A Ordinary Shares in accordance with the terms of the Amended and Restated Warrant Agreement (as defined in the Merger Agreement) to be entered into immediately prior to the Effective Time.
On the date (the “Closing Date”) of the consummation of the Merger (the “Closing”), immediately prior to the Stock Split (as defined below) and the Effective Time, each preferred share, with nominal value NIS 0.01, of Pagaya will be converted into ordinary shares, with no par value, of Pagaya (each, a “Pagaya Ordinary Share”) in accordance with Pagaya’s organizational documents (the “Preferred Share Conversion”). Immediately following the Preferred Share Conversion but prior to the consummation of the PIPE Investment (as defined below), Pagaya will convert each Pagaya Ordinary Share that is issued and outstanding immediately prior to the Effective Time (and any warrant, right or other security convertible into or exchangeable or exercisable therefor) into a number of Pagaya Ordinary Shares calculated in accordance with the terms of the Merger Agreement such that each Pagaya Ordinary Share will have a value of $10.00 per share (the “Stock Split”), with the three founders of Pagaya (the “Founders”), in their capacity as shareholders of Pagaya, each receiving Class B ordinary shares of Pagaya no par value (“Pagaya Class B Ordinary Shares”), which will carry voting rights in the form of 10 votes per share of Pagaya, and the other shareholders of Pagaya receiving Pagaya Class A Ordinary Shares, which will carry voting rights in the form of one vote per share of Pagaya, in accordance with Pagaya’s organizational documents (we refer to these adjustments to Pagaya’s share capital as the “Reclassification” and, together with the Preferred Share Conversion and the Stock Split, the “Capital Restructuring”).
Concurrently with the execution of the Merger Agreement, Pagaya and EJF Debt Opportunities Master Fund, LP (the “EJF Investor”) entered into the a subscription agreement (the “EJF Subscription Agreement”), pursuant to which, on the terms and subject to the conditions set forth in the EJF Subscription Agreement, the EJF Investor has agreed to purchase, and Pagaya has agreed to sell to it, an aggregate of up to 20 million Pagaya Class A Ordinary Shares, for a purchase price of $10.00 per share and at an aggregate purchase price of up to $200 million on the terms and subject to the conditions set forth therein (the “PIPE Investment”). The EJF Subscription Agreement contains customary representations and warranties of Pagaya, on the one hand, and the EJF Investor, on the other hand, and customary conditions to closing, including the consummation of the Transactions. Subsequently, Pagaya also entered into additional subscription agreements with certain other investors, pursuant to which, on the terms and subject to the conditions set forth in such subscription agreements, such investors have agreed to purchase, and Pagaya has agreed to sell to them, 22.2 million Pagaya Class A Ordinary Shares at a purchase price of $10.00 per share, which shares reduced the foregoing commitment of the EJF Investor by 7.2 million shares.
This proxy statement/prospectus registers the issuance of Pagaya Class A Ordinary Shares to the shareholders of EJFA (the “EJFA Shareholders”) as described above, consisting of an aggregate of 35,937,500 Pagaya Class A Ordinary Shares (including 9,583,333 Pagaya Class A Ordinary Shares underlying the EJFA Public Warrants) and 9,583,333 Pagaya Warrants issued upon conversion of EJFA Public Warrants. We are not registering herein the issuance or resale of Pagaya Ordinary Shares issuable to pre-Closing Pagaya shareholders or to the EJF Investor or the Pagaya Ordinary Shares underlying Pagaya options or the issuance or resale of the Pagaya Warrants issued upon conversion of the EJFA private placement warrants or warrants owned by pre-Closing Pagaya securityholders (or Pagaya Ordinary Shares underlying such warrants).
As a result of the Transactions (including adjustments to Pagaya’s preexisting capitalization), Pagaya will have two classes of ordinary shares outstanding after the Closing: Pagaya Class A Ordinary Shares and Pagaya Class B Ordinary Shares. The rights of the holders of Pagaya Class A Ordinary Shares and Pagaya Class B Ordinary Shares will be identical, except with respect to voting and conversion rights. Each Pagaya Class A Ordinary Share will be entitled to one vote per share. Each Pagaya Class B Ordinary Share will be entitled to 10 votes per share and will be convertible into one Pagaya Class A Ordinary Share. Holders of Pagaya Class A Ordinary Shares and Pagaya Class B Ordinary Shares will vote together as a single class on all matters (including the election of directors) submitted to a vote of Pagaya shareholders except as otherwise provided in Pagaya’s Amended and Restated Articles of Association (the “Pagaya A&R Articles”), to be effective immediately prior to the Reclassification. The Pagaya A&R Articles require a separate vote of holders of Pagaya Class B Ordinary Shares for the reclassification of Pagaya Class A Ordinary Shares into shares having more than one vote, authorization or issuance of any additional class of Pagaya shares having the right to more than one vote per share, the issuance of any additional Pagaya Class B Ordinary Shares, a modification of the rights of the Pagaya Class B Ordinary Shares, or the subdivision, combination or reclassification of a class of Pagaya Ordinary Shares in a manner that is different or disproportionate to the subdivision, combination or reclassification of the other class of Pagaya Ordinary Shares.
Concurrently with the execution of the Merger Agreement, Pagaya, EJFA and the Sponsor entered into the Side Letter Agreement, which provides that, solely in the event the EJFA Transaction Costs exceed $45 million (the amount of such excess, the “Expenses Excess Amount”), a number of EJFA Class B Ordinary Shares equal to the quotient of (i) the Expenses Excess Amount divided by (ii) $10.00 (subject to equitable adjustment) will be forfeited for no consideration and cancelled by EJFA and no longer outstanding, except that the Sponsor may pay, in whole or in part, the EJFA Transaction Costs in cash prior to the Effective Time without further liability to EJFA, in which case the Expenses Excess Amount will be reduced on a dollar-for-dollar basis by the amount so paid by the Sponsor.
After giving effect to the Transactions, assuming no redemption of EJFA Ordinary Shares and assuming there is no Expenses Excess Amount, Pagaya Class A Ordinary Shares will collectively represent approximately 66% of the post-Closing combined company’s total issued and outstanding shares and 19% of the post-Closing combined company’s voting power attached to all of its issued and outstanding shares, and Pagaya Class B Ordinary Shares will collectively represent approximately 34% of the post-Closing combined company’s total issued and outstanding shares and 81% of its voting power attached to all of its issued and outstanding shares.
Proposals to approve the Merger Agreement and the other matters discussed in this proxy statement/prospectus will be presented at the extraordinary general meeting of EJFA Shareholders scheduled to be held at a.m. Eastern Time, on , 2022 at and or such other date, time and place to which such meeting may be adjourned or postponed.
Although Pagaya is not currently a public reporting company, following the effectiveness of the registration statement of which this proxy statement/prospectus is a part and the Closing, Pagaya will become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Pagaya is applying to list the Pagaya Class A Ordinary Shares and Pagaya Warrants on The Nasdaq Capital Market (“Nasdaq”) under the proposed symbols “ ” and “ ,” respectively, to be effective at the Closing. It is a condition of the consummation of the Transactions that the Pagaya Class A Ordinary Shares are approved for listing on Nasdaq (or any other public stock market or exchange in the United States as may be agreed by Pagaya and EJFA), subject only to official notice of issuance thereof. While trading on Nasdaq is expected to begin on the first business day following the Closing Date, there can be no assurance that Pagaya’s securities will be listed on Nasdaq or that a viable and active trading market will develop. See “Risk Factors” beginning on page 23 for more information.
Pagaya expects to qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, and is therefore eligible to take advantage of certain reduced reporting requirements otherwise applicable to other public companies.
Pagaya also expects to qualify as a “foreign private issuer” as defined in the Exchange Act, and will be exempt from certain rules under the Exchange Act that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, Pagaya’s officers, directors and principal shareholders will be exempt from the reporting and “short-swing” profit recovery provisions under Section 16 of the Exchange Act. Moreover, Pagaya will not be required to file periodic reports and financial statements with the U.S. Securities and Exchange Commission as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.
This proxy statement/prospectus provides EJFA Shareholders with detailed information about the Merger and other matters to be considered at the extraordinary general meeting of EJFA. We encourage you to read this entire proxy statement/prospectus, including the Annexes and other documents referred to therein, carefully and in their entirety. You should also carefully consider the risk factors described in “Risk Factors” beginning on page 23 of this proxy statement/prospectus.
None of the U.S. Securities and Exchange Commission, the Israel Securities Authority or any state securities commission has approved or disapproved of the securities to be issued in connection with the Merger, or determined if this proxy statement/prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.
NOTICE OF EXTRAORDINARY GENERAL MEETING OF SHAREHOLDERS
of EJF Acquisition Corp.
To Be Held on , 2022
TO THE SHAREHOLDERS OF EJF ACQUISITION CORP.:
NOTICE IS HEREBY GIVEN that an extraordinary general meeting of shareholders of EJF Acquisition Corp. (“EJFA”), a Cayman Islands exempted company, will be held at a.m. Eastern Time, on , 2022 (the “extraordinary general meeting” or the “Special Meeting”) at and or such other date, time and place to which such meeting may be adjourned or postponed.
In light of ongoing developments related to the coronavirus (COVID-19) pandemic, after careful consideration, EJFA encourages its shareholders to attend the meeting virtually via live webcast in order to facilitate shareholder attendance and participation while safeguarding the health and safety of our shareholders, directors and management team. For the purposes of Cayman Islands law and the amended and restated memorandum and articles of association of EJFA (the “EJFA Memorandum and Articles of Association”), the physical location of the meeting shall be at . You or your proxyholder will be able to attend and vote at the meeting online by visiting and using a control number assigned to you. To register and receive access to the meeting, registered shareholders and beneficial shareholders (those holding shares through a stock brokerage account or by a bank or other holder of record) will need to follow the instructions applicable to them provided in the accompanying proxy statement/prospectus.
The extraordinary general meeting will be held in order to consider and vote on the following proposals:
1. | Proposal No. 1—The Business Combination Proposal—to consider and vote upon a proposal to approve and adopt by ordinary resolution the Agreement and Plan of Merger (the “Merger Agreement”), dated as of September 15, 2021, by and among EJFA, Pagaya Technologies Ltd. (“Pagaya”), a company organized under the laws of the State of Israel, and Rigel Merger Sub Inc. (“Merger Sub”), a Cayman Islands exempted company and wholly-owned subsidiary of Pagaya, a copy of which is attached to the accompanying proxy statement/prospectus as Annex A, and the transactions contemplated therein (the “Transactions”), whereby, among other things, Merger Sub, will merge with and into EJFA (the “Merger”), with EJFA surviving the Merger and becoming a wholly-owned subsidiary of Pagaya (the “Business Combination Proposal”), which will become the parent/public company following the Merger; |
2. | Proposal No. 2—The Merger Proposal—to consider and vote upon a proposal to approve and authorize by special resolution the Merger and the Plan of Merger required by the Companies Act (as amended) of the Cayman Islands substantially in the form attached as Exhibit F to the Merger Agreement, a copy of which is attached as Annex A to the accompanying proxy statement/prospectus (the “Merger Proposal”); and |
3. | Proposal No. 3—The Adjournment Proposal—to consider and vote upon a proposal to approve by ordinary resolution, if necessary, the adjournment of the extraordinary general meeting to a later date or dates to ensure that any required supplement or amendment to the accompanying proxy statement/prospectus is provided to shareholders, to permit further solicitation and votes of proxies in the event that there are insufficient votes for, or otherwise in connection with, the approval of the Business Combination Proposal and the Merger Proposal (the “Adjournment Proposal”, and, together with the Business Combination Proposal and the Merger Proposal, the “Proposals” and each, a “Proposal”), or to seek withdrawals of redemption requests from shareholders. |
Each of the Business Combination Proposal and the Merger Proposal is cross-conditioned on the approval and adoption of the other Proposal. The Adjournment Proposal is not conditioned on the approval of any other Proposals set forth in the accompanying proxy statement/prospectus and, to the extent that it is put to the Special Meeting, may be proposed as the first resolution at the Special Meeting.
The items of business listed above and the full texts of the resolutions are more fully described in the accompanying proxy statement/prospectus. Whether or not you intend to attend the extraordinary general meeting, we urge you to read the accompanying proxy statement/prospectus in its entirety, including the annexes and accompanying financial statements, before voting. IN PARTICULAR, WE URGE YOU TO CAREFULLY READ THE SECTION IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS ENTITLED “RISK FACTORS.”
Board Recommendation
After careful consideration, the board of directors of EJFA (the “EJFA Board”) has determined that each Proposal is in the best interests of EJFA and unanimously recommends that you vote or give instruction to vote “FOR” each of the Proposals. When you consider the recommendations of the EJFA Board, you should keep in mind that EJFA’s directors and officers may have interests in the Transactions that conflict with, or are different from, your interests as a shareholder of EJFA. See “Proposal One—The Business Combination Proposal—Interests of Certain Persons in the Business Combination.”
Entitlement to Vote
Only holders of record of EJFA Ordinary Shares at the close of business on , 2022 (the “Record Date”) are entitled to notice of the extraordinary general meeting and to vote and have their votes counted at the extraordinary general meeting and any adjournments or postponements of the extraordinary general meeting.
To ensure your representation at the extraordinary general meeting you are urged to complete, sign, date and return the enclosed proxy card as soon as possible. If you are a holder of record of EJFA Ordinary Shares on the Record Date, you may also cast your vote at the extraordinary general meeting. If your EJFA Ordinary Shares are held in an account at a brokerage firm or bank, you must instruct your broker or bank on how to vote your shares or, if you wish to attend the extraordinary general meeting, obtain a proxy from your broker or bank.
Your vote is important regardless of the number of shares you own. Whether you plan to attend the extraordinary general meeting or not, please complete, sign, date and return the enclosed proxy card as soon as possible in the envelope provided. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly voted and counted. If you have any questions or need assistance voting your EJFA Ordinary Shares, please contact . Questions can also be sent by email to . This notice of extraordinary general meeting and the accompanying proxy statement/prospectus relating to the Transactions will be available at https:// .
Thank you for your participation. We look forward to your continued support.
| | | By Order of the Board of Directors | |
| | | Emanuel Friedman | |
| | | Chairman of the Board of Directors |
IF YOU RETURN YOUR SIGNED PROXY CARD WITHOUT AN INDICATION OF HOW YOU WISH TO VOTE, YOUR SHARES WILL BE VOTED IN FAVOR OF EACH OF THE PROPOSALS.
Redemption Rights
ALL HOLDERS OF EJFA CLASS A ORDINARY SHARES (THE “EJFA PUBLIC SHAREHOLDERS”) ISSUED IN EJFA’S INITIAL PUBLIC OFFERING (THE “EJFA PUBLIC SHARES”) HAVE THE RIGHT TO HAVE THEIR EJFA PUBLIC SHARES REDEEMED FOR CASH IN CONNECTION WITH THE PROPOSED TRANSACTIONS. EJFA PUBLIC SHAREHOLDERS ARE NOT REQUIRED TO AFFIRMATIVELY VOTE FOR OR AGAINST THE PROPOSALS OR TO VOTE ON THE PROPOSALS AT ALL IN ORDER TO HAVE THEIR EJFA PUBLIC SHARES REDEEMED FOR CASH. TO EXERCISE REDEMPTION RIGHTS, THE EJFA PUBLIC SHAREHOLDERS MUST TENDER THEIR SHARES TO CONTINENTAL STOCK TRANSFER & TRUST COMPANY, EJFA’S TRANSFER AGENT, NO LATER THAN TWO BUSINESS DAYS PRIOR TO THE EXTRAORDINARY GENERAL MEETING. YOU MAY TENDER YOUR SHARES BY EITHER DELIVERING YOUR SHARE CERTIFICATE TO THE TRANSFER AGENT OR BY DELIVERING YOUR SHARES ELECTRONICALLY USING THE DEPOSITORY TRUST COMPANY’S DEPOSIT WITHDRAWAL AT CUSTODIAN SYSTEM. IF THE TRANSACTIONS ARE NOT COMPLETED, THEN THESE SHARES WILL NOT BE REDEEMED FOR CASH. IF YOU HOLD THE SHARES IN STREET NAME, YOU WILL NEED TO INSTRUCT THE ACCOUNT EXECUTIVE AT YOUR BANK OR BROKER TO WITHDRAW THE SHARES FROM YOUR ACCOUNT IN ORDER TO EXERCISE YOUR REDEMPTION RIGHTS. SEE “SPECIAL MEETING OF EJFA SHAREHOLDERS—REDEMPTION RIGHTS” FOR MORE SPECIFIC INSTRUCTIONS.
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SIGNATURES | | |
ANNEXES
A | | | Agreement and Plan of Merger, dated as of September 15, 2021, by and among Pagaya Technologies Ltd., EJF Acquisition Corp. and Rigel Merger Sub Inc. |
B | | | Form of Memorandum of Association of EJF Acquisition Corp. |
C | | | Form of Amended and Restated Articles of Association of Pagaya Technologies Ltd. |
D | | | Subscription Agreement, dated as of September 15, 2021, by and between Pagaya Technologies Ltd. and EJF Debt Opportunities Master Fund, LP. |
E | | | Side Letter Agreement, dated as of September 15, 2021, by and among Pagaya Technologies Ltd., EJF Acquisition Corp. and Wilson Boulevard LLC |
F | | | Pagaya Voting Agreement, dated as of September 15, 2021, by and among EJF Acquisition Corp., Pagaya Technologies Ltd., and certain of Pagaya Technologies Ltd.’s shareholders |
G | | | EJFA Voting Agreement, dated as of September 15, 2021, by and between Pagaya Technologies Ltd. and Wilson Boulevard LLC |
H | | | Form of Amended and Restated Registration Rights Agreement |
I | | | Form of 2022 Incentive Equity Plan & Sub-Plan for Israeli Persons |
J | | | Opinion of Duff & Phelps |
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This proxy statement/prospectus, which forms a part of a registration statement on Form F-4 filed with the SEC by Pagaya, constitutes a prospectus of Pagaya under Section 5 of the Securities Act with respect to (a) Pagaya Class A Ordinary Shares to be issued to EJFA Shareholders in the Merger, (b) Pagaya Warrants to be issued to holders of the EJFA Public Warrants and (c) the Pagaya Class A Ordinary Shares issuable upon the exercise of the Pagaya Warrants issued to holders of the EJFA Public Warrants. This document also constitutes a proxy statement of EJFA under the Exchange Act, and the rules thereunder, and a notice of meeting with respect to the Special Meeting of EJFA Shareholders to consider and vote upon, among others, the proposals to approve and adopt the Merger Agreement, a copy of which is attached to this proxy statement/prospectus as Annex A, and the Transactions, including the Merger, and to adjourn the Special Meeting, if necessary, to permit further solicitation of proxies because there are not sufficient votes to adopt the Merger Agreement.
Unless otherwise indicated or the context otherwise requires, all references in this proxy statement/prospectus to “Pagaya” refer to Pagaya Technologies Ltd., together with its subsidiaries, and to “EJFA” refer to EJF Acquisition Corp.
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To evaluate the performance of its business, Pagaya relies on both its results of operations recorded in accordance with U.S. GAAP and certain non-U.S. GAAP financial measures, including Adjusted EBITDA. These measures, as defined below, are not defined or calculated under principles, standards or rules that comprise U.S. GAAP. Accordingly, the non-U.S. GAAP financial measures Pagaya uses and refers to should not be viewed as a substitute for Pagaya’s consolidated financial statements prepared and presented in accordance with U.S. GAAP or any other performance measure derived in accordance with U.S. GAAP, and we encourage you not to rely on any single financial measure to evaluate our business, financial condition or results of operations. Pagaya’s definition of Adjusted EBITDA (the net income (loss) attributable to Pagaya’s Shareholders excluding share-based compensation expense, interest expense, depreciation expense, change in fair value of warrant liability, warrant expense, non-recurring expenses associated with this transaction, and provision for income taxes) is specific to our business and you should not assume that it is comparable to similarly titled financial measures of other companies.
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Unless otherwise indicated, information contained in this proxy statement/prospectus concerning Pagaya’s industry and the regions in which it operates, including Pagaya’s general expectations and market position, market opportunity, market share and other management estimates, is based on information obtained from various independent publicly available sources and reports provided to Pagaya. While Pagaya has compiled, extracted, and reproduced industry data from these sources, Pagaya has not independently verified the data. Similarly, internal surveys, industry forecasts and market research, which Pagaya believes to be reliable based upon its management’s knowledge of the industry, have not been independently verified. While Pagaya believes that the market data, industry forecasts and similar information included in this proxy statement/prospectus are generally reliable, such information is inherently imprecise and the accuracy and completeness of such information is not guaranteed. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and uncertainties as the other forward-looking statements in this proxy statement/prospectus. In addition, assumptions and estimates of Pagaya’s future performance and growth objectives and the future performance of its industry and the markets in which it operates are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those discussed under the headings “Summary,” “Risk Factors,” “Cautionary Statement Regarding Forward-Looking Statements; Market, Ranking and Other Industry Data,” “Pagaya’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Unaudited Prospective Financial Information of Pagaya” in this proxy statement/prospectus.
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We have proprietary rights to trademarks used in this proxy statement/prospectus that are important to our business, many of which are registered (or pending registration) under applicable intellectual property laws. This proxy statement/prospectus contains references to trademarks, trade names and service marks belonging to other entities. Solely for convenience, trademarks, trade names and service marks referred to in this proxy statement/prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that the applicable licensor will not assert, to the fullest extent under applicable law, its rights to these trademarks, trade names and service marks. Pagaya does not intend its use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of Pagaya by, any other companies.
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“2021 Plan” refers to the 2021 Share Incentive Plan of Pagaya and the Stock Option Sub-Plan For United States Persons thereunder.
“2022 Plan” refers to the 2022 Share Incentive Plan of Pagaya to be adopted pursuant to the Merger Agreement, substantially in the form attached as Annex I to this proxy statement/prospectus.
“Adjournment Proposal” refers to the proposal to adjourn the Special Meeting, if necessary, by an ordinary resolution requiring the affirmative vote of a majority of the votes cast by holders of outstanding EJFA Ordinary Shares present in person or by proxy at the Special Meeting and entitled to vote on the matter.
“Aggregate EJFA Shareholder Redemption Payments Amount” refers to the aggregate amount of all payments required to be made by EJFA in connection with any EJFA Shareholder Redemption.
“Asset Investor” refers to a third-party investor in a Financing Vehicle.
“Business Combination Proposal” refers to the proposal to approve and adopt the Merger Agreement and the Transactions, by an ordinary resolution requiring the affirmative vote of a majority of the votes cast by holders of outstanding EJFA Ordinary Shares present in person or by proxy at the Special Meeting and entitled to vote on the matter.
“Business Day” refers to any day other than a Saturday, a Sunday or other day on which commercial banks in New York, New York, Tel Aviv, Israel or the Cayman Islands are authorized or required by such jurisdictions’ laws to close.
“Capital Restructuring” refers to, collectively, the Reclassification, the Preferred Share Conversion and the Stock Split.
“Closing” refers to the consummation of the Merger.
“Closing Date” refers to the date on which the Closing actually occurs.
“Code” refers to the United States Internal Revenue Code of 1986, as amended.
“Companies Act” refers to the Companies Act (As Revised) of the Cayman Islands.
“Companies Law” refers to the Israeli Companies Law, 5759-1999, as amended, and the regulations promulgated thereunder.
“Continental” or “EJFA Transfer Agent” refers to Continental Stock Transfer & Trust Company, the transfer agent, warrant agent and trustee of EJFA.
“COVID-19 Measures” refers to any restriction, quarantine, “shelter in place,” “stay at home,” workforce reduction, school closure or in-person or other attendance modification or restriction, social distancing, shut down, closure, sequester, safety or similar requirement of law, order or regulation, directive, guidelines, suggestion or recommendation promulgated, ordered, made or threatened by any industry group, business or any governmental entity, including the Centers for Disease Control and Prevention and the World Health Organization, in response to COVID-19, including the Coronavirus Aid, Relief, and Economic Security Act, Pub.L. 116–136 (03/27/2020) (CARES Act).
“Credit Agreement” refers to that certain Credit Agreement, dated as of December 23, 2021, by and among Pagaya, the lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as administrative agent, which is attached as Exhibit 10.15 to this proxy statement/prospectus.
“Current Pagaya Articles” refers to the Amended and Restated Articles of Association of Pagaya, dated as of March 17, 2021.
“Effective Time” refers to the effective time of the Merger.
“EJF Investor” refers to EJF Debt Opportunities Master Fund, LP, a Delaware limited liability company, an affiliate of EJFA.
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“EJF Subscription Agreement” refers to that certain Subscription Agreement, dated as of September 15, 2021, by and between Pagaya and the EJF Investor, attached as Annex D to this proxy statement/prospectus, providing for the purchase by the EJF Investor at the Closing of up to 20 million Pagaya Class A Ordinary Shares at a price per share of $10.00, for an aggregate purchase price of up to $200 million.
“EJFA” refers to EJF Acquisition Corp., a Cayman Islands exempted company.
“EJFA Board” refers to the board of directors of EJFA.
“EJFA Class A Ordinary Shares” refers to the class A ordinary shares, par value $0.0001 per share, of EJFA.
“EJFA Class B Ordinary Shares” refers to the class B ordinary shares, par value $0.0001 per share, of EJFA.
“EJFA IPO” refers to the initial public offering of EJFA, which closed on March 1, 2021.
“EJFA Memorandum and Articles of Association” refers to the Amended and Restated Memorandum and Articles of Association of EJFA, as amended, restated, modified or supplemented from time to time.
“EJFA Ordinary Shares” refers to the EJFA Class A Ordinary Shares and EJFA Class B Ordinary Shares.
“EJFA Private Placement Warrants” refers to the 5,166,667 private placement warrants of EJFA entitling the holder to purchase one EJFA Class A Ordinary Share per warrant.
“EJFA Public Shareholders” refers to the holders of the EJFA Class A Ordinary Shares included in the EJFA Units issued in the EJFA IPO.
“EJFA Public Shares” refers to EJFA Class A Ordinary Shares sold as part of the EJFA Units issued in the EJFA IPO (whether they were purchased in that offering or thereafter in the open market).
“EJFA Public Warrants” refers to the 9,583,333 public warrants of EJFA entitling the holder to purchase one EJFA Class A Ordinary Share per warrant.
“EJFA Shareholder Matters” refers to (a) the approval and adoption of the Merger Agreement and the Transactions, (b) the approval of and authorization of the Merger, (c) if required, the approval of the adjournment of the Special Meeting and (d) any other matters required to be approved by EJFA Shareholders by legal requirements.
“EJFA Shareholder Proposals” refers to (a) the Business Combination Proposal, (b) the Merger Proposal and (c) the Adjournment Proposal.
“EJFA Shareholder Redemption” refers to EJFA’s acquisition of EJFA Public Shares in connection with the Merger pursuant to the right of the holders of EJFA Public Shares to have their shares redeemed in accordance with the procedures set forth in this proxy statement/prospectus.
“EJFA Shareholders” refers to, collectively, holders of EJFA Class A Ordinary Shares and holders of EJFA Class B Ordinary Shares.
“EJFA Transaction Costs” refers to (a) all fees, costs and expenses incurred by EJFA prior to the Closing and payable after June 30, 2021 in connection with the negotiation, preparation and execution of the Merger Agreement, the other transaction agreements and the consummation of the transactions contemplated thereby, (b) all fees, costs and expenses incurred by EJFA prior to the Closing and payable after June 30, 2021, in connection with the EJFA IPO, including any such amounts which are triggered by or become payable as a result of the Closing and (c) all costs, fees and expenses related to the EJFA director and officer tail policy, except the following fees, costs or expenses do not constitute “EJFA Transaction Costs”: (i) any amounts incurred at the request or direction of another party to the Merger Agreement; and (ii) any amounts incurred in connection with any actual or threatened legal proceeding.
“EJFA Units” refers to the units issued in the EJFA IPO, each consisting of one EJFA Class A Ordinary Share and one-third of one EJFA Public Warrant.
“EJFA Unitholders” refers to the holders of EJFA Units.
“EJFA Voting Agreement” refers to that certain EJFA Voting Agreement, dated as of September 15, 2021, by and between Pagaya and the Sponsor, in the form attached as Annex G to this proxy statement/prospectus.
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“EJFA Warrantholders” refers to the holders of EJFA Public Warrants.
“EJFA Warrants” refers to the EJFA Private Placement Warrants and the EJFA Public Warrants.
“Exchange Act” refers to the Securities Exchange Act of 1934, as amended.
“Excluded Shares” refers to all EJFA Ordinary Shares that are owned by EJFA, Merger Sub, Pagaya or any of their respective subsidiaries immediately prior to the Effective Time.
“Financing Vehicles” refers to (i) funds managed or advised by Pagaya or one of its affiliates, (ii) securitization vehicles sponsored or administered by Pagaya or one of its affiliates and (iii) other similar vehicles.
“HSR Act” refers to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder.
“Investment Advisers Act” refers to the U.S. Investment Advisers Act of 1940, as amended, and the rules and regulations promulgated thereunder.
“Israeli Securities Law” refers to the Israeli Securities Law, 5728-1968, as amended, and the regulations promulgated thereunder.
“ITA” refers to the Israel Tax Authority.
“ITO” refers to the Israeli Income Tax Ordinance [New Version], 5721-1961, and the regulations, rules and orders promulgated thereunder, as amended.
“Lock-Up Shares” refers to (i) with respect to the Pagaya Equity Holders and their permitted transferees, the Pagaya Ordinary Shares held by such Pagaya Equity Holders as of immediately following the Stock Split and the Preferred Share Conversion, and (ii) with respect to the Sponsor and certain directors and advisors of EJFA and their permitted transferees, (A) the Pagaya Ordinary Shares issuable to the Sponsor and certain directors and advisors of EJFA and their permitted transferees as Merger Consideration (as defined in the Merger Agreement) under the Merger Agreement in respect of the 7,187,500 EJFA Class B Ordinary Shares that they hold, (B) the Pagaya Warrants issuable to the Sponsor as Merger Consideration in respect of the EJFA Private Placement Warrants, and (C) any Pagaya Ordinary Shares issuable to the Sponsor upon exercise of such Pagaya Warrants mentioned in the preceding Clause (B). In furtherance of the foregoing, Pagaya Ordinary Shares issued to any affiliate of the Sponsor in accordance with any subscription agreement between such affiliate and Pagaya are not Lock-Up Shares.
“Merger” refers to the merger of Merger Sub with and into EJFA, as contemplated by the Merger Agreement.
“Merger Agreement” refers to that certain Agreement and Plan of Merger, dated as of September 15, 2021, by and among EJFA, Pagaya and Merger Sub, as attached in Annex A to this proxy statement/prospectus.
“Merger Proposal” refers to the proposal to approve and authorize the Merger, by a special resolution requiring the affirmative vote of at least two-thirds (2/3) of the votes cast by holders of outstanding EJFA Ordinary Shares present in person or by proxy at the Special Meeting and entitled to vote on the matter.
“Merger Sub” refers to Rigel Merger Sub Inc., a Cayman Islands exempted company and a wholly-owned subsidiary of Pagaya.
“Nasdaq” refers to The Nasdaq Capital Market.
“Network Capital” refers to the total capital currently invested in assets originated by Partners with the assistance of our AI technology and network and acquired by a Financing Vehicle plus capital committed by Asset Investors that is available for a Financing Vehicle to acquire new assets.
“Network Fee” refers to fees earned and collected (i) from Financing Vehicles upon the generation of Network Volume and (ii) related to the establishment and administration of certain Financing Vehicles.
“Network Volume” refers to the gross dollar amount of assets that are originated by Partners with the assistance of Pagaya’s AI technology and are acquired by Financing Vehicles.
“Pagaya” refers to Pagaya Technologies Ltd., a company organized under the laws of the State of Israel.
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“Pagaya A&R Articles” refers to the Amended and Restated Articles of Association of Pagaya, to be effective as of immediately prior to the Reclassification, attached as Annex C to this proxy statement/prospectus.
“Pagaya Board” refers to the board of directors of Pagaya.
“Pagaya Class A-1 Preferred Shares” refers to the Class A-1 preferred shares, nominal value NIS 0.01 each, of Pagaya, prior to the Capital Restructuring.
“Pagaya Class A Ordinary Shares” refers to the Class A ordinary shares, no par value, of Pagaya, following the Capital Restructuring, which will carry voting rights in the form of one vote per share of Pagaya.
“Pagaya Class A Preferred Shares” refers to the Class A Preferred Shares, nominal value NIS 0.01 each, of Pagaya, prior to the Capital Restructuring.
“Pagaya Class B Ordinary Shares” refers to the Class B Ordinary Shares, no par value, of Pagaya, following the Capital Restructuring, which will carry voting rights in the form of 10 votes per share of Pagaya.
“Pagaya Class B Preferred Shares” refers to the Class B Preferred Shares, nominal value NIS 0.01 each, of Pagaya, prior to the Capital Restructuring.
“Pagaya Class C Preferred Shares” refers to the Class C Preferred Shares, nominal value NIS 0.01 each, of Pagaya, prior to the Capital Restructuring.
“Pagaya Class D Preferred Shares” refers to the Class D Preferred Shares, nominal value NIS 0.01 each, of Pagaya, prior to the Capital Restructuring.
“Pagaya Class E Preferred Shares” refers to the Class E Preferred Shares, nominal value NIS 0.01 each, of Pagaya, prior to the Capital Restructuring.
“Pagaya Equity Holders” refers to the shareholders of Pagaya as of immediately prior to the Effective Time.
“Pagaya Option” refers to each outstanding and unexercised option to purchase Pagaya Ordinary Shares issued pursuant to the Pagaya Share Plans, whether or not then vested or fully exercisable.
“Pagaya Ordinary Shares” refers to the ordinary shares, NIS 0.01 each, of Pagaya, prior to the Capital Restructuring, provided, however, that after the Preferred Share Conversion and Reclassification, every reference to Pagaya Ordinary Shares shall be to the Pagaya Class A Ordinary Shares and Pagaya Class B Ordinary Shares.
“Pagaya Preferred Shares” refers to the Pagaya Class A Preferred Shares, Pagaya Class A-1 Preferred Shares, Pagaya Class B Preferred Shares, Pagaya Class C Preferred Shares, Pagaya Class D Preferred Shares and Pagaya Class E Preferred Shares, prior to the Capital Restructuring.
“Pagaya Share Plans” refers to Pagaya’s 2016 Equity Incentive Plan and the Stock Option Sub-Plan For United States Persons thereunder and the 2021 Plan, collectively.
“Pagaya Shareholders” refers, prior to the Merger, to the shareholders of Pagaya and, after the Merger, to the shareholders of the post-Closing combined company.
“Pagaya Shareholder Approval” refers to (a) with respect to the Merger, the affirmative vote or written consent of the Preferred Majority, (b) with respect to (i) the adoption of the Pagaya A&R Articles, (ii) the approval and adoption of the Merger Agreement and (iii) the approval of the other transactions contemplated by the Merger Agreement, including the Capital Restructuring, the affirmative vote or written consent of each of (x) the Pagaya Shareholders by a shareholder resolution and (y) the Preferred Majority and (c) with respect to any other matters required by applicable legal requirements, the affirmative vote or written consent of Pagaya Shareholders required by applicable legal requirements.
“Pagaya Shareholder Matters” refers to (a) the Preferred Share Conversion, (b) the Merger, (c) the adoption of the Pagaya A&R Articles, (d) the approval and adoption of the Merger Agreement, (e) the other transactions contemplated by the Merger Agreement, including the Reclassification and Stock Split, and (f) any other matters required to be approved by Pagaya Shareholders by applicable legal requirements.
“Pagaya Shares” means the Pagaya Ordinary Shares and the Pagaya Preferred Shares.
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“Pagaya Voting Agreement” refers to that certain Company Voting Agreement, dated as of September 15, 2021, by and among EJFA and certain of the Pagaya Shareholders, in the form attached as Annex F to this proxy statement/prospectus.
“Pagaya Warrant” refers to each outstanding and unexercised warrant to purchase one Pagaya Class A Ordinary Share per warrant.
“Partners” refers to financial institutions including, among others, banks, peer-to-peer lending networks, online marketplaces, non-bank finance companies, fintechs, financing intermediaries, consumer product companies, brokers, agents and credit unions that have entered into arrangements to utilize Pagaya’s AI technology and network to assist them in originating credit and other assets that may be acquired by a Financing Vehicle.
“PCAOB” refers to the Public Company Accounting Oversight Board.
“Permitted Class B Owner” refers to a Founder or any person or entity that, through contract, proxy or operation of law, has irrevocably delegated the sole and exclusive right to vote the Pagaya Class B Ordinary Shares held by such person or entity to a Founder.
“PIPE Investment” refers to the investment by the EJF Investor and by those certain other PIPE Investors pursuant to the Subscription Agreements.
“PIPE Investors” refers to the EJF Investor and those certain other investors participating in the PIPE Investment pursuant to the Subscription Agreements.
“PIPE Shares” refers to the 35.0 million Pagaya Class A Ordinary Shares issuable pursuant to the Subscription Agreements.
“Plan of Merger” refers to the plan of merger substantially in the form attached as Exhibit F to the Merger Agreement, which is attached as Annex A to this proxy statement/prospectus.
“Preferred Majority” refers to the holders of a majority of the Pagaya Preferred Shares outstanding at a given time prior to the Capital Restructuring, voting together as a single class on an as-converted basis.
“Preferred Share Conversion” refers to the conversion of the outstanding Pagaya Preferred Shares into Pagaya Ordinary Shares in accordance with the Merger Agreement.
“Reclassification” refers to the reclassification of each Pagaya Ordinary Share that is outstanding immediately following the Preferred Share Conversion (and for the avoidance of doubt, any warrant, right or other security convertible into or exchangeable or exercisable therefor, including each Pagaya Ordinary Share underlying any Pagaya Option), into one Pagaya Class A Ordinary Share or one Pagaya Class B Ordinary Share, as applicable, as set forth in the Merger Agreement.
“Registration Rights Agreement” refers to the Amended and Restated Registration Rights Agreement to be entered into at Closing, by and among Pagaya, EJFA, the Sponsor and certain equityholders of Pagaya named therein, replacing EJFA’s and Pagaya’s existing registration rights agreements.
“SEC” refers to the U.S. Securities and Exchange Commission.
“Securities Act” refers to the U.S. Securities Act of 1933, as amended.
“Side Letter Agreement” refers to that certain side letter agreement, dated September 15, 2021, by and among Pagaya, EJFA and the Sponsor, in the form attached as Annex E to this proxy statement/prospectus.
“Special Meeting” refers to the extraordinary general meeting of EJFA Shareholders to vote on the EJFA Shareholder Matters, to be convened on at Eastern Time at the offices of located at or at such other time, on such other date and at such other place to which the extraordinary general meeting may be adjourned or postponed and will be virtually accessible at .
“Split Factor” shall have the meaning ascribed to it in the Merger Agreement.
“Sponsor” refers to Wilson Boulevard LLC, a Delaware limited liability company.
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“Stock Split” refers to the stock split of the Pagaya Ordinary Shares into a number of Pagaya Ordinary Shares calculated in accordance with the terms of the Merger Agreement such that each Pagaya Ordinary Share will have a value of $10.00 per share immediately following the Capital Restructuring on the basis of the Company Value (as defined in the Merger Agreement) set out in the Merger Agreement.
“Subscription Agreements” refers to the EJF Subscription Agreement and the other subscription agreements entered into by the PIPE Investors, the form of which is attached as Exhibit 10.8 to this proxy statement/prospectus, pursuant to which the PIPE Investment will be consummated.
“Transaction Agreements” refers to the Merger Agreement, the Registration Rights Agreement, the EJF Subscription Agreement, the Pagaya Voting Agreement, the EJFA Voting Agreement, the Side Letter Agreement, the confidentiality agreement by and between Pagaya and EJFA, the Pagaya A&R Articles and all the agreements documents, instruments and certificates entered into in connection with the Merger Agreement or therewith and any and all exhibits and schedules thereto.
“Transactions” refers to the Merger and the other transactions contemplated by the Merger Agreement.
“Treasury Regulations” refers to the regulations promulgated by the U.S. Department of the Treasury pursuant to and in respect of provisions of the Code.
“Trust Account” refers to the trust account established pursuant to a trust agreement with Continental, as trustee, in connection with the EJFA IPO.
“Trust Agreement” refers to the Investment Management Trust Agreement, effective as of February 24, 2021, by and between EJFA and Continental.
“United States” or “U.S.” refers to the United States of America, including the states, the District of Columbia and its territories and possessions.
“U.S. Dollars” or “$” refers to U.S. dollars.
“U.S. GAAP” refers to the U.S. generally accepted accounting principles.
“U.S. Holder” refers to any beneficial owner of EJFA securities or Pagaya securities, as the case may be, that is, for U.S. federal income tax purposes:
• | an individual who is a citizen or resident of the United States; |
• | a corporation (including any entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or any state thereof or the District of Columbia; |
• | an estate whose income is subject to U.S. federal income taxation regardless of its source; or |
• | a trust if (i) a court within the United States is able to exercise primary supervision over the trust’s administration and one or more U.S. persons have the authority to control all of the trust’s substantial decisions, or (ii) the trust has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person. |
“VWAP” refers to, on any trading day on or after the Closing Date, the volume weighted average of the trading prices of the Pagaya Class A Ordinary Shares trading during such day on the principal securities exchange or securities market on which Pagaya Class A Ordinary Shares are then traded or quoted for purchase and sale (as reported by Bloomberg L.P. or, if not reported therein, in another authoritative source selected by Pagaya), except if there occurs any change in the outstanding Pagaya Class A Ordinary Shares as a result of any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares, or any stock dividend, the VWAP shall be equitably adjusted to reflect such change.
“Warrant Agreement” refers to the Amended and Restated Warrant Agreement, to be entered into immediately prior to the Effective Time, by and among EJFA, Pagaya and Continental, as transfer agent.
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THE SPECIAL MEETING
The questions and answers below highlight only selected information set forth elsewhere in this proxy statement/prospectus and only briefly address some commonly asked questions about the Special Meeting and the proposals to be presented at the Special Meeting, including with respect to the Merger. The following questions and answers do not include all the information that may be important to EJFA Shareholders. EJFA Shareholders are urged to carefully read this entire proxy statement/prospectus, including the annexes and the other documents referred to herein, to fully understand the Merger and the voting procedures for the Special Meeting.
Q: | Why am I receiving this proxy statement/prospectus? |
A: | EJFA and Pagaya have agreed to a merger and certain related transactions under the terms of the Merger Agreement that is described in this proxy statement/prospectus. A copy of the Merger Agreement is attached to this proxy statement/prospectus as Annex A and EJFA encourages the EJFA Shareholders to read the Merger Agreement in its entirety. EJFA Shareholders are being asked to consider and vote upon a proposal to approve and adopt the Merger Agreement and the Merger, with EJFA surviving the Merger as a wholly-owned subsidiary of Pagaya. See the section of this proxy statement/prospectus entitled “Proposal One—The Business Combination Proposal.” |
Q: | Are there any other matters being presented to EJFA Shareholders at the Special Meeting? |
A: | In addition to voting on the Business Combination Proposal, the EJFA Shareholders will vote on the following proposals: |
• | To approve and authorize the Merger. See the section of this proxy statement/prospectus entitled “Proposal Two—The Merger Proposal.” |
• | To consider and vote upon a proposal to adjourn the Special Meeting to a later date or dates, if necessary, if the parties are not able to consummate the Merger for any reason. See the section of this proxy statement/prospectus entitled “Proposal Three—The Adjournment Proposal.” |
EJFA will hold the Special Meeting of EJFA Shareholders to consider and vote upon these proposals. This proxy statement/prospectus contains important information about the Merger and the other matters to be acted upon at the Special Meeting. EJFA Shareholders should read this proxy statement/prospectus (including the annexes and the other documents referred to herein) carefully and in its entirety.
Your vote is important. Regardless of how many shares you own, you are encouraged to vote as soon as possible after carefully reviewing this proxy statement/prospectus.
Q: | Why is EJFA proposing the Merger? |
A: | EJFA was incorporated for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. |
On March 1, 2021, EJFA completed (a) the EJFA IPO of 28,750,000 units at an offering price of $10.00 per unit, with each EJFA Unit consisting of one EJFA Class A Ordinary Share and one-third of one EJFA Public Warrant, with each whole EJFA Public Warrant entitling the holder thereof to purchase one EJFA Class A Ordinary Share at an exercise price of $11.50 per share, subject to adjustments, and (b) a concurrent private placement of 5,166,667 warrants to the Sponsor. A total of $287,500,000 of the net proceeds from the EJFA IPO and the concurrent private placement of EJFA Private Placement Warrants were placed in the Trust Account, which was established for the benefit of the EJFA Public Shareholders. Since the EJFA IPO, EJFA’s activity has been limited to the evaluation of potential targets for its initial business combination.
Prior to reaching its decision to approve the business combination and the Merger, the EJFA Board consulted with EJFA’s management as well as its legal and financial advisors, reviewed various industry and financial data, valuation analyses and the results of management’s due diligence review of Pagaya. In considering the business combination, the EJFA Board determined that Pagaya satisfied the vast majority of the criteria identified in the prospectus for the EJFA IPO to be important factors in identifying and selecting an acquisition candidate and also considered any potentially relevant deterrent factors and concluded that the
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business combination with Pagaya is in the best interest of EJFA and the EJFA Shareholders. See the section of this proxy statement/prospectus entitled “Proposal One—The Business Combination Proposal” for a discussion of the factors considered by the EJFA Board in reaching its decision.
Q: | What will happen in the Merger? |
A: | At the Closing, Merger Sub will merge with and into EJFA, with EJFA surviving as a wholly-owned subsidiary of Pagaya. In addition, at the Effective Time, (i) each EJFA Unit will be automatically separated into one EJFA Class A Ordinary Share and one-third of one EJFA Public Warrant; provided that no fractional EJFA Public Warrants will be issued in connection with the EJFA Unit separation such that if a holder of EJFA Units would be entitled to receive a fractional EJFA Public Warrant upon the EJFA Unit separation, then the number of EJFA Public Warrants to be issued to such holder upon the EJFA Unit separation will be rounded down to the nearest whole number of EJFA Public Warrants., (ii) each EJFA Class B Ordinary Share issued and outstanding immediately prior to the Effective Time (other than Excluded Shares) will be converted into the right to receive one Pagaya Class A Ordinary Share, (iii) each EJFA Class A Ordinary Share issued and outstanding immediately prior to the Effective Time (after giving effect to the EJFA Shareholder Redemption and other than Excluded Shares) will be converted into the right to receive one Pagaya Class A Ordinary Share and (iv) each EJFA Warrant outstanding immediately prior to the Effective Time will be converted into one Pagaya Warrant, as described in more detail in the section of this proxy statement/prospectus entitled “Proposal One—The Business Combination Proposal.” |
Prior to the Effective Time, Pagaya will consummate the PIPE Investment subject to the terms of the Subscription Agreements in an aggregate amount of $350 million.
Q: | What other transactions will happen in connection with the Merger? |
A: | Prior to the Effective Time, subject to receiving the Pagaya Shareholder Approval, Pagaya intends to (i) effect the Preferred Share Conversion, pursuant to which the then outstanding Pagaya Preferred Shares will convert into Pagaya Ordinary Shares in accordance with the Current Pagaya Articles, (ii) effect the Reclassification, pursuant to which Pagaya will reclassify (A) each Pagaya Ordinary Share that, immediately following the Preferred Share Conversion, is outstanding and held by any shareholder other than a Founder, as well as each Pagaya Ordinary Share underlying any Pagaya Options, into one Pagaya Class A Ordinary Share and (B) each Pagaya Ordinary Share that, immediately following the Preferred Share Conversion, is outstanding and held by a Founder, into one Pagaya Class B Ordinary Share, and (iii) effect the Stock Split, pursuant to which each Pagaya Ordinary Share will split into a number of Pagaya Ordinary Shares calculated in accordance with the terms of the Merger Agreement such that each Pagaya Ordinary Share will have a value of $10.00 per share immediately following such split, based on the Company Value. |
Q: | What is the PIPE Investment? |
A: | Concurrently with the execution of the Merger Agreement, Pagaya entered into the EJF Subscription Agreement with the EJF Investor, pursuant to which, on the terms and subject to the conditions set forth in the EJF Subscription Agreement, the EJF Investor has agreed to purchase, and Pagaya has agreed to sell to it, an aggregate of up to 20 million Pagaya Class A Ordinary Shares, for a purchase price of $10.00 per share and at an aggregate purchase price of up to $200 million. Subsequently, Pagaya also entered into additional subscription agreements with certain other investors, pursuant to which, on the terms and subject to the conditions set forth in such subscription agreements, such investors have agreed to purchase, and Pagaya has agreed to sell to them, 22.2 million Pagaya Class A Ordinary Shares at a purchase price of $10.00 per share, which shares reduced the foregoing commitment of the EJF Investor by 7.2 million shares. |
Q: | Did the EJFA Board obtain a third-party valuation or fairness opinion in determining whether or not to proceed with the Merger? |
A: | EJFA retained Duff & Phelps as its financial advisor in connection with the Merger. In connection with this engagement, the EJFA Board requested that Duff & Phelps evaluate the fairness, from a financial point of view, of the consideration to be paid to the EJFA Shareholders (excluding the Sponsor, EJFA, Pagaya and each of their respective wholly-owned subsidiaries, and any other Pagaya Voting Agreement Signatories (as defined in the Merger Agreement)(collectively, the “Excluded Shareholders”)). Duff & Phelps delivered a |
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written fairness opinion to the EJFA Board dated September 14, 2021, in which it concluded that, as of such date and based upon and subject to the assumptions made, scope of analysis considered, matters evaluated and other qualifications and limitations set forth therein, the consideration to be paid to the EJFA Shareholders was fair, from a financial point of view, to EJFA Shareholders (excluding the Excluded Shareholders). See the section of this proxy statement/prospectus entitled “Fairness Opinion of Duff & Phelps.”
Q: | Do I have redemption rights? |
A: | Holders of EJFA Public Shares may seek to have all or a portion of such shares redeemed for cash, regardless of whether they vote for or against the Business Combination Proposal; provided that such redemption will be limited to an aggregate dollar amount that would allow EJFA to have net tangible assets in excess of $5,000,001. Any EJFA Public Shareholder holding EJFA Public Shares as of the Record Date may demand that EJFA redeem such shares into a full pro rata portion of the Trust Account (which was $ per share as of , 2022, the Record Date), calculated as of two Business Days prior to the anticipated consummation of the Merger. |
Notwithstanding the foregoing, an EJFA Public Shareholder, together with any affiliate of such EJFA Public Shareholder or any other person with whom such EJFA Public Shareholder is acting in concert or as a “group” (as defined in Section 13(d)(3) of the Exchange Act), will be restricted from redeeming its EJFA Public Shares with respect to more than 15% of the EJFA Public Shares, without the consent of EJFA. Accordingly, if an EJFA Public Shareholder, alone or acting in concert or as a group, seeks to redeem more than 15% of the EJFA Public Shares, then any such shares in excess of that 15% limit would not be redeemed for cash without the consent of EJFA.
Q: | How do I exercise my redemption rights? |
A: | Holders of EJFA Public Shares as of the Record Date who wish to exercise their redemption rights are required to (i) submit their redemption request, which includes the name of the beneficial owner of the shares to be redeemed, in writing to Continental, EJFA’s transfer agent, and (ii) deliver their shares, either physically or electronically using DTC’s DWAC system, to Continental no later than 5:00 p.m. Eastern Time on (two Business Days prior to the Special Meeting). If a holder of EJFA Public Shares seeking redemption of EJFA Public Shares holds the shares in “street name,” meaning their EJFA Ordinary Shares are held of record by a broker, bank or other nominee, such EJFA Shareholder will have to coordinate with their broker, bank or other nominee to have the shares certificated or delivered electronically. Shares represented by certificates that have not been tendered (either physically or electronically) in accordance with these procedures will not be redeemed for cash. There is a nominal cost associated with this tendering process and the act of certificating the shares or delivering them through the DWAC system. If the Merger is not consummated this may result in an additional cost to shareholders for the return of their shares. |
Any request to have EJFA Public Shares redeemed may be made no later than two Business Days prior to the Special Meeting. If a holder of EJFA Public Shares delivers EJFA Public Shares for redemption and later decides prior to the Special Meeting not to elect redemption, such holder may request return of their shares without EJFA consent so long as the return is made prior to the redemption deadline. Any request for return of shares after the redemption deadline requires EJFA consent. Such a request must be made by contacting Continental at the phone number or address set out elsewhere in this proxy statement/prospectus.
Q: | If I am an EJFA Warrantholder, can I exercise redemption rights with respect to my EJFA Public Warrants? |
A: | No. The holders of EJFA Public Warrants have no redemption rights with respect to the EJFA Public Warrants. |
If you are a holder of EJFA Public Shares (including through the ownership of EJFA Units) and you separate the EJFA Units into underlying EJFA Public Shares and EJFA Public Warrants and thereafter exercise your redemption rights, it will not result in the loss of any EJFA Public Warrants that you may hold (including those contained in any EJFA Units you hold). At the Effective Time, your EJFA Public Warrants will become Pagaya Warrants, exercisable commencing 30 days after the Effective Time.
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Q: | If I am an EJFA Unitholder, can I exercise redemption rights with respect to my EJFA Public Warrants? |
A: | No. Holders of outstanding EJFA Units must elect to separate the EJFA Units into the underlying EJFA Public Shares and EJFA Public Warrants prior to exercising redemption rights with respect to the EJFA Public Shares. If you hold your EJFA Units in an account at a brokerage firm, bank or other nominee, you must notify your broker or bank that you elect to separate the EJFA Units into the underlying EJFA Public Shares and EJFA Public Warrants, or if you hold EJFA Units registered in your own name, you must contact Continental, EJFA’s transfer agent, directly and instruct them to do so. If you fail to cause your EJFA Units to be separated and delivered to Continental by , New York City time, on , 2022, you will not be able to exercise your redemption rights with respect to your EJFA Public Shares. |
Q: | Do I have appraisal rights if I object to the Merger? |
A: | The Companies Act prescribes when EJFA Shareholder appraisal rights will be available and sets the limitations on such rights. Where such rights are available, EJFA Shareholders are entitled to receive fair value for their shares. However, regardless of whether such rights are or are not available, EJFA Shareholders are still entitled to exercise the rights of redemption, as set out in the section of this proxy statement/prospectus entitled “Special Meeting of EJFA Shareholders—Redemption Rights”, and the EJFA Board is of the view that the redemption proceeds payable to EJFA Shareholders who exercise such redemption rights represents the fair value of those shares. See the section of this proxy statement/prospectus entitled “Appraisal Rights.” |
Q: | What happens to the funds deposited in the Trust Account after consummation of the Merger? |
A: | A total of $287,500,000 of the net proceeds from the EJFA IPO and the concurrent private placement of EJFA Private Placement Warrants was placed in the Trust Account immediately following the EJFA IPO. If the Merger is consummated, the funds in the Trust Account will be used (i) to pay, on a pro rata basis, holders of EJFA Public Shares the redemption price for EJFA Public Shares redeemed by the EJFA Public Shareholders who properly exercised redemption rights, (ii) to pay fees and expenses incurred in connection with the transactions contemplated by the Merger Agreement (including aggregate fees of approximately $10.1 million to the underwriters of the EJFA IPO as deferred underwriting commissions) and (iii) to repay working capital loans made by the Sponsor, if any. As of the date of this proxy statement/prospectus, there are no outstanding working capital loans. Any funds remaining in the Trust Account after such payments will be released as directed by EJFA. |
Q: | What happens if a substantial number of EJFA Public Shareholders vote in favor of the Business Combination Proposal and exercise their redemption rights? |
A: | EJFA Public Shareholders may vote in favor of the Merger and still exercise their redemption rights, although they are not required to vote in any way to exercise such redemption rights. Accordingly, the Merger may be consummated even though the funds available from the Trust Account and the number of EJFA Public Shareholders are substantially reduced as a result of redemptions by EJFA Public Shareholders. |
Pagaya’s obligation to consummate the transactions contemplated by the Merger Agreement is conditioned on the amount of “available cash” being at least $200 million. Under the Merger Agreement, “available cash” is defined as (a) an amount equal to the aggregate amount of cash contained in the Trust Account immediately prior to the Closing less the Aggregate EJFA Shareholder Redemption Payments Amount, plus (b) the proceeds actually paid to Pagaya upon consummation of the PIPE Investment (including any funds paid by the EJF Investor in its capacity as a backstop for defaulting PIPE investors, if any). The amount of the PIPE Investment is greater than $200 million, and therefore the “available cash” condition is expected to be satisfied even if there are significant numbers of EJFA Shareholder Redemptions, provided that the PIPE Investment is consummated in accordance with the EJF Subscription Agreement. In addition, each of Pagaya’s and EJFA’s obligation to consummate the transactions contemplated by the Merger Agreement is conditioned on EJFA having at least $5,000,001 in net tangible assets after giving effect to the payment of amounts that EJFA will be required to pay to redeeming shareholders upon consummation of the Merger. To the extent that there are fewer EJFA Public Shares and EJFA Public Shareholders, the trading market for Pagaya Ordinary Shares may be less liquid than the market was for EJFA Public Shares prior to the
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Transactions and Pagaya may not be able to meet the listing standards of a national securities exchange. In addition, to the extent of any redemptions, fewer funds from the Trust Account would be available to Pagaya to be used in its business following the consummation of the Merger.
Q: | What happens if the Merger is not consummated? |
A: | If EJFA does not consummate the Merger with Pagaya for whatever reason, EJFA would search for another target business with which to complete an initial business combination. If EJFA does not consummate the Merger with Pagaya or a business combination with another company by March 1, 2023 (or such later date as may be approved by EJFA Shareholders in an amendment to the EJFA Memorandum and Articles of Association), EJFA must redeem 100% of the outstanding EJFA Public Shares, at a per-share price, payable in cash, equal to an amount then held in the Trust Account (approximately $ as of , 2022), less up to $100,000 of interest to pay dissolution expenses, divided by the number of outstanding EJFA Public Shares. The Sponsor and certain directors and advisors of EJFA have waived their rights to liquidating distributions from the Trust Account with respect to their EJFA Class B Ordinary Shares in the event EJFA fails to complete a business combination by March 1, 2023 (or such later date as may be approved by EJFA Shareholders in an amendment to the EJFA Memorandum and Articles of Association), and, accordingly, their EJFA Class B Ordinary Shares will be worthless in such an event. Additionally, in the event of such liquidation, there will be no distribution with respect to the outstanding EJFA Warrants and the EJFA Warrants would expire worthless. |
Q: | How do the Sponsor and EJFA’s directors and officers intend to vote on the proposals? |
A: | The Sponsor beneficially owns and is entitled to vote an aggregate of approximately % of the outstanding EJFA Ordinary Shares. Pursuant to the EJFA Voting Agreement, the Sponsor and the directors and advisors and their permitted transferees of EJFA holding EJFA Class B Ordinary Shares have agreed to vote their EJFA Ordinary Shares in favor of the approval and adoption of the Merger Agreement and the transactions contemplated thereby, the approval and authorization of the Merger, if required, the approval of the adjournment of the EJFA Special Meeting, and any other matter reasonably necessary to the consummation of the transactions contemplated by the Merger Agreement and considered and voted upon by EJFA Shareholders. In addition to the EJFA Ordinary Shares held by the Sponsor and the directors and advisors of EJFA holding EJFA Class B Ordinary Shares and their permitted transferees, EJFA would need (i) shares, or approximately %, of the EJFA Public Shares outstanding as of the Record Date to be voted in favor of the Business Combination Proposal and the Adjournment Proposal in order for such proposals to be approved and (ii) shares, or approximately %, of the EJFA Public Shares outstanding as of the Record Date to be voted in favor of the Merger Proposal in order for such proposal to be approved. |
Q: | What interests do the Sponsor and the current officers and directors of EJFA have in the Merger? |
A: | In considering the recommendation of the EJFA Board to vote in favor of the Merger, EJFA Shareholders should be aware that, aside from their interests as shareholders, the Sponsor and certain of EJFA’s officers and directors have interests in the Merger that are different from, or in addition to, those of other shareholders generally. The EJFA Board was aware of and considered these interests, among other matters, in evaluating the Merger, in recommending to EJFA Shareholders that they approve the Merger and, where applicable, in agreeing to vote their shares in favor of the Merger. EJFA Shareholders should take these interests into account in deciding whether to approve the Merger. See the section of this proxy statement/prospectus entitled “Proposal One—The Business Combination Proposal—Interests of Certain Persons in the Business Combination.” |
These interests include, among other things, the fact that:
• | If the Merger with Pagaya or another business combination is not consummated by March 1, 2023 (or such later date as may be approved by EJFA Shareholders in an amendment to the EJFA Memorandum and Articles of Association), EJFA will cease all operations except for the purpose of winding up, redeeming 100% of the outstanding EJFA Public Shares for cash and, subject to the approval of its remaining shareholders and the EJFA Board, dissolving and liquidating. On the other hand, if the Merger is consummated, each outstanding EJFA Ordinary Share will be converted into one Pagaya Class A Ordinary Share, subject to adjustment as described herein. |
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• | If EJFA is unable to complete a business combination within the required time period, the Sponsor will be liable under certain circumstances described herein to ensure that the proceeds in the Trust Account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by EJFA for services rendered or contracted for or products sold to EJFA. If EJFA consummates a business combination, on the other hand, EJFA will be liable for all such claims. |
• | The Sponsor and EJFA’s officers and directors and their affiliates are entitled to reimbursement of out-of-pocket expenses incurred by them in connection with certain activities on EJFA’s behalf, such as identifying and investigating possible business targets and business combinations. However, if EJFA fails to consummate a business combination within the required period, they will not have any claim against the Trust Account for reimbursement. Accordingly, EJFA may not be able to reimburse these expenses if the Merger or another business combination is not completed by March 1, 2023 (or such later date as may be approved by EJFA Shareholders in an amendment to the EJFA Memorandum and Articles of Association). As of the Record Date, the Sponsor and EJFA’s officers and directors and their affiliates had incurred approximately $ of unpaid reimbursable expenses. |
• | The Merger Agreement provides for the continued indemnification of EJFA’s current directors and officers and the continuation of directors and officers liability insurance covering EJFA’s current directors and officers. |
• | Subject to Pagaya’s consent in accordance with the Merger Agreement, the Sponsor and EJFA’s officers and directors (or their affiliates) may make loans from time to time to EJFA to fund certain capital requirements. Loans may be made after the date of this proxy statement/prospectus. If the Merger is not consummated, the loans will not be repaid and will be forgiven except to the extent there are funds available to EJFA outside of the Trust Account. |
• | Emanuel Friedman will be a member of the Pagaya Board following the Closing and, therefore, in the future, Mr. Friedman will receive any cash fees, stock options or stock awards that the Pagaya Board determines to pay to its non-executive directors. |
• | The EJF Investor will participate in the purchase of PIPE Shares from Pagaya at the Closing, and certain of EJFA’s directors and officers are affiliated with the EJF Investor. |
• | Duff & Phelps, a Kroll Business, rendered the Opinion (as defined below) to the EJFA Board, for which it will receive a fee from EJFA. A portion of such fee was payable upon delivery of the Opinion and a portion is payable upon and subject to the Closing. |
• | Pagaya, EJFA and the Sponsor entered into the Side Letter Agreement, which provides that, solely in the event the EJFA Transaction Costs exceed the Expenses Excess Amount, a number of EJFA Class B Ordinary Shares will be forfeited for no consideration and cancelled by EJFA and no longer outstanding, except that the Sponsor may pay, in whole or in part, the EJFA Transaction Costs in cash prior to the Effective Time without further liability to EJFA, in which case the Expenses Excess Amount will be reduced on a dollar-for-dollar basis by the amount so paid by the Sponsor. |
• | Given the difference in the purchase price the Sponsor paid for EJFA Class B Ordinary Shares ($0.003 per share) and EJFA Private Placement Warrants ($1.50 per Warrant) as compared to the purchase price of the EJFA Units sold in the EJFA IPO ($10.00 per EJFA Unit), the Sponsor may earn a positive return on its investment even if the EJFA Public Shareholders experience a negative rate of return following the consummation of the business combination. |
• | Certain directors and officers of EJFA, as well as certain partners and employees of EJF Capital, hold equity interests in the Sponsor, and thus have an interest in the business combination transaction that is not the same as the majority of EJFA Shareholders, who do not hold equity interests in the Sponsor. |
• | In connection with the consummation of the business combination, the Sponsor, EJFA, Pagaya and certain equityholders of Pagaya will enter into a new Registration Rights Agreement, which will, among other things, provide that the Sponsor and certain equity holders will have a demand right for Pagaya to conduct an underwritten offering of the Registrable Securities (as defined below), provided that the total offering price of all securities proposed to be sold in such offering exceeds $75 million in the aggregate and subject to certain limitations. |
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• | Each of EJFA’s directors and officers presently has fiduciary or contractual obligations to other entities pursuant to which such officer or director is required to present a business combination opportunity to such entity. EJFA’s directors and officers also may have become aware of business combination opportunities which may have been appropriate for presentation to EJFA and the other entities to which they owe certain fiduciary or contractual duties. Accordingly, they may have had conflicts of interest in determining to which entity a particular business opportunity should have been presented. These conflicts may not have been resolved in EJFA’s favor and such potential business combination opportunities may have been presented to other entities prior to their presentation to EJFA. The EJFA Memorandum and Articles of Association provide that, to the maximum extent permitted by applicable law, EJFA renounces any interest or expectancy in, or in being offered an opportunity to participate in, any potential transaction or matter (i) which may be a business combination opportunity for an entity related to a director or officer of EJFA, on the one hand, and EJFA, on the other, or (ii) the presentation of which would breach an existing legal obligation of a director or officer to another entity, and EJFA waives any claim or cause of action it may have in respect thereof. EJFA does not believe, however, that the fiduciary duties or contractual obligations of its officers or directors or waiver of corporate opportunity materially affected its search for an acquisition target nor will materially impact its ability to complete the proposed Merger. |
Q: | When do you expect the Merger to be completed? |
A: | It is currently anticipated that the Merger will be consummated in early 2022. The Closing is subject to the receipt of the requisite approval of the EJFA Shareholders described in this proxy statement/prospectus. The Closing is also subject to other customary closing conditions, including the receipt of the requisite approval by the Pagaya Shareholders. For a description of the conditions for the consummation of the Merger, see the section of this proxy statement/prospectus entitled “The Merger Agreement—Conditions to Closing.” |
Q: | Who will solicit and pay the cost of soliciting proxies? |
A: | EJFA has engaged a professional proxy solicitation firm, Morrow Sodali LLC (“Morrow Sodali”), to assist in soliciting proxies for the Special Meeting. EJFA has agreed to pay Morrow Sodali a fee of $35,000.00, plus disbursements. EJFA will reimburse Morrow Sodali for all other expenses associated with the Special Meeting (provided however, that (other than “broker bills”) any individual Morrow Sodali expense in excess of $8,500.00 must be approved by EJFA in advance) and will indemnify Morrow Sodali and its affiliates against certain claims, liabilities, losses, damages and expenses. EJFA will also reimburse banks, brokers and other nominees representing beneficial owners of EJFA Class A Ordinary Shares for their expenses in forwarding soliciting materials to beneficial owners of EJFA Class A Ordinary Shares and in obtaining voting instructions from those beneficial owners. EJFA’s management team may also solicit proxies by telephone, by facsimile, by mail, on the Internet or in person. They will not be paid any additional amounts for soliciting proxies. |
Q: | What do I need to do now? |
A: | EJFA urges you to carefully read and consider the information contained in this proxy statement/prospectus, including the annexes, and to consider how the Merger will affect you as an EJFA Shareholder and/or EJFA Warrantholder. EJFA Shareholders should then vote as soon as possible in accordance with the instructions provided in this proxy statement/prospectus and on the enclosed proxy card. |
Q: | When and where will the Special Meeting take place? |
A: | The Special Meeting will be held on , 2022 at Eastern Time at the offices of located at or at such other time, on such other date and at such other place to which the meeting may be adjourned or postponed, and is virtually accessible at . You may attend and vote at the Special Meeting webcast by visiting and entering the control number found on your proxy card, voting instruction form or notice you previously received. |
Q: | How can I vote my shares at the Special Meeting? |
A: | EJFA Ordinary Shares held directly in your name as the shareholder of record of such shares as of the close of business on , 2022, the Record Date, may be voted electronically at the Special Meeting. If you |
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choose to attend the Special Meeting, you will need to visit , and enter the control number found on your proxy card, voting instruction form or notice you previously received. You may vote in person or electronically during the Special Meeting by following the instructions available on the meeting website during the meeting. If you are a beneficial owner of EJFA Ordinary Shares but not the shareholder of record of such shares, you will also need to obtain a legal proxy for the meeting provided by your bank, broker, or other nominee. Please note that if your EJFA Ordinary Shares are held in “street name” by a broker, bank or other nominee and you wish to vote at the Special Meeting, you will not be permitted to vote electronically at the Special Meeting unless you first obtain a legal proxy issued in your name from the record owner. To request a legal proxy, please contact your broker, bank or other nominee holder of record. It is suggested you do so in a timely manner to ensure receipt of your legal proxy prior to the Special Meeting.
Q: | How can I vote my shares without attending the Special Meeting? |
A: | If you are a shareholder of record of EJFA Ordinary Shares as of the close of business on , 2022, the Record Date, you can vote by proxy by mail by following the instructions provided in the enclosed proxy card. Please note that if you hold such shares in “street name”, you should contact your broker, bank or other nominee to ensure that votes related to the shares you beneficially own are properly counted. In this regard, you must provide the broker, bank or other nominee with instructions on how to vote your shares, or otherwise follow the instructions provided by your bank, brokerage firm or other nominee. |
Q: | What happens if I sell my EJFA Ordinary Shares before the Special Meeting? |
A: | The Record Date for the Special Meeting is earlier than the date of the Special Meeting and earlier than the date the Merger is expected to be completed. If you transfer your EJFA Ordinary Shares after the applicable Record Date, but before the Special Meeting date, unless you grant a proxy to the transferee, you will retain your right to vote at the Special Meeting, but you will not be entitled to receive any portion of the Merger Consideration (as defined in the Merger Agreement) unless you hold EJFA Ordinary Shares immediately prior to the Effective Time. |
Q: | If my shares are held in “street name,” will my bank, broker or other nominee automatically vote my shares for me? |
A: | Your bank, broker or other nominee can vote your EJFA Ordinary Shares without receiving your instructions on “routine” proposals only. Your bank, broker or other nominee cannot vote your shares with respect to “non-routine” proposals unless you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker, bank or other nominee. |
None of the proposals expected to be voted on at the Special Meeting are routine proposals. Accordingly, your bank, broker or other nominee cannot vote your EJFA Ordinary Shares with respect to these proposals unless you provide voting instructions.
Q: | May I change my vote after I have mailed my signed proxy card? |
A: | Yes. If you are an EJFA Shareholder of record of EJFA Ordinary Shares as of the close of business on the Record Date, you can change or revoke your proxy before on in one of the following ways: |
• | submit a new proxy card bearing a later date; |
• | give written notice of your revocation to EJFA’s Corporate Secretary, which notice must be received by EJFA’s Corporate Secretary prior to the vote at the Special Meeting; or |
• | vote electronically at the Special Meeting by visiting and entering the control number found on your proxy card, voting instruction form or notice you previously received. Please note that your attendance at the Special Meeting will not alone serve to revoke your proxy. |
If you hold your shares in “street name,” you should contact your bank, broker or other nominee to change your instructions on how to vote. If you hold your EJFA Ordinary Shares in “street name” and wish to virtually attend the Special Meeting and vote through the web portal, you must obtain a legal proxy from your bank, broker or other nominee.
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Q: | What constitutes a quorum for the Special Meeting? |
A: | A quorum is the minimum number of EJFA Ordinary Shares that must be present to hold a valid meeting. The presence, in person or by proxy, of a majority of the paid up voting share capital of EJFA entitled to vote at the Special Meeting constitutes a quorum at the Special Meeting. |
Broker non-votes (to the extent that the EJFA Shareholders have given the bank, broker or other nominee voting instructions on at least one proposal in this proxy statement/prospectus) will count as present for the purposes of establishing a quorum. As of the Record Date, EJFA Ordinary Shares would be required to achieve a quorum.
Q: | What shareholder vote thresholds are required for the approval of each proposal brought before the Special Meeting? |
A: | Vote thresholds are as follows: |
• | Business Combination Proposal — The approval of the Business Combination Proposal will require an ordinary resolution under Cayman Islands law, being the affirmative vote of the holders of a majority of EJFA Ordinary Shares who, being present and entitled to vote at the Special Meeting, vote at the Special Meeting. Abstentions and broker non-votes, while considered present for the purposes of establishing a quorum, will not count as votes cast at the Special Meeting, and otherwise will have no effect on a particular proposal. |
• | Merger Proposal — The authorization of the Plan of Merger will require a special resolution under Cayman Islands law, being the affirmative vote of the holders of at least two thirds of EJFA Ordinary Shares who, being present and entitled to vote at the Special Meeting, vote at the Special Meeting. Abstentions and broker non-votes, while considered present for the purposes of establishing a quorum, will not count as votes cast at the Special Meeting, and otherwise will have no effect on a particular proposal. |
• | Adjournment Proposal — The approval of the Adjournment Proposal will require an ordinary resolution under Cayman Islands law, being the affirmative vote of the holders of a majority of EJFA Ordinary Shares who, being present and entitled to vote at the Special Meeting, vote at the Special Meeting. Abstentions and broker non-votes, while considered present for the purposes of establishing a quorum, will not count as votes cast at the Special Meeting, and otherwise will have no effect on a particular proposal. |
Q: | Are the proposals conditioned on one another? |
A: | The Merger is conditioned on the approval of each of the proposals described in this proxy statement/prospectus (other than the Adjournment Proposal). The Business Combination Proposal and the Merger Proposal are cross-conditioned on the approval of each other, while the Adjournment Proposal is not conditioned on the approval of any other proposal. |
Q: | What will be the relative equity stakes of EJFA Shareholders, the Sponsor, the EJF Investor and existing Pagaya Shareholders in Pagaya upon consummation of the Merger? |
A: | Upon consummation of the Merger, Pagaya will become a new public company and EJFA will become a wholly-owned subsidiary of Pagaya. The former securityholders of EJFA will become securityholders of Pagaya. |
Upon consummation of the Merger, the post-Closing share ownership of Pagaya is expected to be as follows:
| | | Pagaya Ordinary Shares (%) | |
EJFA Shareholders | | | % |
Sponsor | | | % |
Pagaya Shareholders | | | % |
EJF Investor | | | % |
Total | | | 100% |
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These relative percentages assume that none of the EJFA Shareholders exercise their redemption rights. These percentages do not account for the outstanding options and warrants issued by Pagaya or the Pagaya Warrants that will be issued upon conversion of the EJFA Public Warrants and EJFA Private Placement Warrants. If any of the EJFA Shareholders exercise such EJFA Shareholder’s redemption rights, the percentage ownership of the EJFA Shareholders will be lower and the percentage ownership of all other holders will be higher.
Q: | What are the material differences in the rights of shareholders as a result of the dual class structure? |
A: | The Pagaya Class B Ordinary Shares will have 10 votes per share, while the Pagaya Class A Ordinary Shares will have one vote per share. |
Pagaya Class B Ordinary Shares are expected to be issued to, and registered in the name of, (i) Gal Krubiner, Yahav Yulzari and Avital Pardo (each a “Founder” and, collectively, the “Founders”) and (ii) any Permitted Class B Owner (as defined in the Pagaya A&R Articles).
All outstanding Pagaya Class B Ordinary Shares owned by a Founder and by any Permitted Class B Owners affiliated with such Founder shall automatically convert into an equal number of Pagaya Class A Ordinary Shares on the date of the earliest to occur of (i), (ii) or (iii) below:
(i) | (1) the earliest to occur of (a) such Founder’s employment or engagement as an officer of Pagaya being terminated not for Cause (as defined in the Pagaya A&R Articles), (b) such Founder’s resigning as an officer of Pagaya, (c) death or permanent disability of such Founder, except, in such event, such Founder’s Pagaya Class B Ordinary Shares shall be transferred automatically to the other Founders, pro rata to their holdings, if the other Founders continue to hold Pagaya Class B Ordinary Shares at such time, or (d) the appointment of a receiver, trustee or similar official in bankruptcy or similar proceeding with respect to a Founder or such Founder’s Pagaya Class B Ordinary Shares; and (2) such Founder no longer serves as a member of the Pagaya Board; |
(ii) | 90 days following the date on which such Founder first receives notice that his employment as an officer of Pagaya is terminated for Cause, except that if, prior to the expiration of such 90 day period, (a) the Pagaya Board repeals its determination that such Founder was terminated for Cause or determines that the Cause had been cured, then the provisions of clause (i) above shall apply, or (b) such Founder commences legal proceedings with the competent judicial forum to determine that such determination by the Pagaya Board of termination for Cause was improper or incorrect, then such Founder shall retain its Pagaya Class B Ordinary Shares until the earlier of (y) the issuance of a final unappealable judgment confirming the determination of the Pagaya Board, or a judgment which execution had not been stayed pending an appeal, and (z) the abandonment of such proceedings or their dismissal or denial by a ruling of the relevant judicial forum on any grounds, substantive or procedural, and regardless of whether or not the Pagaya Board’s determination regarding the termination for Cause is confirmed as part of such ruling, provided the basis for Cause shall be deemed to not be curable, and such conversion shall be effective immediately upon written notice by Pagaya to such Founder; or |
(iii) | the earlier to occur of (1) such time as the Founders and the Permitted Class B Owners first collectively hold less than 10% of the total issued and outstanding ordinary share capital of Pagaya, and (2) the fifteenth anniversary of the Closing Date. |
Additionally, any Pagaya Class B Ordinary Shares that are transferred to any person or entity other than a Permitted Class B Owner shall automatically upon such transfer convert into an equal number of Pagaya Class A Ordinary Shares.
Although no single holder will control a majority of voting power, the holders of the Pagaya Class B Ordinary Shares will collectively have up to % of the voting power of Pagaya following the Merger (under the no redemption scenario) and will collectively be able to control matters submitted to its shareholders for approval, including the election of directors, amendments of its organizational documents and any merger, consolidation, sale of all or substantially all of its assets and other major corporate transactions.
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Q: | What happens if I fail to take any action with respect to the Special Meeting? |
A: | If you fail to take any action with respect to the Special Meeting and the Merger is approved by the EJFA Shareholders and consummated, you will become a shareholder or warrantholder of Pagaya as long as you hold EJFA Ordinary Shares, EJFA Public Warrants or EJFA Private Placement Warrants, as applicable, immediately prior to the Effective Time. |
If you fail to take any action with respect to the Special Meeting and the Merger is not approved, you will continue to be a shareholder and/or warrantholder of EJFA, as applicable, and EJFA will continue to search for another target business with which to complete an initial business combination. If EJFA does not complete an initial business combination by March 1, 2023 (or such later date as may be approved by EJFA Shareholders in an amendment to the EJFA Memorandum and Articles of Association), EJFA must redeem 100% of the outstanding EJFA Public Shares, at a per-share price, payable in cash, equal to an amount then held in the Trust Account, less up to $100,000 of interest to pay dissolution expenses, divided by the number of outstanding EJFA Public Shares.
Q: | What should I do with my share and/or warrant certificates? |
A: | EJFA Warrantholders and those EJFA Shareholders who do not elect to have their EJFA Ordinary Shares redeemed for a pro rata share of the Trust Account should wait for instructions from the EJFA Transfer Agent regarding what to do with their certificates. EJFA Shareholders who exercise their redemption rights must deliver their share certificates to EJFA’s Transfer Agent (either physically or electronically) no later than two Business Days prior to the Special Meeting as described above. |
Upon consummation of the Transactions, the EJFA Public Warrants, by their terms, will entitle holders to purchase shares of Pagaya. Therefore, EJFA Warrantholders need not deliver their EJFA Public Warrants to EJFA or Pagaya at that time.
Q: | What should I do if I receive more than one set of voting materials? |
A: | EJFA Shareholders may receive more than one set of voting materials, including multiple copies of this proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, if you hold your EJFA Ordinary Shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction card that you receive in order to cast a vote with respect to all of your EJFA Ordinary Shares. |
Q: | What are the U.S. federal income tax consequences of the Merger to U.S. Holders of EJFA Ordinary Shares and/or EJFA Public Warrants? |
A: | As described in the section of this proxy statement/prospectus entitled “U.S. Federal Income Tax Considerations—Effects of the Merger—Characterization of the Merger as a reorganization under section 368(a) of the Code,” significant uncertainty exists as to the qualification of the Merger as a tax-free reorganization within the meaning of Section 368(a) of the Code to U.S. Holders of EJFA Ordinary Shares and EJFA Public Warrants. If, as of the Closing Date, any requirement for Section 368(a) of the Code is not met, then such U.S. Holder will recognize gain or loss in an amount equal to the difference, if any, between the fair market value (as of the Closing Date) of the securities received, over such U.S. Holder’s aggregate tax basis in the securities surrendered by such U.S. Holder in the Merger. Even if the requirements under Section 368(a) of the Code are satisfied, U.S. Holders may be required to recognize gain (but not loss) under the Passive Foreign Investment Company (“PFIC”) rules, as described in more detail below under “U.S. Federal Income Tax Considerations—Ownership and disposition of Pagaya securities—Passive foreign investment company considerations.” |
Q: | Under Israeli law, what are the material Israeli income tax consequences of the Merger for EJFA Shareholders? |
A: | The Merger is a taxable event in Israel. The EJFA Shareholders and holders of EJFA Warrants that are not residents of Israel should, under certain conditions, be exempt from Israeli tax while those that are Israeli residents may be taxed on any capital gains resulting from the exchange of their EJFA Class A Ordinary |
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Shares, EJFA Class B Ordinary Shares or EJFA Public Warrants. Pagaya, Merger Sub, their respective affiliates, and any other person making a payment under the Merger Agreement (including the issuance of shares as consideration under the Merger Agreement) is required to deduct and withhold tax from the Merger Consideration in accordance with applicable legal requirements. Pagaya has applied for a tax ruling from the ITA exempting Pagaya, Merger Sub and their respective agents from any obligation to withhold Israeli tax from the Merger Consideration payable or otherwise deliverable to EJFA Shareholders and holders of EJFA Warrants, and deferring the taxable event to the time of the sale of the shares or warrants. In case such tax ruling is not timely obtained or does not cover all EJFA Shareholders and holders of EJFA Warrants, according to the Merger Agreement, any EJFA Shareholder or holder of EJFA Warrants that owns at least 5% of EJFA Ordinary Shares (expected to be determinated in accordance with Rule 13d-3 of the Exchange Act) or is a resident of Israel will be subject to tax withholding in Israel, unless an exemption certificate from the ITA is provided by such EJFA Shareholder or holder of EJFA Warrants.
No assurance can be given that the tax ruling will be obtained or that the ITA will exempt Pagaya, Merger Sub and their respective agents from any obligation to withhold Israeli tax. In the event that such tax ruling is not obtained prior to the payment of the Merger Consideration, Israeli tax withholding may be required with respect to payments made to certain shareholders who do not obtain an exemption certificate from the ITA, by that time. The tax consequences of the Merger are complex and will depend on your particular circumstances. For a more detailed discussion, see the section titled “Certain Material Israeli Tax Considerations.”
Q: | Under Israeli law, what are the material Israeli income tax consequences of the other transactions that will happen in connection with the Merger? |
A: | Each of the Preferred Share Conversion and Reclassification (including reclassifying Pagaya Ordinary Shares into Pagaya Class B Ordinary Shares) may be treated as a taxable event in Israel for some or all of the Pagaya Shareholders. Furthermore, the reclassification of the ordinary shares underlying the Pagaya Options into Pagaya Class A Ordinary Shares may cause the holders of such options to lose their eligibility for a reduced tax rate under the ITO and the Pagaya Share Plans with respect to such options. However, Pagaya has applied for a tax ruling from the ITA exempting the Pagaya Shareholders from such Israeli tax and preventing the option holders from losing their tax benefits. |
No assurance can be given that the tax ruling will be obtained or that the ITA will not classify the Merger, the Preferred Share Conversion or the Reclassification as taxable events. The tax consequences of the Merger and the other transactions that will happen in connection with the Merger are complex and will depend upon, among other things, your particular circumstances. For a more detailed discussion, see the section titled “Certain Material Israeli Tax Considerations.”
Q: | What are the U.S. federal income tax consequences of exercising my redemption rights? |
A: | The U.S. federal income tax consequences of exercising your redemption rights are complex and depend on your particular facts and circumstances. For a discussion of the U.S. federal income tax considerations of exercising your redemption rights, see the section of this proxy statement/prospectus entitled “U.S. Federal Income Tax Considerations—Exercise of redemption rights.” If you are a U.S. Holder of EJFA Ordinary Shares contemplating to exercise of your redemption rights, you are urged to consult your tax advisor to determine the tax consequences thereof. |
Q: | Who can help answer my questions? |
A: | If you have questions about the Merger or if you need additional copies of this proxy statement/prospectus or the enclosed proxy card, you should contact: |
Tel:
Attn:
Email:
or the proxy solicitor at:
You may also obtain additional information about EJFA from documents filed with the SEC by following the instructions in the section of this proxy statement/prospectus entitled “Where You Can Find More
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Information.” If you are a holder of EJFA Public Shares and you intend to seek redemption of your shares, you will need to deliver your shares (either physically or electronically) to the EJFA Transfer Agent at the address below at least two Business Days prior to the vote at the Special Meeting. If you have questions regarding the certification of your position or delivery of your shares, please contact:
Continental Stock Transfer & Trust Company
1 State Street, 30th Floor
New York, New York 10004
Email: cstmail@contintentalstock.com
Tel: (212) 509-4000
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This summary highlights selected information from this proxy statement/prospectus and does not contain all of the information that is important to you. You should carefully read the entire proxy statement/prospectus and the other documents referred to in this proxy statement/prospectus, including the annexes and exhibits, to fully understand the Merger Agreement, the Transactions, including the Merger, and the other matters being considered at the Special Meeting. For additional information, see the section of this proxy statement/prospectus entitled “Where You Can Find More Information.” Each item in this summary refers to the page of this proxy statement/prospectus on which that subject is discussed in more detail.
Information about the companies (page 173)
Pagaya Technologies Ltd.
Pagaya makes life-changing financial products and services available to more people.
Pagaya has built, and is continuing to scale, a leading artificial intelligence (“AI”) and data network for the benefit of financial services providers, their customers, and asset investors. Financial services providers integrated in Pagaya’s network, which are referred to as Pagaya’s “Partners,” range from high-growth financial technology companies to incumbent financial institutions, auto finance providers and brokers. Partners utilize Pagaya’s network to extend financial products to their customers, in turn helping those customers fulfill their financial needs and dreams. These assets originated by Partners with the assistance of Pagaya’s AI technology are acquired by Financing Vehicles.
In recent years, investments in digitization have improved the front-end delivery of financial products, upgrading customer experience and convenience. Notwithstanding these advances, Pagaya believes underlying approaches to the determination of credit fitness for financial products are often outdated and overly manual. In Pagaya’s experience, providers of financial services tend to utilize a limited number of factors to make decisions, operate with siloed technology infrastructure and have data limited to their own experience. As a result, Pagaya believes financial services providers approve a smaller proportion of their application volume than is possible with the benefit of modern technology, such as Pagaya’s AI technology and network.
Pagaya is a technology company that deploys sophisticated data science, machine learning and AI technology to drive better results. Partners utilize Pagaya’s centralized AI and data network to evaluate their customers’ applications in real time. Pagaya believes this solution measures risk and predicts behavior more accurately than legacy approaches, and Pagaya’s performance continuously improves as more information flows through its network. Further, Partners integrate seamlessly through Application Programming Interfaces (“APIs”), providing them with access to Pagaya’s proprietary technology with minimal latency and no significant upfront investment.
Pagaya was founded in 2016 and is organized under the laws of the State of Israel. The mailing address of Pagaya’s principal executive office is Azrieli Sarona Bldg, 54th Floor, 121 Derech Menachem Begin, Tel-Aviv, 6701203, Israel and its phone number is +972 (3) 715 0920.
EJFA
EJFA is a blank check company incorporated on December 22, 2020 as a Cayman Islands exempted company and incorporated for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses.
On March 1, 2021, EJFA consummated its initial public offering of 28,750,000 EJFA Units, which includes the exercise by the underwriters of their over-allotment option in the amount of 3,750,000 EJFA Units, at a price of $10.00 per EJFA Unit, generating aggregate gross proceeds of $287,500,000. Each EJFA Unit consists of one EJFA Class A Ordinary Share, and one-third of one EJFA Public Warrant. The EJFA Units sold in the EJFA IPO were registered under the Securities Act on a registration statement on Form S-1 (No. 333-252892), which the SEC declared effective on February 9, 2021. Simultaneously with the closing of the EJFA IPO, EJFA consummated the sale of 5,166,667 EJFA Private Placement Warrants to the Sponsor at a price of $1.50 per EJFA Private Placement Warrant, generating total proceeds of $7,750,000. Each EJFA Warrant entitles the holder to purchase one EJFA Class A Ordinary Share at an exercise price of $11.50 per EJFA Class A Ordinary Share, subject to adjustment.
The EJFA Units, EJFA Class A Ordinary Shares and EJFA Warrants are listed on Nasdaq under the symbols EJFAU, EJFA and EJFAW, respectively.
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The mailing address of EJFA’s principal executive office is 2107 Wilson Boulevard, Suite 410, Arlington, Virginia 22201, and its telephone number is (703) 879-3292. After the consummation of the transactions, EJFA’s principal executive office will be that of Pagaya.
The Merger Agreement (page 138)
The following summary of the Merger Agreement is qualified in its entirety by reference to the complete text of the Merger Agreement, a copy of attached as Annex A to this proxy statement/prospectus.
Expected pro forma ownership
It is anticipated that, upon completion of the Transactions, the Pagaya Ordinary Shares issued to the EJFA Shareholders, including the Sponsor, as Merger Consideration will represent an ownership interest (excluding EJFA Warrants, Pagaya Options and outstanding Pagaya Warrants) in Pagaya of approximately 5.0% and 1.0%, assuming the no redemption scenario and the maximum redemption scenario, respectively (representing approximately 2.0% and 1.0% of the voting power of the Pagaya Ordinary Shares under the no redemption and the maximum redemption scenario, respectively). Pagaya Ordinary Shares held by Pagaya Shareholders immediately prior to the Effective Time (but after giving effect to the Stock Split) will represent an ownership interest in Pagaya of approximately 95.0% and 99.0%, assuming the no redemption scenario and the maximum redemption scenario, respectively (representing approximately 98.0% and 99.0% of the voting power of the Pagaya Ordinary Shares under the no redemption and the maximum redemption scenario, respectively). These percentages include the Pagaya Ordinary Shares that will be held by the Sponsor and certain directors and advisors of EJFA and their permitted transferees but that will be subject to price-based transfer restrictions. These percentages do not account for the outstanding Pagaya Options, Pagaya Warrants, or EJFA Warrants. See the section of this proxy statement/prospectus entitled “Proposal One—The Business Combination Proposal—Pro Forma Capitalization” for further information.
The Merger
At the Closing, Merger Sub will merge with and into EJFA, with EJFA surviving as a wholly-owned subsidiary of Pagaya. In addition, at the Effective Time, (i) each EJFA Unit will be automatically separated and become one EJFA Class A Ordinary Share and one-third of one EJFA Public Warrant, (ii) each EJFA Class B Ordinary Share issued and outstanding immediately prior to the Effective Time (other than Excluded Shares) will be converted into the right to receive one Pagaya Class A Ordinary Share, (iii) each EJFA Class A Ordinary Share issued and outstanding immediately prior to the Effective Time (after giving effect any EJFA Shareholder Redemption and other than Excluded Shares) will be converted into the right to receive one Pagaya Class A Ordinary Share, and (iv) each EJFA Warrant outstanding immediately prior to the Effective Time will be converted into one Pagaya Warrant.
Pre-Closing Capital Restructuring
Prior to the Effective Time, subject to receiving the Pagaya Shareholder Approval, Pagaya intends to (i) effect the Preferred Share Conversion, pursuant to which Pagaya will convert the then issued and outstanding Pagaya Preferred Shares into Pagaya Ordinary Shares in accordance with Pagaya’s organizational documents, (ii) adopt the Pagaya A&R Articles, (iii) effect the Stock Split, pursuant to which Pagaya Ordinary Shares will split into such number of Pagaya Ordinary Shares calculated in accordance with the terms of the Merger Agreement such that each Pagaya Ordinary Share will have a value of $10.00 per share, and (iv) effect the Reclassification, pursuant to which the Founders (in their capacity as shareholders of Pagaya) will receive Pagaya Class B Ordinary Shares, no par value, which will carry voting rights in the form of 10 votes per share of Pagaya and the other pre-Closing Pagaya Shareholders will receive Pagaya Class A Ordinary Shares, no par value, which will carry voting rights in the form of one vote per share of Pagaya, in accordance with the organizational documents of Pagaya.
The EJFA Board’s Reasons for the Merger (page 126)
The EJFA Board, in evaluating the Transactions, consulted with EJFA’s management and financial and legal advisors. In reaching its unanimous resolution (i) that the Merger Agreement and the transactions contemplated thereby are in the best interests of EJFA and its shareholders and (ii) to recommend that the shareholders adopt the Merger Agreement and approve the Merger and the Transactions, the EJFA Board considered a range of
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factors, including, but not limited to, the factors discussed below. In light of the number and wide variety of factors considered in connection with its evaluation of the Transactions, the EJFA Board did not consider it practicable to, and did not attempt to, quantify or otherwise assign relative weights to the specific factors that it considered in reaching its determination and supporting its decision. The EJFA Board viewed its decision as being based on all of the information available and the factors presented to and considered by it. In addition, individual directors may have given different weight to different factors. This explanation of EJFA’s reasons for the Transactions and all other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed under “Cautionary Statement Regarding Forward-Looking Statements; Market, Ranking and Other Industry Data.”
The EJFA Board considered a number of factors pertaining to the Transactions as generally supporting its decision to enter into the Merger Agreement and the Transactions, including, but not limited to, the following material factors:
• | Business Model. Pagaya is a financial technology company that the EJFA Board considered to be well-positioned to reshape the lending marketplace by using machine learning, big data analytics, and sophisticated AI-driven credit and analysis technology. |
• | Competitive Landscape. Pagaya is an early mover in using machine learning and other sophisticated data analysis techniques to assist its Partners in credit decisions and therefore enjoys a competitive advantage. Pagaya’s proprietary AI solutions and Partner relationships provide a strong differentiating factor from other competitors. |
• | Technology and AI. Pagaya’s business is driven by its proprietary AI and deep bench of data scientists. Pagaya has a highly accomplished technology and data team with a track record of innovation likely to further drive Pagaya’s success. |
• | Pagaya Management Team. Led by its Co-Founder and Chief Executive Officer Gal Krubiner, Co-Founder and Chief Technology Officer Avital Pardo, Co-Founder and Chief Revenue Officer Yahav Yulzari, and Chief Financial Officer Michael Kurlander, Pagaya has built a strong management team with extensive experience in the fintech space. |
• | Pagaya’s Business Performance. Pagaya has quickly achieved scale with its products and continues to demonstrate impressive growth. This is particularly impressive, given that Pagaya’s business was founded only four years ago. |
• | EJFA and Pagaya Combination Benefits. Pagaya’s potential public company status following the consummation of the Transactions, combined with the capital to be provided from the PIPE Investment, is expected to provide Pagaya with substantial support for further scaling its network. EJFA’s leadership in the finance space will help Pagaya further grow and identify attractive partnerships. |
• | Financial Performance and Valuation. EJFA has evaluated the performance of Pagaya and believes the valuation in the Transactions is attractive, including as the valuation is compared to competitor firms. |
• | Due Diligence. EJFA conducted due diligence examinations of Pagaya, including financial, accounting, tax, legal (including corporate governance, indebtedness, real property, intellectual property, executive compensation and labor, anti-trust/regulatory, litigation and asset management), industry, data science/artificial intelligence, management background and technical due diligence. |
• | Lock-Up. Following the Closing, all shares of the post-Closing combined company issued to the Pagaya Equity Holders (including those issued to the Founders) will be subject to a lock-up period of between 90 days and 12 months depending, among other things, upon whether the shares of the post-Closing combined entity trade for over $12.50 for any 20 trading days within a 30 consecutive trading day period on the principal securities exchange or securities market on which the Pagaya Class A Ordinary Shares are then traded or quoted for purchase and sale (anticipated to be Nasdaq). |
• | Fairness Opinion. The Opinion delivered by Duff & Phelps to the EJFA Board to the effect that, as of September 14, 2021 and based upon and subject to the assumptions made, scope of analysis considered, matters evaluated and other qualifications and limitations set forth therein, the Merger Consideration to be paid to the EJFA Shareholders (excluding the Excluded Shareholders) pursuant to the Transactions was fair, from a financial point of view, to such EJFA Shareholders. |
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• | Other Alternatives. The EJFA Board believes, after a thorough review of other business combination opportunities reasonably available to EJFA, that the proposed Transactions represent the best potential business combination for EJFA that is currently available in the market. |
The EJFA Board also considered a variety of uncertainties and risks and other potentially negative factors concerning the Transactions, including, but not limited to, the following:
• | Lack of Operating History. Pagaya was founded only four years ago. Thus, although it has shown impressive performance over that period, Pagaya does not have a long and proven operating history. In particular, Pagaya has not operated its business during a credit downturn. |
• | Valuation Depends on Future Performance. The valuation of Pagaya agreed to in the Transactions depends in large part on Pagaya’s performance in calendar years 2021, 2022 and 2023. Although the EJFA Board believes that this valuation is fair, and received the Opinion from Duff & Phelps confirming, as of September 14, 2021 and based upon and subject to the assumptions made, scope of analysis considered, matters evaluated and other qualifications and limitations set forth therein, the same, there is risk that, if Pagaya does not perform as expected in 2021 and 2022, the valuation agreed to by the EJFA Board will be too high. |
• | Public Company Readiness. While EJFA believes Pagaya has a strong management team, the management team has limited experience managing a public company. Additionally, management and Pagaya’s infrastructure will need to mature quickly to support Pagaya as a public company. |
• | Execution of Growth Plan. Pagaya has a strong pipeline with large regional and money center banks, but slower sales conversion could delay the continued strong growth rate. |
• | Access to Funding. Pagaya has secured diversified funding access with multiple Financing Vehicles, but these sources need to expand materially in the future to allow Pagaya to execute on its aggressive growth strategy across asset classes and with larger partners. |
• | Consumer Credit and Macroeconomic Conditions. Consumer credit performance has received a boost in the last 18 months, with extended government support in the form of credits and unemployment payments, but performance in the coming years is dependent on a robust post-COVID-19 recovery. |
• | Limitations of Due Diligence. Although EJFA conducted due diligence on Pagaya, the scope of its review was limited by the time available, the materials provided by Pagaya and the inherent uncertainties in any due diligence process. Accordingly, there can be no assurance that EJFA discovered all material issues that may be present with regard to Pagaya’s business, or that factors outside of EJFA’s or Pagaya’s control will not later arise. |
• | Difficulty in Protecting, Maintaining and Enforcing Intellectual Property and other Proprietary Rights. Pagaya relies on AI and other proprietary data analysis techniques to assist its Partners in making credit decisions. This technology is core to Pagaya’s business. Pagaya may be unable to sufficiently, and it may be difficult and costly to, obtain, maintain, protect, or enforce its intellectual property and other proprietary rights effectively. As such, it is possible that competitors could develop similar or superior technology, or key personnel at Pagaya could leave the business and use their personal knowledge in a competitive fashion. |
• | Changes in Regulations. EJFA has conducted diligence into Pagaya’s operations based on the current regulatory landscape, but legislation and regulations that affect Pagaya’s core business may change. |
• | Closing Conditions. The fact that the completion of the Transactions is conditioned on the satisfaction of certain closing conditions that are not within EJFA’s control. |
• | Liquidation of EJFA. The risks and costs to EJFA if the Transactions are not completed, including the risk of diverting management focus and resources from other business combination opportunities. |
• | Litigation: The possibility of litigation challenging the business combination or that an adverse judgment granting permanent injunctive relief could indefinitely enjoin consummation of the Merger. |
• | Fees and Expenses: The fees and expenses associated with completing the business combination. |
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• | Additional Risks and Uncertainties. EJFA also considered other risks of the type and nature described under the section of this proxy statement/prospectus entitled “Risk Factors.” |
The EJFA Board concluded that the potential benefits that it expected EJFA and its shareholders to achieve as a result of the Merger outweighed the potentially negative factors associated with the Transactions. Accordingly, the EJFA Board unanimously determined that the Merger Agreement and the Transactions were in the best interests of EJFA and its shareholders.
Interests of Certain Persons in the Business Combination (page 131)
In considering the recommendation of the EJFA Board to vote in favor of approval of the Business Combination Proposal and the Merger Proposal, EJFA Shareholders should keep in mind that the Sponsor and EJFA’s directors and executive officers have interests in such proposals that are different from, or in addition to, those of EJFA Shareholders generally. In particular:
• | If the Merger with Pagaya or another business combination is not consummated by March 1, 2023 (or such later date as may be approved by EJFA Shareholders in an amendment to the EJFA Memorandum and Articles of Association), EJFA will cease all operations except for the purpose of winding up, redeeming 100% of the outstanding EJFA Public Shares for cash and, subject to the approval of its remaining shareholders and the EJFA Board, dissolving and liquidating. On the other hand, if the Merger is consummated, each outstanding EJFA Ordinary Share will be converted into one Pagaya Class A Ordinary Share, subject to adjustment as described herein. |
• | If EJFA is unable to complete a business combination within the required time period, the Sponsor will be liable under certain circumstances described herein to ensure that the proceeds in the Trust Account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by EJFA for services rendered or contracted for or products sold to EJFA. If EJFA consummates a business combination, on the other hand, EJFA will be liable for all such claims. |
• | The Sponsor and EJFA’s officers and directors and their affiliates are entitled to reimbursement of out-of-pocket expenses incurred by them in connection with certain activities on EJFA’s behalf, such as identifying and investigating possible business targets and business combinations. However, if EJFA fails to consummate a business combination within the required period, they will not have any claim against the Trust Account for reimbursement. Accordingly, EJFA may not be able to reimburse these expenses if the Merger or another business combination is not completed by March 1, 2023 (or such later date as may be approved by EJFA Shareholders in an amendment to the EJFA Memorandum and Articles of Association). As of the Record Date, the Sponsor and EJFA’s officers and directors and their affiliates had incurred approximately $ of unpaid reimbursable expenses. |
• | The Merger Agreement provides for the continued indemnification of EJFA’s current directors and officers and the continuation of directors and officers liability insurance covering EJFA’s current directors and officers. |
• | Subject to Pagaya’s consent in accordance with the Merger Agreement, the Sponsor and EJFA’s officers and directors (or their affiliates) may make loans from time to time to EJFA to fund certain capital requirements. Loans may be made after the date of this proxy statement/prospectus. If the Merger is not consummated, the loans will not be repaid and will be forgiven except to the extent there are funds available to EJFA outside of the Trust Account. |
• | Emanuel Friedman will be a member of the Pagaya Board following the Closing and, therefore, in the future Mr. Friedman will receive any cash fees, stock options or stock awards that the Pagaya Board determines to pay to its non-executive directors. |
• | The EJF Investor will participate in the purchase of PIPE Shares from Pagaya at the closing of the Transactions, and certain of EJFA’s directors and officers are affiliated with the EJF Investor. |
• | Duff & Phelps, a Kroll Business, rendered the Opinion to the EJFA Board, for which it will receive a fee from EJFA. A portion of such fee was payable upon delivery of the Opinion and a portion is payable upon and subject to the Closing. |
• | Pagaya, EJFA and the Sponsor entered into the Side Letter Agreement, which provides that, solely in the event the EJFA Transaction Costs exceed the Expenses Excess Amount, a number of EJFA Class B |
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Ordinary Shares will be forfeited for no consideration and cancelled by EJFA and no longer outstanding, except that the Sponsor may pay, in whole or in part, the EJFA Transaction Costs in cash prior to the Effective Time without further liability to EJFA, in which case the Expenses Excess Amount will be reduced on a dollar-for-dollar basis by the amount so paid by the Sponsor.
• | Given the difference in the purchase price the Sponsor paid for EJFA Class B Ordinary Shares ($0.003 per share) and EJFA Private Placement Warrants ($1.50 per Warrant) as compared to the purchase price of the EJFA Units sold in the EJFA IPO ($10.00 per EJFA Unit), the Sponsor may earn a positive return on its investment even if the EJFA Public Shareholders experience a negative rate of return following the consummation of the business combination. |
• | Certain directors and officers of EJFA, as well as certain partners and employees of EJF Capital, hold equity interests in the Sponsor, and thus have an interest in the business combination transaction that is not the same as the majority of EJFA Shareholders, who do not hold equity interests in the Sponsor. |
• | In connection with the consummation of the business combination, the Sponsor, EJFA, Pagaya and certain equityholders of Pagaya will enter into a new Registration Rights Agreement, which will, among other things, provide that the Sponsor and certain equity holders will have a demand right for Pagaya to conduct an underwritten offering of the Registrable Securities (as defined below), provided that the total offering price of all securities proposed to be sold in such offering exceeds $75 million in the aggregate and subject to certain limitations. |
• | Each of EJFA’s directors and officers presently has fiduciary or contractual obligations to other entities pursuant to which such officer or director is required to present a business combination opportunity to such entity. EJFA’s directors and officers also may have become aware of business combination opportunities which may have been appropriate for presentation to EJFA and the other entities to which they owe certain fiduciary or contractual duties. Accordingly, they may have had conflicts of interest in determining to which entity a particular business opportunity should have been presented. These conflicts may not have been resolved in EJFA’s favor and such potential business combination opportunities may have been presented to other entities prior to their presentation to EJFA. The EJFA Memorandum and Articles of Association provide that, to the maximum extent permitted by applicable law, EJFA renounces any interest or expectancy in, or in being offered an opportunity to participate in, any potential transaction or matter (i) which may be a business combination opportunity for an entity related to a director or officer of EJFA, on the one hand, and EJFA, on the other, or (ii) the presentation of which would breach an existing legal obligation of a director or officer to another entity, and EJFA waives any claim or cause of action it may have in respect thereof. EJFA does not believe, however, that the fiduciary duties or contractual obligations of its officers or directors or waiver of corporate opportunity materially affected its search for an acquisition target nor will materially impact its ability to complete the proposed Merger. |
These financial interests of the officers and directors may have influenced their decision to approve the Merger. You should consider these interests when evaluating the Transactions and the recommendation of the proposal to vote in favor of the Business Combination Proposal and the Merger Proposal to be presented to EJFA Shareholders.
Agreements Relating to the Merger Agreement (page 155)
In connection with the Merger, certain related agreements have been, or will be entered into on or prior to the Closing Date, including:
Subscription Agreements
In connection with the execution of the Merger Agreement, Pagaya and the EJF Investor entered into the EJF Subscription Agreement, pursuant to which the EJF Investor committed to purchase, in the aggregate, up to 20 million Pagaya Class A Ordinary Shares at $10.00 per share for an aggregate commitment amount of up to $200 million. The obligation of the parties to consummate the PIPE Investment under the EJF Subscription Agreement is conditioned upon, among other things, the conditions to the Closing having been satisfied. Subsequently, Pagaya also entered into additional subscription agreements with certain other investors, pursuant to which, on the terms and subject to the conditions set forth in such subscription agreements, such investors
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have agreed to purchase, and Pagaya has agreed to sell to them, 22.2 million Pagaya Class A Ordinary Shares at a purchase price of $10.00 per share, which shares reduced the foregoing commitment of the EJF Investor by 7.2 million shares. The closing of the PIPE Investment is expected to occur substantially concurrently with the Closing.
Side Letter Agreement
Concurrently with the execution of the Merger Agreement, Pagaya, EJFA and the Sponsor entered into the Side Letter Agreement, which provides that, solely in the event the EJFA Transaction Costs exceed $45 million, a number of EJFA Class B Ordinary Shares equal to the quotient of (i) the Expenses Excess Amount divided by (ii) $10.00 (subject to equitable adjustment) will be forfeited for no consideration and cancelled by EJFA and no longer outstanding, except that the Sponsor may pay, in whole or in part, the EJFA Transaction Costs in cash prior to the Effective Time without further liability to EJFA, in which case the Expenses Excess Amount will be reduced on a dollar-for-dollar basis by the amount so paid by the Sponsor.
Lockup Arrangements
The Merger Agreement contemplates that Pagaya will adopt the Pagaya A&R Articles, to be effective immediately prior to the Reclassification. The Pagaya A&R Articles contemplate certain lock-up arrangements to become effective as of the Effective Time. Pursuant to such lock-up arrangements, Pagaya Equity Holders, the Sponsor and the directors and advisors of EJFA holding EJFA Class B Ordinary Shares and their permitted transferees may not directly or indirectly transfer their Lock-Up Shares during their applicable lock-up period described below, subject to certain exceptions, terms and conditions as set forth in the Pagaya A&R Articles.
Following the Closing, (i) the Lock-Up Shares held by Pagaya Equity Holders and their permitted transferees may not be transferred (except to a permitted transferee and subject to certain exceptions) until (a) with respect to 50% of the Pagaya Ordinary Shares held by each such Pagaya Equity Holder (or their permitted transferee) on the Closing Date, on the earlier of (1) the date that is six months following the Closing Date and (2) the date on which the VWAP equals or exceeds $12.50 for any 20 trading days within any 30 consecutive trading day period commencing on the Closing Date, and (b) with respect to the remaining 50% of the Pagaya Ordinary Shares held by such Pagaya Equity Holder (or their permitted transferee) on the Closing Date, on the earlier of (1) the date that is 12 months following the Closing Date and (2) the date on which the VWAP equals or exceeds $12.50 for any 20 trading days within any 30 consecutive trading day period commencing on the Closing Date and (ii) the Lock-Up Shares held by the Sponsor and the directors and advisors of EJFA holding EJFA Class B Ordinary Shares and their permitted transferees may not be transferred (except to a permitted transferee and subject to certain exceptions) until the earlier of (a) the date that is 12 months following the Closing Date and (b) the date on which the VWAP equals or exceeds $12.50 for any 20 trading days within any 30 consecutive trading day period, except the lock-up restrictions will not be lifted pursuant to (i)(a)(2) above prior to the date that is 90 days following the Closing Date and will not be lifted pursuant to (i)(b)(2) or (ii)(b) above prior to the date that is 180 days following the Closing Date.
Pagaya Voting Agreement
Concurrently with the execution of the Merger Agreement, EJFA and certain of the pre-Closing Pagaya Shareholders entered into the Pagaya Voting Agreement, pursuant to which each of those Pagaya Shareholders have agreed to, among other things, at any Pagaya Shareholders meeting at which the matters described in (iv) and (v) below are considered, (i) appear or otherwise cause Pagaya securities that are held by such Pagaya Shareholders and related to which such Pagaya Shareholders are entitled to vote (collectively, the “Pagaya Voting Shares”) to be counted as present at such meeting for the purpose of establishing a quorum; (ii) vote or cause to be voted the Pagaya Voting Shares; (iii) execute a written consent or consents if Pagaya Shareholders are requested to vote their shares through the execution of an action by written consent; (iv) vote all Pagaya Voting Shares in favor of the Pagaya Shareholder Matters, and any other matter reasonably necessary to the consummation of the Transactions and considered and voted upon by the Pagaya Equity Holders; and (v) vote all Pagaya Voting Shares against (A) any proposal or offer from any person (other than EJFA or any of its affiliates) concerning (1) a merger, consolidation, liquidation, recapitalization, share exchange or other business combination transaction involving Pagaya, (2) the issuance or acquisition of shares or other equity securities of Pagaya, or (3) the sale, lease, exchange or other disposition of any significant portion of Pagaya’s properties or assets; (B) any action, proposal, transaction or agreement that could reasonably be expected to result in a breach
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of any covenant or obligation of Pagaya set forth in the Merger Agreement or any other transaction agreement, or in any representation or warranty of Pagaya set forth in the Merger Agreement or any other transaction agreement becoming inaccurate; and (C) any action, proposal, transaction or agreement that could reasonably be expected to impede, interfere with, delay, discourage, adversely affect or inhibit the timely consummation of the Transactions or the fulfillment of Pagaya’s conditions under the Merger Agreement or any other transaction agreement or change in any manner the voting rights of any class of shares of Pagaya (including any amendments to Pagaya’s governing documents), except as contemplated by the Pagaya Voting Agreement. In addition, the Pagaya Shareholders party to the Pagaya Voting Agreement agreed not to transfer, directly or indirectly, any of their Pagaya Voting Shares until the earlier of the Effective Time and the date on which the Merger Agreement is terminated in accordance with its terms, subject to certain exceptions.
EJFA Voting Agreement
Concurrently with the execution of the Merger Agreement, Pagaya and the Sponsor entered into the EJFA Voting Agreement, pursuant to which the Sponsor and the directors and advisors of EJFA holding EJFA Class B Ordinary Shares and their permitted transferees have agreed to, among other things, at any meeting of EJFA Shareholders at which the matters described in (iv) and (v) below are considered, (i) appear or otherwise cause EJFA securities that are held by the Sponsor or such directors or advisors of EJFA or their permitted transferees and related to which such EJFA Shareholders are entitled to vote (collectively, the “EJFA Voting Shares”) to be counted as present at such meeting for the purpose of establishing a quorum; (ii) vote or cause to be voted the EJFA Voting Shares, (iii) execute a written consent or consents if EJFA Shareholders are requested to vote their shares through the execution of an action by written consent; (iv) vote all EJFA Voting Shares in favor of the EJFA Shareholder Proposals, including the EJFA Shareholder Matters, and any other matter reasonably necessary to the consummation of the Transactions and considered and voted upon by equityholders of EJFA; and (v) vote all EJFA Voting Shares against (A) any proposal or offer from any person (other than Pagaya or any of its affiliates) concerning (1) a merger, consolidation, liquidation, recapitalization, share exchange or other business combination transaction involving EJFA, (2) the issuance or acquisition of shares or other equity securities of EJFA, or (3) the sale, lease, exchange or other disposition of any significant portion of EJFA’s properties or assets; (B) any action, proposal, transaction or agreement that could reasonably be expected to result in a breach of any covenant or obligation of EJFA set forth in the Merger Agreement or any other transaction agreement, or in any representation or warranty of EJFA set forth in the Merger Agreement or any other transaction agreement becoming inaccurate; and (C) any action, proposal, transaction or agreement that could reasonably be expected to impede, interfere with, delay, discourage, adversely affect or inhibit the timely consummation of the Transactions or the fulfillment of EJFA’s conditions under the Merger Agreement or any other transaction agreement or change in any manner the voting rights of any class of shares of EJFA (including any amendments to EJFA’s governing documents), except as contemplated by the EJFA Voting Agreement. In addition, the Sponsor and the directors and advisors of EJFA holding EJFA Class B Ordinary Shares and their permitted transferees have agreed not to transfer, directly or indirectly, any of their EJFA Voting Shares until the earlier of the Effective Time and the date on which the Merger Agreement is terminated in accordance with its terms, subject to certain exceptions.
Registration Rights Agreement
The Merger Agreement contemplates that, at the Effective Time, each of Pagaya, the Sponsor and certain Pagaya Shareholders (the Sponsor and such Pagaya Shareholders, collectively, the “Shareholder Parties” and each a “Shareholder Party”) as of immediately prior to the Merger will enter into the Registration Rights Agreement, pursuant to which Pagaya will agree to file a registration statement, by no later than 30 days following the Closing Date, to register the resale of the Pagaya Class A Ordinary Shares, including such shares issuable upon the exercise of warrants, held by Shareholder Parties as of the Closing Date (the “Registrable Securities”). The Registration Rights Agreement provides the Shareholder Parties with a demand right for Pagaya to conduct an underwritten offering of the Registrable Securities, provided that the total offering price of all securities proposed to be sold in such offering exceeds $75 million in the aggregate and subject to certain limitations.
In connection with the execution of the Registration Rights Agreement, the Registration and Shareholder Rights Agreement, dated February 24, 2021, by and between the Sponsor and EJFA and the Registration Rights Agreement, dated March 17, 2021, by and between Pagaya and certain Pagaya Shareholders, will automatically terminate and be of no further force and effect as of the Closing Date. The Registration Rights Agreement will terminate on the earliest of (a) the tenth anniversary of the date of the Registration Rights Agreement, (b) any
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acquisition of Pagaya after the Merger, as a result of which the Registrable Securities are converted into the right to receive consideration consisting solely of cash or other property other than securities listed on a national securities exchange registered under Section 6 of the Exchange Act or (c) with respect to any Shareholder Party, on the date that such Shareholder Party no longer holds any Registrable Securities.
U.S. Federal Income Tax Considerations (page 159) and Certain Material Israeli Tax Considerations (page 167)
As described in the section of this proxy statement/prospectus entitled “U.S. Federal Income Tax Considerations” significant uncertainty exists as to the tax-free treatment of the Merger to U.S. Holders of EJFA Ordinary Shares and EJFA Public Warrants for U.S. federal income tax purposes.
For a description of Israeli tax consequences of the ownership and disposition of Pagaya Ordinary Shares and/or Pagaya Warrants, please see the information set forth in “Certain Material Israeli Tax Considerations.”
Holders of EJFA Ordinary Shares and EJFA Public Warrants should read carefully the information included under the sections of this proxy statement/prospectus entitled “U.S. Federal Income Tax Considerations” and “Certain Material Israeli Tax Considerations” for a more detailed discussion of U.S. federal tax considerations of the Merger, including the receipt of cash pursuant to the exercise of redemption rights, and the U.S. federal and Israeli tax considerations of the ownership and disposition of Pagaya Ordinary Shares and Pagaya Warrants after the Merger. Holders of EJFA Ordinary Shares and EJFA Public Warrants should consult their own tax advisors to determine the tax consequences to them (including the application and effect of any state, local or other income and other tax laws) of the Merger, and prospective holders of Pagaya Ordinary Shares and Pagaya Warrants should consult their own tax advisors to determine the tax consequences (including the application and effect of any state, local or other income and other tax laws) of any acquisition, holding, redemption and disposal of Pagaya Ordinary Shares or any acquisition, holding, exercise or disposal of Pagaya Warrants.
Special Meeting of EJFA Shareholders—Redemption Rights (page 112)
Holders of EJFA Public Shares may seek to redeem all or a portion of their shares for cash if the Merger is consummated. Any holder of EJFA Public Shares may demand that EJFA redeem such shares for a full pro rata portion of the Trust Account, calculated as of two Business Days prior to the anticipated consummation of the Merger. If an EJFA Shareholder properly seeks redemption as described in this section and the Merger is consummated, EJFA will redeem these shares for a pro rata portion of funds deposited in the Trust Account and the holder will no longer own these shares following the Merger. Holders will be entitled to receive cash for these shares only if they properly demand redemption no later than two Business Days before the Special Meeting by delivering your share certificate (if any) and other redemption forms (either physically or electronically) to Continental Stock Transfer & Trust Company, the EJFA Transfer Agent, prior to the vote at the Special Meeting, and the Merger is consummated.
Any request to redeem such shares, once made, may be withdrawn at any time prior to the Special Meeting. Furthermore, if a holder of EJFA Public Shares delivered its share certificate and other redemption forms in connection with an election of its redemption and subsequently decides prior to the applicable date not to elect to exercise such rights, it may simply request that the EJFA Transfer Agent return the certificate (physically or electronically).
Notwithstanding the foregoing, a holder of EJFA Public Shares, together with any affiliate of his or any other person with whom he is acting in concert or as a “group” (as defined in Section 13(d)(3) of the Exchange Act), will be restricted from seeking redemption rights with respect to more than 15% of the EJFA Public Shares. Accordingly, all EJFA Public Shares in excess of 15% held by an EJFA Public Shareholder, together with any affiliate of such holder or any other person with whom such holder is acting in concert or as a “group,” will not be redeemed for cash without EJFA’s prior consent.
Holders of EJFA Class B Ordinary Shares will not have redemption rights with respect to such shares.
Appraisal Rights (page 278)
The Companies Act prescribes when EJFA Shareholder appraisal rights will be available and sets the limitations on such rights. Where such rights are available, EJFA Shareholders are entitled to receive fair value for their shares. However, regardless of whether such rights are or are not available, EJFA Shareholders are still entitled to
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exercise the rights of redemption, as set out in the section of this proxy statement/prospectus entitled “Special Meeting of EJFA Shareholders–Redemption Rights”, and the EJFA Board is of the view that the redemption proceeds payable to EJFA Shareholders who exercise such redemption rights represents the fair value of those shares. See the section of this proxy statement/prospectus entitled “Appraisal Rights.”
Special Meeting of EJFA Shareholders—Record Date; Persons Entitled to Vote (page 110)
EJFA Shareholders will be entitled to vote or direct votes to be cast at the Special Meeting if they owned EJFA Ordinary Shares at the close of business on , which is the Record Date for the Special Meeting. EJFA Shareholders will have one vote for each EJFA Ordinary Share owned at the close of business on the Record Date. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker, bank or nominee to ensure that votes related to the shares you beneficially own are properly counted. Neither the EJFA Public Warrants nor the EJFA Private Placement Warrants have voting rights. On the Record Date, there were EJFA Ordinary Shares outstanding, of which were EJFA Public Shares. EJFA Public Warrants do not have voting rights. On the Record Date, there were EJFA Ordinary Shares outstanding, of which were EJFA Public Shares with the rest being EJFA Class B Ordinary Shares held by the Sponsor and directors and advisors of EJFA and their permitted transferees.
Proposal One – The Business Combination Proposal (page 117)
The EJFA Shareholders will consider and vote upon a proposal to approve and adopt the Merger Agreement, a copy of which is attached as Annex A to this proxy statement/prospectus, and the Transactions, whereby, among other things, Merger Sub will be merged with and into EJFA, with EJFA surviving the Merger as a wholly-owned subsidiary of Pagaya.
Proposal Two – The Merger Proposal (page 136)
The EJFA Shareholders will consider and vote upon a proposal to approve and authorize the Plan of Merger substantially in the form attached as Exhibit F to the Merger Agreement, which is attached as Annex A to this proxy statement/prospectus.
Proposal Three – The Adjournment Proposal (page 137)
The EJFA Shareholders will consider and vote upon a proposal to approve the adjournment of the Special Meeting to a later date or dates, if required, if the parties are not able to consummate the Transactions.
Recommendation of the EJFA Board (page 110)
The EJFA Board has determined that each of the Business Combination Proposal, the Merger Proposal and the Adjournment Proposal is in the best interests of EJFA and its shareholders and recommends that EJFA Shareholders vote “FOR” the Business Combination Proposal, “FOR” the Merger Proposal and “FOR” the Adjournment Proposal, if presented. When you consider the recommendations of the EJFA Board, you should keep in mind that EJFA’s directors and officers may have interests in the Merger that conflict with, or are different from, your interests as an EJFA Shareholder. See the section of this proxy statement/prospectus entitled “Proposal One—The Business Combination Proposal—Interests of Certain Persons in the Business Combination.”
Comparison of Rights of Pagaya Shareholders and EJFA Shareholders (page 255)
If the Transactions are successfully completed, EJFA Shareholders will become holders of Pagaya Ordinary Shares, and their rights as shareholders will be governed by Pagaya’s organizational documents and the laws of the State of Israel, which contain important differences from EJFA’s organizational documents and the corporate laws of the Cayman Islands. For more information, please see the section of this proxy statement/prospectus entitled “Comparison of Rights of Pagaya Shareholders and EJFA Shareholders.”
Emerging Growth Company (page F-81)
Each of EJFA and Pagaya is, and consequently, following the Merger, the post-Closing combined company is expected to be, an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, the post-Closing combined
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company is expected to be eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies”, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in the post-Closing combined company’s periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. If some investors find the post-Closing combined company’s securities less attractive as a result, there may be a less active trading market for the post-Closing combined company’s securities and the prices of the post-Closing combined company’s securities may be more volatile.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The post-Closing combined company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the post-Closing combined company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the post-Closing combined company’s financial statements with certain other public companies difficult or impossible because of the potential differences in accounting standards used.
The post-Closing combined company will remain an emerging growth company until the earlier of: (i) the last day of the fiscal year (a) following the fifth anniversary of the closing of the post-Closing combined company’s initial public offering, (b) in which Pagaya has annual total gross revenue of at least $1.07 billion, or (c) in which the post-Closing combined company is deemed to be a large accelerated filer, which means the market value of the post-Closing combined company’s ordinary equity that is held by non-affiliates exceeds $700 million as of the last business day of the second fiscal quarter of such fiscal year; and (ii) the date on which the post-Closing combined company has issued more than $1 billion in non-convertible debt securities during the prior three-year period. References herein to “emerging growth company” have the meaning associated with it in the JOBS Act.
Foreign Private Issuer Exemptions (page 235)
Pagaya expects to be a “foreign private issuer” under SEC rules following the consummation of the Merger. Consequently, Pagaya is expected to be subject to the reporting requirements under the Exchange Act applicable to foreign private issuers. As a result, Pagaya will not be required to file its annual report on Form 20-F until 120 days after the end of each fiscal year and Pagaya will furnish reports on Form 6-K to the SEC regarding certain information required to be publicly disclosed by Pagaya in Israel or that is distributed or required to be distributed by Pagaya to its shareholders. Based on its foreign private issuer status, Pagaya will not be required to (i) file periodic reports and financial statements with the SEC as frequently or as promptly as a U.S. company whose securities are registered under the Exchange Act, (ii) comply with Regulation FD, which addresses certain restrictions on the selective disclosure of material information or (iii) comply with SEC rules relating to proxy solicitation in connection with shareholder meetings and presentation of shareholder proposals. In addition, among other matters, based on its foreign private issuer status, Pagaya officers, directors and principal shareholders will be exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of Pagaya Ordinary Shares.
Regulatory Matters (page 132)
The completion of the Transactions is not subject to any U.S. federal or state regulatory requirement or approval, other than with respect to U.S. federal securities laws, the filing of required notifications and the expiration or termination of the required waiting periods under the HSR Act (which waiting period expired on November 12, 2021) and filings with the Registrar of Companies in the Cayman Islands necessary to effectuate the Merger.
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Anticipated Accounting Treatment of the Merger (page 212)
The Merger will be treated as follows:
• | The exchange of shares held by Pagaya Shareholders will be accounted for as a recapitalization in accordance with U.S. GAAP. The Merger is not within the scope of ASC 805 since EJFA does not meet the definition of a business in accordance with ASC 805. Any difference between the fair value of Pagaya Ordinary Shares issued and the fair value of EJFA’s identifiable net assets will to be recorded as additional paid-in capital. For purposes of the unaudited pro forma condensed combined financial information, it is assumed that the fair value of each individual Pagaya Ordinary Share issued to EJFA Shareholders is equal to the fair value of each individual Pagaya Ordinary Share issued to pre-Closing Pagaya Shareholders resulting from the $8.5 billion enterprise value assigned to Pagaya in the Merger Agreement. |
• | The PIPE Investment will result in the issuance of Pagaya Class A Ordinary Shares, leading to an increase in Pagaya Ordinary Shares, par value and additional paid-in capital. |
Proxy Solicitation Costs (page 113)
Proxies may be solicited by mail, telephone or in person. EJFA has engaged to assist in the solicitation of proxies.
If an EJFA Shareholder grants a proxy, it may still vote its shares in person if it revokes its proxy before the extraordinary general meeting. An EJFA Shareholder also may change its vote by submitting a later-dated proxy or vote electronically at the Special Meeting as described in the section of this proxy statement/prospectus entitled “Questions and Answers about the Transactions and the Special Meeting—Q: May I change my vote after I have mailed my signed proxy card?”
Sources and Uses for the Business Combination (page 211)
The following table summarizes the estimated sources and uses for funding the Merger and the Transactions (all amounts in millions). These figures assume that no EJFA Public Shareholders exercise their redemption rights in connection with the Merger and the Transactions. If the actual facts are different from these assumptions, the below figures will be different.
Sources | | | | | Uses | | | ||
Trust Account(1) | | | $287.5 | | | Estimated fees, issuance and other expenses(3) | | | $90.0 |
PIPE Investment proceeds(2) | | | $350.0 | | | Net cash to Pagaya balance sheet | | | $547.5 |
Total sources: | | | $637.5 | | | Total uses: | | | $637.5 |
(1) | Cash available in the Trust Account excludes amounts in excess of $10.00 per share and estimated interest earned by the Closing Date and remaining operating cash, if any. In the case of maximum redemption, all funds in the Trust Account will be utilized to fund such redemption and there will be no remaining balance. |
(2) | Assumes the issuance of 35,000,000 shares of Pagaya Class A Ordinary Shares at $10 per share for aggregate gross proceeds of $350.0 million in connection with the PIPE Investment. |
(3) | Represents an estimate of Transaction expenses. Actual amount may vary and may include expenses unknown at this time. |
Risk Factors (page 23)
Pagaya’s business and an investment in Pagaya Ordinary Shares are subject to numerous risks and uncertainties, including those highlighted in the section of this proxy statement/prospectus entitled “Risk Factors.” Some of those risks include:
• | We are a rapidly growing company with a relatively limited operating history, which may result in increased risks, uncertainties, expenses and difficulties, and it may be difficult to evaluate our future prospects. |
• | Our revenue growth rate and financial performance in recent periods may not be indicative of future performance and such growth may slow over time. In addition, the historical returns attributable to the Financing Vehicles should not be indicative of the future results of the Financing Vehicles and poor performance of the Financing Vehicles would cause a decline in our revenue, income and cash flow. |
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• | If we fail to effectively manage our growth, our business, financial condition, and results of operations could be adversely affected. |
• | Our business and the performance of Financing Vehicles may be adversely affected by economic conditions and other factors that we cannot control. These factors include interest rates, unemployment levels, conditions in the housing market, immigration policies, government shutdowns, trade wars and delays in tax refunds, as well as events such as natural disasters, acts of war, terrorism, catastrophes, and pandemics, including the ongoing COVID-19 pandemic. |
• | We are heavily dependent on our AI technology. If we are unable to continue to improve our AI technology or if our AI technology does not operate as we expect, contains errors or is otherwise ineffective, we could improperly evaluate products, not be able to process the volume we have historically, and our growth prospects, business, financial condition and results of operations could be adversely affected. |
• | We rely on our Partners to originate assets facilitated with the assistance of our AI technology. Currently, a limited number of Partners account for a substantial portion of the total number of financial products facilitated with the assistance of our AI technology and, ultimately, our revenue. |
• | If we are unable to both retain existing Partners and attract and onboard new Partners, our business, financial condition and results of operations could be adversely affected. |
• | Our ability to raise capital from Asset Investors is a vital component of the products we offer to Partners. If we are unable to raise capital from Asset Investors at competitive rates, it would materially reduce our revenue and cash flow and adversely affect our financial condition. |
• | The fees paid to us by Financing Vehicles comprise a key portion of our revenues, and a reduction in these revenues could have an adverse effect on our results of operations. |
• | If we are unable to develop and maintain a diverse and robust funding component of our network, our growth prospects, business, financial condition and results of operations could be adversely affected. In addition, certain Financing Vehicles have redemption features and a substantial withdrawal of capital by one or more Asset Investors may have an adverse effect on the Financing Vehicles’ performance. |
• | Our AI technology has not yet been extensively tested during different economic conditions, including down-cycles. We continue to build and refine our AI technology to offer new products and services as we expand into new markets, such as real estate and insurance, and if our AI technology does not perform as well in these new markets as it has in our existing business and we are unable to manage the related risks and effectively execute our growth strategy as we enter into these new lines of business, our growth prospects, business, financial condition and results of operations could be adversely affected. |
• | The industry in which we operate is highly competitive, and if we fail to compete effectively, we could experience price reductions, reduced margins or loss of revenues. |
• | A significant portion of our current revenues are derived from Financing Vehicles that acquire consumer credit assets and related products, and as a result, we are particularly susceptible to fluctuations in consumer credit activity and the capital markets. |
• | If we are unable to manage the risks associated with fraudulent activity, our brand and reputation, business, financial condition, and results of operations could be adversely affected and we could face material legal, regulatory and financial exposure (including fines and other penalties). |
• | We are subject to risks related to our dependency on our Founders, key personnel, employees and independent contractors, including highly-skilled technical experts, as well as attracting, retaining and developing human capital in a highly competitive market. |
• | We may need to raise additional funds in the future that may be unavailable on acceptable terms, or at all. As a result, we may be unable to meet our future capital requirements, which could limit our ability to grow and jeopardize our ability to continue our business. |
• | Our risk management policies and procedures, and those of our third-party vendors upon which we rely, may not be fully effective in identifying or mitigating risk exposure. |
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• | We may be unable to sufficiently, and it may be difficult and costly to, obtain, maintain, protect, or enforce our intellectual property and other proprietary rights. |
• | Our proprietary AI technology relies in part on the use of our Partners’ borrower data and third-party data, and if we lose the ability to use such data, or if such data contains gaps or inaccuracies, our business could be adversely affected. |
• | Cyberattacks and security breaches of our technology, or those impacting our users or third parties, could adversely impact our brand and reputation and our business, operating results and financial condition. |
• | The dual class structure of Pagaya Ordinary Shares has the effect of concentrating voting power with certain shareholders—in particular, our Founders—which will effectively eliminate your ability to influence the outcome of many important determinations and transactions, including a change in control. |
• | Litigation, regulatory actions, consumer complaints and compliance issues could subject us to significant fines, penalties, judgments, remediation costs and/or requirements resulting in increased expenses. If we are deemed to be an investment company under the Investment Company Act, we may be required to institute burdensome compliance requirements and our activities may be restricted, and our ability to consummate the Merger and conduct business could be materially adversely affected. |
• | As the political and regulatory framework for AI technology and machine learning evolves, our business, financial condition and results of operations may be adversely affected. |
• | If obligations by one or more Partners that utilize our network were subject to successful challenge that the Partner was not the “true lender,” such obligations may be unenforceable, subject to rescission or otherwise impaired, we or other program participants may be subject to penalties, and/or our commercial relationships may suffer, each of which would adversely affect our business, financial condition and results of operations. |
• | If loans originated by our Partners were found to violate the laws of one or more states, whether at origination or after sale by our Partner, assets acquired, directly or indirectly, by Financing Vehicles may be unenforceable or otherwise impaired, we (or Financing Vehicles) may be subject to, among other things, fines and penalties, and/or our commercial relationships may suffer, each of which would adversely affect our business and results of operations. |
• | Conditions in Israel and relations between Israel and other countries could adversely affect our business. |
• | Our management team has limited experience managing a public company. |
• | The unaudited pro forma financial information included in the section of this proxy statement/prospectus entitled “Unaudited Pro Forma Condensed Combined Financial Information” may not be representative of our results if the Merger is completed. Additionally, the projections and forecasts presented in this proxy statement/prospectus may not be an indication of the actual results of the Transaction or Pagaya’s future results. |
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The following summary consolidated statement of operations data for the years ended December 31, 2020 and 2019, and consolidated balance sheet data as of December 21, 2020 and 2019, have been derived from our audited consolidated financial statements and related notes included elsewhere in this proxy statement / prospectus. The summary condensed consolidated statement of operations data for the six months ended June 30, 2021 and 2020, and the consolidated balance sheet data as of June 30, 2021, have been derived from our unaudited condensed consolidated financial statements and related notes thereto appearing elsewhere in the proxy statement / prospectus.
The unaudited condensed consolidated financial statements of Pagaya have been prepared on the same basis as Pagaya’s audited consolidated financial statements and, in the opinion of Pagaya’s management, reflect all adjustments, which consist only of normal recurring adjustments, necessary for the fair representation of those unaudited condensed consolidated financial statements. Pagaya’s historical results are not necessarily indicative of the results that may be expected in the future and the results for the six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the full year or any other period.
You should read the consolidated financial data below in conjunction with the selected title “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this proxy statement / prospectus. Our historical results are not necessarily indicative of the results to be expected for any other period in the future.
Consolidated Statements of Operations Data
| | | Year Ended December 31, | | | Six Months Ended June 30, | |||||||
(In thousands, except share and per share data) | | | 2020 | | | 2019 | | | 2021 | | | 2020 |
| | | (In thousands, except share and per share data) | ||||||||||
Revenue and Other Income | | | $99,010 | | | $36,141 | | | $183,268 | | | $26,257 |
Costs and Operating Expenses(1) | | | 77,757 | | | 40,045 | | | 201,696 | | | 23,568 |
Operating Income (Loss) | | | 21,253 | | | (3,904) | | | (18,428) | | | 2,689 |
Other expense, net | | | (55) | | | (124) | | | (18,771) | | | (51) |
Income (Loss) Before Income Taxes | | | 21,198 | | | (4,028) | | | (37,199) | | | 2,638 |
Income tax expense | | | 1,276 | | | 172 | | | 7,793 | | | 113 |
Net Income (Loss) and Comprehensive Income (Loss) | | | 19,922 | | | (4,200) | | | (44,992) | | | 2,525 |
Net Income and Comprehensive Income Attributable to Noncontrolling Interests | | | 5,452 | | | 1,420 | | | 7,546 | | | 2,353 |
Net Income (Loss) and Comprehensive Income (Loss) Attributable to Pagaya Technologies Ltd. shareholders | | | $14,470 | | | $(5,620) | | | $(52,538) | | | $172 |
Per share data: | | | | | | | | | ||||
Net Income (Loss) and Comprehensive Income (Loss) Attributable to Pagaya Technologies Ltd. Shareholders | | | $14,470 | | | $(5,620) | | | $(52,538) | | | $172 |
Less: Undistributed earnings allocated to participating securities | | | (9,558) | | | (2,748) | | | (8,559) | | | (1,903) |
Less: Deemed dividend distribution | | | — | | | — | | | (23,612) | | | — |
Net income (loss) attributable to Pagaya Technologies Ltd. ordinary shareholders—basic | | | $4,912 | | | $(8,368) | | | $(84,709) | | | $(1,731) |
Weighted average ordinary shares outstanding—basic | | | 1,022,959 | | | 1,017,033 | | | 1,036,688 | | | 1,026,122 |
Net income (loss) per share attributable to Pagaya Technologies Ltd. ordinary shareholders—basic | | | $4.80 | | | $(8.23) | | | $81.71 | | | $(1.69) |
Net income (loss) attributable to Pagaya Technologies Ltd. ordinary shareholders—diluted | | | $4,608 | | | $(8,580) | | | $(84,709) | | | $(1,731) |
Weighted average ordinary shares outstanding—diluted | | | 1,107,349 | | | 1,023,029 | | | 1,036,688 | | | 1,026,122 |
Net income (loss) per share attributable to Pagaya Technologies Ltd. ordinary shareholders—diluted | | | $4.16 | | | $(8.39) | | | $(81.71) | | | $(1.69) |
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(1) | Amount includes share-based compensation expense as follows: |
| | | Year Ended December 31, | | | Six Months Ended June 30, | |||||||
| | | 2020 | | | 2019 | | | 2021 | | | 2020 | |
Research and Development | | | $89 | | | $37 | | | $25,074 | | | $30 |
Selling and Marketing | | | 4 | | | — | | | 16,779 | | | 1 |
General and Administrative | | | 63 | | | 37 | | | 17,264 | | | 19 |
Total share-based Compensation | | | $156 | | | $74 | | | $59,117 | | | $50 |
In connection with a secondary sale of Pagaya Ordinary Shares and Pagaya Preferred Shares, share-based compensation for the six months ended June 30, 2021 included $56.8 million of expense related to the amount paid in excess of the estimated fair value of Pagaya Ordinary Shares as of the date of the Transactions. See Note 11 to our condensed consolidated financial statements included elsewhere in this proxy statement/prospectus for further details.
Consolidated Balance Sheet Data | | | As of December 31, | | | As of June 30, | ||||||
(in thousands) | | | 2020 | | | 2019 | | | 2021 | | | 2020 |
Total assets | | | $204,272 | | | $58,626 | | | $495,558 | | | $122,456 |
Total liabilities | | | 10,146 | | | 1,638 | | | 43,374 | | | 5,083 |
Redeemable convertible preferred shares | | | 105,981 | | | 43,613 | | | 278,608 | | | 91,759 |
Total Pagaya’s shareholders’ equity (deficit) | | | 3,200 | | | (11,426) | | | 30,665 | | | (11,204) |
Non-Controlling interests | | | 84,945 | | | 24,801 | | | 142,911 | | | 36,818 |
Total shareholders’ equity | | | 88,145 | | | 13,375 | | | 173,576 | | | 25,614 |
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SELECTED HISTORICAL FINANCIAL DATA OF EJFA
The following selected historical financial information of EJFA set forth below should be read in conjunction with the section of this proxy statement/prospectus entitled “EJFA’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and EJFA’s historical audited and unaudited financial statements and the related notes thereto included elsewhere in this proxy statement/prospectus.
EJFA’s statements of operations for the nine-month period ended September 30, 2021 and for the period from December 22, 2020 (inception) through December 31, 2020, and its balance sheets as of September 30, 2021 and as of December 31, 2020, in each case as set forth below, are derived from EJFA’s unaudited condensed statements of operations for the three and nine months ended September 30, 2021 and unaudited condensed balance sheet as of September 30, 2021 and EJFA’s audited statements of operations for the period from December 22, 2020 (inception) through December 31, 2020 and audited balance sheet as of December 31, 2020, which are included elsewhere in this proxy statement / prospectus.
EJFA’s historical results are not necessarily indicative of the results that may be expected in the future and the results for the nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the full year or any other period.
| | | For the nine months ended September 30, 2021 | | | For the period from December 22, 2020 (inception) through December 31, 2020 | |
Statement of Operations: | | | | | ||
Net loss | | | $(5,028,520) | | | $(3,537) |
Weighted average ordinary shares subject to possible redemption outstanding, basic and diluted | | | 22,431,319 | | | — |
Basic and diluted net loss per ordinary share subject to possible redemption | | | $(0.17) | | | — |
Weighted average non-redeemable ordinary shares outstanding, basic and diluted | | | 6,981,456 | | | 6,250,000 |
Basic and diluted net loss per non-redeemable ordinary share | | | $(0.17) | | | $(0.00) |
| | | As of September 30, 2021 | | | As of December 31, 2020 | |
Balance Sheet: | | | | | ||
Total assets | | | $288,553,896 | | | $276,751 |
Total liabilities | | | $36,724,020 | | | $255,288 |
Ordinary shares subject to possible redemption, 28,750,000 and no shares at redemption value as of September 30, 2021 and December 31, 2020, respectively | | | $287,500,000 | | | — |
Total shareholders’ equity | | | $(35,670,124) | | | $21,463 |
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SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following selected unaudited pro forma condensed combined financial information (the “Summary Pro Forma Information”) presents the pro forma effects of the Merger, the PIPE Investment, and the Transactions, as described in Note 1 to the accompanying notes to the unaudited pro forma condensed combined financial statements:
The Merger is expected to be accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under the guidance in ASC 805, EJFA is expected to be treated as the “acquired” company for financial reporting purposes. Accordingly, the Merger will be accounted for as a reverse recapitalization, with no goodwill or other intangible assets are recorded.
The summary unaudited pro forma condensed combined balance sheet data as of June 30, 2021, combines the historical condensed consolidated balance sheet of Pagaya as of June 30, 2021 with the historical condensed consolidated balance sheet of EJFA as of September 30, 2021 on a pro forma basis as if the Merger, the PIPE Investment and the Transactions had been consummated on June 30, 2021.
The summary unaudited pro forma condensed combined statements of operations data for the six months ended June 30, 2021 combines the historical condensed statement of operations and comprehensive loss of Pagaya for the six months ended June 30, 2021, and the historical condensed consolidated statement of operations of EJFA for the six months ended September 30, 2021, on a pro forma basis as if the Merger, the PIPE Investment and the Transactions had been consummated on January 1, 2020.
The summary unaudited pro forma condensed combined statements of operations data for the year ended December 31, 2020 combines the historical statement of operations of EJFA for the period from December 22, 2020 (inception) through December 31, 2020, and the historical consolidated statement of operations of Pagaya for the year ended December 31, 2020, on a pro forma basis as if the Merger, the PIPE Investment and the Transactions had been consummated on January 1, 2020.
The Summary Pro Forma Information has been derived from, and should be read in conjunction with, the more detailed unaudited pro forma condensed combined financial information of the post-Closing combined company appearing elsewhere in this proxy statement/prospectus and the accompanying notes to the unaudited pro forma condensed combined financial information.
The Summary Pro Forma Information is based upon, and should be read in conjunction with, the historical financial statements and related notes of EJFA and Pagaya for the applicable periods included in this proxy statement/prospectus.
The Summary Pro Forma Information has been presented for informational purposes only and is not necessarily indicative of what the post-Closing combined company’s financial position or results of operations actually would have been had the Merger, the PIPE Investment and the Transactions had been consummated as of the dates indicated. In addition, the Summary Pro Forma Information does not purport to project the future financial position or operating results of the post-Closing combined company.
The Summary Pro Forma Information is presented in two scenarios: (1) assuming no redemptions, and (2) assuming maximum redemptions. The no redemptions scenario assumes that no EJFA Public Shareholders elect to exercise their right to redeem their EJFA Public Shares for a pro rata share of the funds in the Trust Account, and thus the full amount held in the Trust Account as of the Closing is available for the Merger. The maximum redemptions scenario assumes that the EJFA Public Shareholders holding 28.8 million EJFA Public Shares will exercise their redemption rights for their pro rata share of the funds in the Trust Account. In both scenarios, the amount of cash available is sufficient to satisfy the minimum cash condition in the Merger Agreement.
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Selected Unaudited Pro Forma Condensed Combined Financial Information
(in thousands, except share and per share data)
| | | Pro Forma Combined (Assuming No Redemptions) | | | Pro Forma Combined (Assuming Maximum Redemptions) | |
Balance Sheet Data as of June 30, 2021 | | | | | ||
Total assets | | | $1,043,022 | | | $755,522 |
Total liabilities | | | $68,921 | | | $68,921 |
Total stockholders’ equity | | | $974,101 | | | $686,601 |
Selected Unaudited Pro Forma Condensed Combined Statement of Operations Data For the Six Months Ended June 30, 2021 | | | | | ||
Total revenue and other income | | | $183,268 | | | $183,268 |
Net loss | | | $(60,495) | | | $(60,495) |
Net loss attributable to Class A and Class B ordinary shareholders—basic and diluted | | | $(44,865) | | | $(44,865) |
Weighted-average Class A and Class B ordinary shares outstanding—basic and diluted | | | 965,522,006 | | | 936,772,006 |
Net loss per share attributable to Class A and Class B ordinary shareholders—basic and diluted | | | $(0.05) | | | $(0.05) |
For the Year Ended December 31, 2020 | | | | | ||
Total revenue and other income | | | $99,010 | | | $99,010 |
Net loss | | | $(82,789) | | | $(82,789) |
Net loss attributable to Class A and Class B ordinary shareholders—basic and diluted | | | $(88,241) | | | $(88,241) |
Weighted-average Class A and Class B ordinary shares outstanding—basic and diluted | | | 965,522,006 | | | 936,772,006 |
Net loss per share attributable to Class A and Class B ordinary shareholders—basic and diluted | | | $(0.09) | | | $(0.09) |
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UNAUDITED HISTORICAL COMPARATIVE AND PRO FORMA COMBINED
PER SHARE DATA OF EJFA AND PAGAYA
Comparative Per Share Data of EJFA
The following table sets forth the closing market prices per share of the EJFA Units, EJFA Public Shares and EJFA Public Warrants as reported by Nasdaq on September 14, 2021, the last trading day before the Merger was publicly announced, and on January 20, 2022, the last practicable trading day before the date of this proxy statement/prospectus.
Trading Date | | | EJFA Units (EJFAU) | | | EJFA Public Shares (EJFA) | | | EJFA Public Warrants (EJFAW) |
September 14, 2021 | | | $9.85 | | | $9.69 | | | $0.61 |
January 20, 2022 | | | $10.27 | | | $9.88 | | | $1.21 |
The market prices of our securities could change significantly. Because the consideration payable in the Merger pursuant to the Merger Agreement will not be adjusted for changes in the market prices of the EJFA Public Shares, the value of the consideration may vary significantly from the value implied by the market prices of EJFA Public Shares on the date of the Merger Agreement, the date of this proxy statement/prospectus, and the date on which EJFA Shareholders vote on the approval of the Merger Agreement. EJFA Public Shareholders are urged to obtain current market quotations for EJFA Public Shares and EJFA Units before making their decision with respect to the approval of the Merger Agreement.
Comparative Per Share Data of Pagaya
Historical market price information regarding Pagaya is not provided because there is no public market for Pagaya Ordinary Shares.
Comparative Historical and Pro Forma Per Share Data
The following table sets forth summary historical comparative share information for EJFA and Pagaya and unaudited pro forma condensed combined per share information after giving effect to the Merger, assuming four redemption scenarios as follows: (1) assuming no redemptions, (2) assuming 50% redemptions (50.0% of the maximum redemptions) and (3) assuming maximum redemptions.
The no redemptions scenario assumes that no EJFA Public Shareholder elects to redeem their EJFA Public Shares for a pro rata share of the funds in the Trust Account, and thus the full amount held in the Trust Account as of Closing is available for the Merger.
The 50% redemption scenario assumes that the EJFA Public Shareholders holding an aggregate of 14,375,000 EJFA Public Shares (50.0% of the maximum redemption) exercise their redemption right for their pro rata share of the funds in the Trust Account.
The maximum redemptions scenario assumes that all EJFA Public Shareholders holding an aggregate of 28,750,000 EJFA Public Shares (100% of maximum redemption) will exercise their redemption right for their pro rata share of the funds in the Trust Account. In every scenario, the amount of cash available is sufficient to satisfy the minimum cash condition in the Merger Agreement.
The pro forma book value information reflects the Merger as if it had occurred on June 30, 2021. The weighted average shares outstanding and net earnings (loss) per share information for the six months ended June 30, 2021 and for the year ended December 31, 2020 reflect the Merger as if it had occurred on January 1, 2020.
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This information is only a summary and should be read in conjunction with the historical financial statements of EJFA and Pagaya and related notes included elsewhere in this proxy statement/prospectus. The unaudited pro forma combined per share information of EJFA and Pagaya is derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial statements and related notes included elsewhere in this proxy statement/prospectus.
The unaudited pro forma condensed combined net loss per share information below does not purport to represent the income (loss) per share which would have occurred had the companies been combined during the periods presented, nor the income (loss) per share for any future date or period. The unaudited pro forma condensed combined book value per share information below does not purport to represent what the value of the Pagaya shares and EJFA shares would have been had the companies been combined during the periods presented.
| | | | | | | Pagaya Equivalent Pro Forma Per Share Data(3) | | | | | ||||||||||||||
| | | Pagaya (Historical) | | | EJFA (Historical) | | | Assuming No Redemptions | | | 50% Redemption Scenario | | | Assuming Maximum Redemptions | | | Assuming No Redemptions | | | 50% Redemption Scenario | | | Assuming Maximum Redemptions | |
As of and for the six months ended June 30, 2021(2) | | | | | | | | | | | | | | | | | ||||||||
Book value per share(1) | | | $29.58 | | | $(0.99) | | | $0.86 | | | | | $0.58 | | | $160.88 | | | | | $108.46 | ||
Net loss attributable to ordinary shareholders—basic and diluted | | | $(84,709) | | | | | | | | | | | | | | | |||||||
Weighted-average ordinary shares outstanding—basic and diluted | | | 1,036,688 | | | | | | | | | | | | | | | |||||||
Net loss per share attributable to ordinary shareholders—basic and diluted | | | $(81.71) | | | | | | | | | | | | | | | |||||||
Weighted-average non-redeemable ordinary shares outstanding—basic and diluted | | | | | 28,750,000 | | | | | | | | | | | | | |||||||
Basic and diluted net loss per non-redeemable ordinary share | | | | | $(0.34) | | | | | | | | | | | | | |||||||
Weighted average ordinary shares subject to possible redemption outstanding—basic and diluted | | | | | 7,187,500 | | | | | | | | | | | | | |||||||
Basic and diluted net loss per ordinary share subject to possible redemption | | | | | $(0.34) | | | | | | | | | | | | | |||||||
Net loss attributable to Class A and Class B ordinary shareholders—basic and diluted | | | | | | | $(44,865) | | | | | $(44,865) | | | | | | | ||||||
Weighted-average Class A and Class B ordinary shares outstanding—basic and diluted | | | | | | | 965,522,006 | | | | | 936,772,006 | | | | | | | ||||||
Net loss per share attributable to Class A and Class B ordinary shareholders—basic and diluted | | | | | | | $(0.05) | | | | | $(0.05) | | | $(8.68) | | | | | $(8.95) | ||||
As of and for the year ended December 31, 2020 | | | | | | | | | | | | | | | | | ||||||||
Net income attributable to ordinary shareholders—basic | | | $4,912 | | | | | | | | | | | | | | | |||||||
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| | | | | | | Pagaya Equivalent Pro Forma Per Share Data(3) | | | | | ||||||||||||||
| | | Pagaya (Historical) | | | EJFA (Historical) | | | Assuming No Redemptions | | | 50% Redemption Scenario | | | Assuming Maximum Redemptions | | | Assuming No Redemptions | | | 50% Redemption Scenario | | | Assuming Maximum Redemptions | |
Weighted-average ordinary shares outstanding—basic | | | 1,022,959 | | | | | | | | | | | | | | | |||||||
Net income per share attributable to ordinary shareholders—basic | | | $4.80 | | | | | | | | | | | | | | | |||||||
Net income attributable to ordinary shareholders— diluted | | | $4,608 | | | | | | | | | | | | | | | |||||||
Weighted-average ordinary shares outstanding—diluted | | | 1,107,349 | | | | | | | | | | | | ||||||||||
Net income per share attributable to ordinary shareholders—diluted | | | $4.16 | | | | | | | | | | | | | | | |||||||
Basic and diluted weighted average Class B shares outstanding | | | | | 6,250,000 | | | | | | | | | | | | | |||||||
Basic and diluted net loss per share | | | | | $(0.00) | | | | | | | | | | | | | |||||||
Net loss attributable to Class A and Class B ordinary shareholders—basic and diluted | | | | | | | $(88,241) | | | | | $(88,241) | | | | | | | ||||||
Weighted-average Class A and Class B ordinary shares outstanding—basic and diluted | | | | | | | 965,522,006 | | | | | 936,772,006 | | | | | | | ||||||
Net loss per share attributable to Class A and Class B ordinary shareholders—basic and diluted | | | | | | | $(0.09) | | | | | $(0.09) | | | $(17.08) | | | | | $(17.60) | ||||
(1) | Book value per share = Total equity divided by total ordinary shares outstanding on an as-converted basis. |
(2) | EJFA’s unaudited pro forma condensed combined statement of operations for the six months ended September 30, 2021 have been derived by subtracting its unaudited results of operations for the three months ended March 31, 2021 from its unaudited results of operations for the nine months ended September 30, 2021. See Note 3 in the section of this proxy statement/prospectus entitled “Unaudited Pro Forma Condensed Combined Financial Information.” |
(3) | The equivalent per share data for Pagaya is calculated by multiplying the combined pro forma per share data by the Per Share Merger Consideration set forth in the Merger Agreement. |
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In addition to the other information contained in this proxy statement/prospectus, including the matters addressed under the heading “Cautionary Statement Regarding Forward-Looking Statements; Market, Ranking and Other Industry Data,” you should carefully consider the following risk factors in deciding how to vote on the proposals presented in this proxy statement/prospectus. Certain factors may have a material adverse effect on our business, financial conditions and results of operations. The risks and uncertainties described below disclose both material and other risks and uncertainties, and are not intended to be exhaustive and are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe to be immaterial also may materially adversely affect our business, financial condition, results of operations and cash flows in future periods or are not identified because they are generally common to businesses. If any of these risks occurs, our business, financial condition, results of operations and future prospects could be materially and adversely affected. In that event, the trading price of Pagaya Ordinary Shares following the Merger could decline, and you could lose part or all of your investment.
Unless otherwise noted or the context otherwise requires, all references in this section to the “Company,” “we,” “us” or “our” refer to the business of Pagaya and its subsidiaries prior to the consummation of the Merger, which will continue to be the business of Pagaya and its subsidiaries following the consummation of the Merger, when it will become a public company.
Risks Related to the Operations of Our Business
We are a rapidly growing company with a relatively limited operating history, which may result in increased risks, uncertainties, expenses and difficulties, and it may be difficult to evaluate our future prospects.
We were founded in 2016 and have experienced rapid growth in recent years in the markets we serve and we plan to continue to expand into new markets. Our limited operating history may make it difficult to make accurate predictions about our future performance. Assessing our business and future prospects may also be difficult because of the risks and difficulties we face. These risks and difficulties include our ability to:
• | maintain and increase the volume of financial products facilitated with the assistance of our AI technology; |
• | enter into new and maintain existing relationships with Partners; |
• | maintain cost-effective access to capital and a diversified asset funding strategy; |
• | expand the use and applicability of our AI technology; |
• | improve the effectiveness and predictiveness of our AI technology; |
• | successfully build our brand and protect our reputation from negative publicity; |
• | successfully adjust our proprietary AI technology, products and services in a timely manner in response to changing macroeconomic conditions, including consumer credit performance and fluctuations in the credit markets; |
• | successfully compete with companies that are currently in, or may in the future enter, the business of providing technological services to enhance the access to credit for customers and funding services; |
• | enter into new markets and introduce new products and services; |
• | comply with and successfully adapt to complex and evolving legal and regulatory environments in our existing markets and ones we may enter in the future; |
• | effectively secure and maintain the confidentiality of the information received, accessed, stored, provided and used across our systems; |
• | successfully obtain and maintain funding and liquidity to support continued growth and general corporate purposes; |
• | attract, integrate and retain qualified employees and independent contractors; and |
• | effectively manage, scale and expand the capabilities of our teams, outsourcing relationships, third-party service providers, operating infrastructure and other business operations. |
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If we are not able to timely and effectively address these risks and difficulties as well as those described elsewhere in this “Risk Factors” section, our business and results of operations may be harmed.
Our revenue growth rate and financial performance in recent periods may not be indicative of future performance and such growth may slow over time. In addition, the historical returns attributable to the Financing Vehicles should not be indicative of the future results of the Financing Vehicles and poor performance of the Financing Vehicles would cause a decline in our revenue, income and cash flow.
We have grown rapidly over the last several years, and our recent revenue growth rate and financial performance may not be indicative of our future performance. Our Revenue and other income was $36.1 million and $99.0 million in 2019 and 2020, respectively, representing a 174% growth rate and $26.3 million and $183.3 million in the six months ended June 30, 2020 and 2021, respectively, representing a 597% growth rate. Our revenue for any previous quarterly or annual period may not be a reliable indicator of our revenue or revenue growth in future periods. As our business grows, our revenue growth rates may slow, or our revenue may decline, in future periods for a number of reasons, which may include slowing demand for our AI technology offerings, products and services, increasing competition, a decrease in our ability to access capital or the growth of our overall network, increasing regulatory costs and challenges, adverse changes in the macroeconomic environment and consumers’ ability to service their debt and our failure to capitalize on growth opportunities. Further, we believe our growth over the last several years has been driven in large part by the expansion across similar consumer credit assets, which will slow as we enter all consumer credit markets. In addition, we believe this growth has been driven in part by the transformative shift by consumers to e-commerce and the acceptance of online networks and digital solutions for the use of and access to financial products that we expect may slow down over time, and as a result, our financial performance may be adversely affected.
In addition, the historical and potential future returns of the Financing Vehicles are not directly linked to returns on Pagaya Ordinary Shares. Therefore, any positive performance of the Financing Vehicles will not necessarily result in positive returns on an investment in Pagaya Ordinary Shares. However, poor performance of the Financing Vehicles would cause a decline in our revenue, income and cash flow from such Financing Vehicles, and would likely negatively affect our ability to raise additional capital for the same or future Financing Vehicles, and would therefore have a negative effect on our performance and, in all likelihood, the returns on an investment in Pagaya Ordinary Shares. Moreover, we could experience losses on our investments of our own principal as a result of poor investment performance by the Financing Vehicles. The future rate of return for any current or future Financing Vehicles may vary considerably from the historical rate of return generated by any particular Financing Vehicle, or for the Financing Vehicles as a whole. Poor performance of the Financing Vehicles could make it more difficult for us to raise new capital. Asset Investors might decline to invest in future Financing Vehicles we raise, and Asset Investors in existing Financing Vehicles might withdraw their investments, as a result of poor performance of the Financing Vehicles in which they are invested. Accordingly, poor performance may deter future investment in Financing Vehicles and thereby decrease the capital invested in the Financing Vehicles and, ultimately, our fee revenue, income and cash flow.
If we fail to effectively manage our growth, our business, financial condition, and results of operations could be adversely affected.
Over the last several years, we have experienced rapid growth in our business and number of employees and independent contractors, and we expect to continue to experience growth in the future. This rapid growth has placed, and may continue to place, significant demands on our management, processes, systems and operational, technological and financial resources. Our ability to manage our growth effectively, integrate new employees, independent contractors and technologies into our existing business and attract new Partners and maintain relationships with existing Partners will require us to continue to retain, attract, train, motivate and manage employees and independent contractors and expand our operational, technological and financial infrastructure. From time to time, we rely on temporary independent contractor programs for various aspects of our business. Failure to effectively implement and manage such programs could result in misclassification or other employment-related claims or inquiries by governmental agencies. Continued growth could strain our ability to develop and improve our operational, technological, financial and management controls, reporting systems and procedures, recruit, train and retain highly skilled personnel and maintain Partner and their customers’ satisfaction. Any of the foregoing factors could negatively affect our business, financial condition and results of operations.
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Our business and the performance of Financing Vehicles may be adversely affected by economic conditions and other factors that we cannot control. These factors include interest rates, unemployment levels, conditions in the housing market, immigration policies, government shutdowns, trade wars and delays in tax refunds, as well as events such as natural disasters, acts of war, terrorism, catastrophes, and pandemics, including the ongoing COVID-19 pandemic.
Uncertainty and negative trends in general economic conditions, including significant tightening of credit markets, historically have created a difficult operating environment for our industry. Many factors, including factors that are beyond our control, may impact our results of operations or financial condition and our overall success by affecting our access to capital. Challenges our Partners may face with low demand for their financial products or willingness or capacity of their customers to make payment on obligations, or the returns on other assets, may affect the success of the Financing Vehicles. These factors include interest rates, unemployment levels, conditions in the housing market, immigration policies, government shutdowns, trade wars and delays in tax refunds, as well as events such as natural disasters, acts of war, terrorism, catastrophes and pandemics.
The global spread and unprecedented impact of COVID-19 has resulted in significant disruption and has created additional risks to us and our Partners’ businesses, the industry and the economy. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. Since that time, COVID-19 has resulted in various federal and state governments imposing numerous restrictions at different times, including travel bans and restrictions, quarantines, stay-at-home orders, social distancing requirements and mandatory closure of “non-essential” businesses, as well as legislative and regulatory changes to laws or policies related to loan deferment, forbearance, or forgiveness.
In response to the economic impacts of COVID-19, governments around the world, including in the United States, provided significant fiscal and monetary stimuli, which have had the effect, among other things, of supporting overall levels of employment, consumer spending and savings levels, and the ability of consumers to service their debt. As these stimulus programs are wound down or withdrawn, economic conditions and consumer credit performance could be adversely affected, which may reduce the demand for and pricing of consumer credit assets and negatively impact our growth, revenues and profitability.
If there is an economic downturn that affects our current and prospective Partners and their customers, Asset Investors or the performance of the Financing Vehicles, or if we are unable to address and mitigate the risks associated with any of the foregoing, our business, financial condition and results of operations could be adversely affected. Additionally, our AI technology has not been extensively tested during economic downturns. For more information, see “Risk Factors—Our AI technology has not yet been extensively tested during different economic conditions, including down-cycles. We continue to build and refine our AI technology to offer new products and services as we expand into new markets, such as real estate and insurance, and if our AI technology does not perform as well in these new markets as it has in our existing business and we are unable to manage the related risks and effectively execute our growth strategy as we enter into these new lines of business, our growth prospects, business, financial condition and results of operations could be adversely affected.”
We are heavily dependent on our AI technology. If we are unable to continue to improve our AI technology or if our AI technology does not operate as we expect, contains errors or is otherwise ineffective, our network may improperly evaluate products not be able to process the volume we have historically, and our growth prospects, business, financial condition and results of operations could be adversely affected.
Our ability to enable our Partners to increase the number of loans or other assets that they originate with the assistance of our AI technology will depend in large part on our ability to effectively evaluate the creditworthiness and likelihood of default of our Partners’ customers and, based on that evaluation, help our Partners offer competitively-priced loans or other assets as well as obtain higher approval rates. Further, our overall operating efficiency and margins will depend in large part on our AI technology’s ability to effectively evaluate the creditworthiness, likelihood of default and credit asset pricing for our Partners’ customers, which will affect our Partners’ business volume. In the ordinary course, we enter into contractual arrangements with our Partners with customary indemnification provisions (including for violation of law). Such indemnification provisions potentially assume regulatory liability and liability for claims by Partners or third parties if the AI technology contains errors or incorrectly evaluates Partners’ customers. We further assume liability as the investment manager, sponsor and/or administrator for the Financing Vehicles, including if the AI technology contains errors or incorrectly evaluates the Partners’ customers underlying the assets purchased by the Financing Vehicles. Such liability may result in claims by Asset Investors or regulatory action. For more information, see
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“Risk Factors—If we fail to comply with or facilitate compliance with, or our Partners fail to comply with the variety of federal, state and local laws to which we are subject, including those related to consumer protection, consumer finance, lending, fair lending, data protection, and investment advisory services, or if we are found to be operating without having obtained necessary state or local licenses, it may result in regulatory action, litigation, monetary payments or may otherwise negatively impact our reputation, business, and results of operations, and may prevent us from serving users in jurisdictions where those regulations apply.”, “Risk Factors—Risks Related to Our Legal and Regulatory Environment” and “Risk Factors—Any legal proceedings, investigations or claims against us could be costly and time-consuming to defend and could harm our reputation regardless of the outcome. In addition, our business and operations could be negatively affected if they become subject to any securities litigation or shareholder activism, which could cause us to incur significant expense, hinder execution of business and growth strategy and impact our share price.” In addition, we utilize the data gathered from various sources in our automated credit analysis process. The data that we gather is evaluated and curated by our AI technology. The ongoing development, maintenance and operation of our AI technology is expensive and complex, and may involve unforeseen difficulties including material performance problems, and undetected defects or errors, for example, with new capabilities incorporating AI. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our AI technology from operating properly. If our AI technology fails to adequately predict the creditworthiness of Partners’ applicants or customers, or to properly place loans or other assets for acquisition by Financing Vehicles due to the design of our models or programming or other errors or failures, other characteristics of our AI or for any other reasons, or any of the other components of the automated credit analysis process fails, our Partners may experience higher than forecasted loan and other losses that will in turn negatively impact the performance of the Financing Vehicles that acquire our Partners’ assets. Additionally, errors or inaccuracies in our AI technology could result in exposure to the credit risk of loans or other assets originated by Partners, whether it be exposure for us, Partners or Asset Investors, which may result in higher than expected losses or lower than desired returns of such loans or other assets.
Any of the foregoing could result in our Partners experiencing sub-optimally priced assets, incorrect approvals or denials of transactions, or higher than expected losses, or could require remediation and/or result in our Partners’ dissatisfaction with us, which in turn could adversely affect our ability to attract new Partners or cause our Partners to terminate their agreements with us and decrease our Partners’ financial product volume, and could also negatively impact the performance of Financing Vehicles, certain Asset Investors’ willingness to invest in future Financing Vehicles, and our ability to continue to create new Financing Vehicles, and our business, financial condition and results of operations may be adversely affected.
We rely on our Partners to originate assets facilitated with the assistance of our AI technology. Currently, a limited number of Partners account for a substantial portion of the total number of financial products facilitated with the assistance of our AI technology and, ultimately, our revenue. If these Partners were to cease or limit operations with us, our business, financial condition and results of operations could be adversely affected.
Currently, a majority of the loans or other assets that are facilitated with the assistance of our AI technology result from transactions with a small number of Partners who operate in the financial technology space. These Partners, taken together, originate substantially all of the loans or other assets facilitated with the assistance of our AI technology. The fees we receive when these loans or other assets are acquired from these Partners by Financing Vehicles account for substantially all of our revenue.
We have entered into several types of agreements with each of our Partners. Our commercial arrangements with these Partners are generally nonexclusive and are based on the type of asset class. For example, we enter into purchase agreements with our Partners, which provide the Financing Vehicles with the opportunity to acquire assets by the Partner assisted by our AI technology, that have a typical duration of one to three years with the option to extend for additional periods. The Financing Vehicles are not required to acquire specific types or amounts of assets from our Partners under such agreements. In addition, there are servicing agreements with our Partners covering the assets originated by such Partners that typically last for the life of the asset. As it relates to any specific asset, these servicing agreements require us to continue to use the Partner that originated the asset for the life of such asset. In addition, even during the term of our arrangement, our Partner could choose to reduce the volume of loans or other assets facilitated with the assistance of our AI technology or increase the volume that it chooses to fund and retain on its own balance sheet. We or any of our Partners may terminate our arrangement for various reasons, which may include material breaches and change in control, subject to payment
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of a termination fee in some cases, and Partners could decide to stop working with us, have disputes with us, ask to modify their commercial or legal terms in a manner disadvantageous to us or enter into exclusive or more favorable relationships with our competitors. In addition, capital and leverage requirements applicable to our Partners that are banks or other financial institutions subject to such requirements could result in decreased demand for our products. Further, our Partners’ respective regulators may require that they terminate or otherwise limit their business with us, or impose regulatory pressure limiting their ability to do business with us. We are a service provider to Partners, some of which are considered banks under the Federal Deposit Insurance Corporation (“FDIC”), and as such, we are subject to audit by such Partners in accordance with FDIC guidance related to management of vendors. We are also subject to the examination and enforcement authority of the FDIC under the Bank Service Company Act. If any of our Partners were to stop working with us, suspend, limit or cease their operations or otherwise terminate or modify adversely to us their relationship with us, the number of financial products originated by our Partners with the assistance of our AI technology could decrease, and our revenue and revenue growth rates and our business, financial condition and results of operations could be adversely affected.
If we are unable to both retain existing Partners and attract and onboard new Partners, our business, financial condition and results of operations could be adversely affected.
Substantially all of our revenue is generated through fees we receive when the loans and other financial products originated by our Partners with the assistance of our AI technology are acquired by Financing Vehicles. Currently, we have a small number of Partners that operate in the financial technology space who originate most of these loans and other assets. To continue to expand our market share in existing markets and grow into new markets we will need to attract and onboard new Partners on attractive commercial terms and also maintain and grow those relationships. We have both lead generation programs and referral programs to identify and develop new Partners but these programs may not succeed in the near term or may cease to be effective over time. If we are not successful in attracting and onboarding new Partners, our business, financial condition and results of operations could be adversely affected.
Our ability to raise capital from Asset Investors is a vital component of the products we offer to Partners. If we are unable to raise capital from Asset Investors at competitive rates, it would materially reduce our revenue and cash flow and adversely affect our financial condition.
We have relied upon the securitization market and committed asset-backed facilities to provide a significant portion of the funding component of our product. The ability of the Financing Vehicles to provide funding at competitive rates is essential to our business. An inability to access the securitization market or a significant reduction in liquidity in the secondary market for securitization transactions could have an adverse impact on the funding component of our product, financial position and results of operations.
Our ability to raise capital from Asset Investors for Financing Vehicles depends on a number of factors, including certain factors that are outside our control. Certain factors, such as the performance of the equity and bond markets and the asset allocation rules or investment policies to which such Asset Investors are then subject, could inhibit or restrict the ability of Asset Investors to make investments in Financing Vehicles or the asset classes in which Financing Vehicles invest.
Our ability to launch new Financing Vehicles could similarly be hampered if the appeal of those investments in the market were to decline. For example, there is a risk that the properties that we have invested in have some undiscovered flaw, or would otherwise require additional expenditures to make them rentable in excess of the expected amount, which could result in greater total renovation costs and a loss of revenue. Further, an investment in a share, unit, membership interest or limited partner interest in a Financing Vehicle is more illiquid, and the returns on such investment may be more volatile than an investment in securities for which there is a more active and transparent market. In periods of positive markets and low volatility, for example, investors may favor passive investment strategies such as index funds over our actively managed investment vehicles. Alternative investments could also fall into disfavor as a result of concerns about liquidity and short-term performance.
In connection with launching new Financing Vehicles or making further investments in existing Financing Vehicles, we may negotiate terms for such Financing Vehicles with existing and potential Asset Investors. The outcome of such negotiations could result in our agreement to terms that are materially less favorable to us than
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for prior Financing Vehicles or as compared to Financing Vehicles of our competitors, including with respect to fees and/or incentive fees, which could have an adverse impact on our revenues. Such terms could also restrict our ability to raise Financing Vehicles with investment objectives or strategies that compete with existing Financing Vehicles, add additional expenses and obligations for us or increase our potential liabilities, all of which could ultimately reduce our revenues. In addition, certain investors, including sovereign wealth funds and public pension funds, have demonstrated an increased preference for alternatives to the traditional financing vehicle structure. Such alternatives may not be as profitable for us as the traditional fund structure, and such a trend could have a material impact on the cost of our operations or profitability if we were to implement these alternative investment structures. In addition, certain investors, including public pension funds, have publicly criticized certain fee and expense structures, including network fees and transaction and advisory fees. Although we have no obligation to modify any of our fees with respect to our existing, we may experience pressure to do so in Financing Vehicles.
The fees paid to us by Financing Vehicles comprise a key portion of our revenues, and a reduction in these revenues could have an adverse effect on our results of operations. If we are unable to raise new and successor Financing Vehicles, the growth of the assets of such Financing Vehicles and related fees generated, our ability to deploy capital into investments and the potential for increasing our performance income would slow or decrease, all of which would materially reduce our revenues and cash flows and adversely affect our financial condition.
A key portion of our revenue from Financing Vehicles in any given period is dependent on the size of the assets of such Financing Vehicles in such period and fee rates charged. We may not be successful in producing investment returns and prioritizing services that will allow us to maintain our current fee structure, to maintain or grow the assets of such Financing Vehicles, or to generate performance income. A decline in the size or pace of growth of assets of Financing Vehicles or applicable fee rates will reduce our revenues. A decline in the size or pace of growth of the assets of Financing Vehicles or applicable fee rates may result from a range of factors, including:
• | Volatile economic and market conditions, which could cause Asset Investors to delay making new commitments to alternative Financing Vehicles or limit the ability of our existing Financing Vehicles to deploy capital; |
• | Competition may make fundraising and the deployment of capital more difficult, thereby limiting our ability to grow or maintain the assets of such Financing Vehicles; |
• | Changes in our strategy or the terms of our Network AI Fees; and |
• | Poor performance of one or more of the Financing Vehicles, either relative to market benchmarks or in absolute terms, or compared to our competitors, may cause Asset Investors to regard the Financing Vehicles less favorably than those of our competitors, thereby adversely affecting our ability to raise more capital for existing Financing Vehicles or new or successor Financing Vehicles. |
If we are unable to develop and maintain a diverse and robust funding component for our network, our growth prospects, business, financial condition and results of operations could be adversely affected. In addition, certain Financing Vehicles have redemption features and a substantial withdrawal of capital by one or more Asset Investors may have an adverse effect on the Financing Vehicles’ performance.
Our business depends on sourcing and maintaining diverse and robust funding to enable loans or other assets from our Partners to be acquired by a Financing Vehicle. The number of Asset Investors in new markets where a long-term track record of performance has not been developed is often very concentrated. Even for more mature markets, although the participating Asset Investors are often more diverse, only a limited number have committed or guaranteed their participation in existing Financing Vehicles. Were the availability of this funding to decrease, our ability to generate Network Volume and revenue will be adversely effected. Further, we have significant concentration in Asset Investors. Four of the largest Asset Investors together contributed approximately 49% of Network Capital during the six months ended June 30, 2021, compared to approximately 81% during the 12 months ended December 31, 2020. New capital from Asset Investors may be unavailable on reasonable terms or at all beyond the current maturity dates of Financing Vehicles.
Further, events of default or breaches of financial, performance or other covenants, or worse than expected performance of certain pools of obligations underpinning Financing Vehicles, could reduce the likelihood of
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affiliates sponsoring, managing or administering Financing Vehicles that acquire assets from our Partners. The performance of such assets is dependent on a number of factors, including the predictiveness of our AI technology and social and economic conditions. The availability and capacity of certain Asset Investors to participate in Financing Vehicles that acquire assets from our Partners also depend on many factors that are outside of our control, such as credit market volatility, politics and regulatory reforms. In the event of a sudden or unexpected disruption of Asset Investors’ participation in Financing Vehicles that acquire assets from our Partners, our network may not be able to maintain the necessary levels of funding to retain current volume of acquisition by Financing Vehicles of loans or other assets originated by our Partners without incurring substantially higher funding costs, which could adversely affect our business, financial condition and results of operations.
A substantial withdrawal of capital by one or more Asset Investors in any Financing Vehicle with redemption features may have an adverse effect on such Financing Vehicle’s performance. The adviser to such Financing Vehicle may find it difficult under such circumstances to adjust its asset allocation to the reduced amount of assets of such Financing Vehicle. Moreover, in order to provide sufficient funds to pay withdrawal amounts, the Financing Vehicles might be required to liquidate positions at an inopportune time or at prices that the adviser believes do not reflect the true value of such investments and that would adversely affect the applicable Asset Investors, or the adviser may not be able to liquidate such positions at all or it may determine it would be inappropriate to do so. If such withdrawals of capital were to continue over a protracted period of time, these issues may be magnified such that similar assets sold at subsequent withdrawal dates might receive even less favorable liquidation values. Withdrawals of capital through redemption may also make it more difficult for such Financing Vehicles to generate the same level of profits operating on a smaller capital base and may trigger defaults or termination events under one or more loans, credit facilities or other financing arrangements.
Our AI technology has not yet been extensively tested during different economic conditions, including down-cycles. We continue to build and refine our AI technology to offer new products and services as we expand into new markets, such as real estate and insurance, and if our AI technology does not perform as well in these new markets as it has in our existing business and we are unable to manage the related risks and effectively execute our growth strategy as we enter into these new lines of business, our growth prospects, business, financial condition and results of operations could be adversely affected.
We continue to build and refine our AI technology to offer new products and services in new markets. We have added one new market per year since 2018 and recently entered the real estate market. We expect to continue to expand our offering to other markets. There are substantial risks and uncertainties associated with these efforts. We may invest significant time and resources to develop and market new lines of business and/or products and services and we may not achieve the return on our investment that we expect. Initial timetables for the introduction and development of new lines of business or new products or services may not be achieved and price and profitability targets may not prove feasible. Further, we may not be able to develop, commercially market and achieve market acceptance of any new products and services. In addition, our investment of resources to develop new products and services may either be insufficient or result in expenses that are excessive in light of the revenue actually derived from these new products and services. If the profile of consumers using any new products and services is different from that of those currently served by our Partners’ existing financial products, our AI technology may not be able to accurately evaluate the credit risk of such customers, and the affiliates sponsoring, managing or administering Financing Vehicles that are acquiring our Partners’ financial products may in turn experience higher levels of delinquencies or defaults. Failure to accurately predict demand or growth with respect to our new products and services could have an adverse impact on our reputation and business, and there is always a risk that new products and services will be unprofitable, increase our costs, decrease operating margins or take longer than anticipated to achieve target margins. In addition, any new products or services may raise new and potentially complex regulatory compliance obligations, which would increase our costs and may cause us to change our business in unexpected ways. Further, our development efforts with respect to these initiatives could distract management from current operations and divert capital and other resources from our existing business.
Furthermore, our AI technology may not perform as well in the real estate asset market and non-consumer credit asset markets as it has in the consumer markets. For example, the use of our AI technology to evaluate and facilitate the acquisition, renovation, lease and eventual realization of real estate assets is significantly different than its application toward the evaluation and origination of loans and financial products, due to the special characteristics of the real estate market and the inherent uniqueness of these assets. The purchase price,
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renovation time and costs, attainable rent and appreciation potential of real estate assets are affected by numerous parameters that are often specific to each asset, and attempting to predict them through AI-based, big-data analytics is prone to error. While we have adapted and calibrated our AI technology to account for such parameters and their irregularity among individual assets, it may not be able to accurately predict the creditworthiness of each such asset and the outcome of its purchase, renovation, lease or future realization. In addition, while we believe our AI technology will accurately evaluate risk in the non-consumer credit asset markets, our AI technology has not been extensively tested in these markets. If our AI technology is unable to accurately evaluate risk in these markets, our Partners and Financing Vehicles through which Asset Investors invest may experience greater than expected losses on such loans or other assets, which would harm our reputation and erode the trust we have built with our Partners and Asset Investors. Any of these factors could adversely affect our business, financial condition and results of operations.
We may also have difficulty with securing the adequate participation of Asset Investors for Financing Vehicles investing in any such new financial products and services by our Partners, and if we are unable to do so, our ability to develop and grow these new offerings and services will be impaired. If we are unable to effectively manage the foregoing risks, our growth prospects, business, financial condition and results of operations could be adversely affected. For example, in real estate investments, the yields available from properties depend on the amount of revenue generated and expenses incurred. If certain properties do not generate sufficient revenues to meet their acquisition and operating expenses, a Financing Vehicle’s cash flow and ability to pay distributions to its Asset Investors will be adversely affected.
Further, if we do not successfully manage the regulatory, business and market risks associated with our expansion into new markets and new products and effectively execute our growth strategy in these new lines of business, our growth prospects, business, financial condition and results of operations could be adversely affected. For example, the insurance markets are highly competitive and regulated. We are considered a managing general agent in the insurance business and are subject to the regulations governing managing general agents, including various licensing requirements. Accordingly, we may have a license revoked or be unable to obtain new licenses and therefore be precluded or temporarily suspended from carrying on or developing some or all of our activities in the insurance business or otherwise be fined or penalized in a given jurisdiction where we are operating in the insurance business.
In addition, Partners in our network recently began analyzing auto loans with the assistance of our AI technology to assist with their origination process for auto loans and acquisition of such loans by Financing Vehicles. We are continuing to invest in developing AI technology to support the origination of new financial products by our Partners and service offerings, such as credit cards, mortgages, student loans, point-of-sale loans and the acquisition of such financial products by Financing Vehicles. New initiatives are inherently risky, as each involves unproven business strategies, addressing and complying with new regulatory requirements, industry expertise and new financial products and services with which we, and in some cases our Partners, have limited or no prior development or operating experience.
The industry in which we operate is highly competitive, and if we fail to compete effectively, we could experience price reductions, reduced margins or loss of revenues.
We operate in a highly competitive and dynamic industry. Our AI technology faces competition from a variety of players, including those that enable transactions and commerce via digital payments. Our primary competition consists of: other sources of consumer credit, including banks, non-bank lenders and other fintech networks, as well as a variety of technology companies that seek to help financial services providers with the digital transformation of their businesses and various “second-look” financing providers that offer lenders revenue when they approve applications that had otherwise been turned down. We expect competition to intensify in the future, both as emerging technologies continue to enter the marketplace and as large financial incumbents increasingly seek to innovate the services that they offer to compete with our network. Technological advances and the continued growth of e-commerce activities have increased consumers’ accessibility to more credit products and services and led to the expansion of competition in digital payment options that diminished the need for regular consumer credit such as pay-over-time solutions.
Some of our competitors are substantially larger than we are, which gives those competitors advantages we do not have, such as more diversified products, a broader Partner and investor base, the ability to reach more Partners and Asset Investors, the ability to cross-sell their financial products and cross-subsidize their offerings through their other business lines, operational efficiencies more versatile technology networks, broad-based local
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distribution capabilities and lower-cost funding. In addition, because many of our competitors are large financial institutions that fund themselves through low-cost insured deposits and originate and own the assets they produce, they have certain revenue and funding opportunities unavailable to us. Our competitors may also have longer operating histories, more extensive and broader consumer and merchant relationships, and greater brand recognition and brand loyalty than we have. For example, more established companies that possess large, existing Partner and investor bases, substantial financial resources, larger marketing teams and established distribution channels could enter the market.
Increased competition could require us to alter the pricing and terms we offer to our Partners. If we are unable to successfully compete, the demand for our AI technology and products could stagnate or substantially decline, and we could fail to retain or grow the number of Partners using our network, which would reduce the attractiveness of our network to Partners, and which would materially and adversely affect our business, results of operations, financial condition and future prospects.
Substantially all of our revenue is derived from a limited variety of consumer assets purchased exclusively in the United States, which is a highly competitive and saturated market, and we do not know how well our AI technology may perform in other markets.
While we are constantly expanding the types of products and services facilitated through our AI technology, the vast majority of our revenue is generated from a limited variety of consumer credit assets products that are currently originated by Partners exclusively in the United States, specifically personal consumer loans and auto loans. The market for these loans is characterized by a large number of operators offering unsecured short-term lending programs, including our Partners, and also by certain behavioral patterns that our AI technology is able to identify and factor, as well as a complex regulatory landscape. However, in order to continue growing, we may need to expand to markets abroad, which are less competitive and saturated than the United States, but which may also differ significantly from it in many facets, including cultural and social norms and economic preferences, and with which our AI technology has not yet coped. If we are unable to configure our AI technology and Financing Vehicles to cater to other markets outside the United States, our business, financial condition and results of operations could be adversely affected.
A significant portion of our current revenues are derived from Financing Vehicles that acquire consumer credit assets and related products, and as a result, we are particularly susceptible to fluctuations in consumer credit activity and the capital markets.
Currently, the majority of our Partners’ asset originations facilitated with the assistance of our AI technology are unsecured personal loans. The market for unsecured personal loans has grown rapidly in recent years, and it is unclear to what extent such market will continue to grow, if at all. A wide variety of factors could impact the market for unsecured personal loans, including macroeconomic conditions, competition, regulatory developments and changes in consumer credit activity. For example, FICO has recently changed its methodology in calculating credit scores in a manner that potentially penalizes borrowers who take out personal loans to pay off or consolidate credit card debt. This change could negatively affect the overall demand for unsecured personal loans. The personal lending market has also benefitted from historically low interest rates, as our Partners’ customers are attracted to relatively low borrowing costs. Our success will depend, in part, on the continued growth of the unsecured personal loan market, and if such market does not further grow or grows more slowly than we expect, our business, financial condition and results of operations could be adversely affected.
In addition, our Partners may, in the future, seek partnerships with competitors that are able to help them offer them a broader array of credit products, such as secured loans. Over time, in order to preserve and expand our relationships with our existing Partners, and enter into relationships with new Partners, it may become increasingly important for us to expand our offerings and be able to help our Partners offer a wider variety of products and services. We also may be susceptible to competitors that choose to offer higher yields to Asset Investors or offer to pay higher prices for loans or other assets acquired from our Partners. Competitors may elect to provide these incentives, even if they expect such pricing practices to lead to losses for them. Such practices by competitors could negatively affect the overall demand for personal loans facilitated with the assistance of our AI technology and, therefore, our business, financial condition and results of operations.
Further, the personal loans that are acquired from our Partners into Financing Vehicles are, for the most part, unsecured, and there is a risk that our Partners’ customers will not prioritize repayment of such loans, particularly
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in any economic downcycle. For example, if our Partners’ customers incur secured debt, such as a mortgage, a home equity line of credit or an auto loan, our Partners’ customers may choose to repay their obligations under such secured debt before repaying their unsecured loans, which could lead to higher default rates by our Partners’ customers with respect to their unsecured debt. This in turn could lead to losses for Financing Vehicles, which could lead to less demand from Asset Investors. If this leads to decreased demand by Asset Investors to participate in Financing Vehicles that acquire assets and other financial products facilitated with the assistance of our AI technology, our business, financial condition and results of operations could be adversely affected.
If our estimates, judgments or assumptions relating to our critical accounting policies prove to be incorrect or financial reporting standards or interpretations change, our results of operations could be adversely affected.
The preparation of financial statements in conformity with U.S. GAAP requires our management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in our consolidated financial statements and accompanying notes. We base our estimates and assumptions on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of certain assets, liabilities, and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements and accompanying notes include those related to revenue recognition, consolidation of variable interest entities (each, “VIE”), fair value of certain assets and liabilities, stock-based compensation, and income taxes, including any valuation allowance for deferred tax assets. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of industry or financial analysts, which may result in a decline in the trading price of Pagaya Class A Ordinary Shares.
Additionally, we regularly monitor our compliance with applicable financial reporting standards and review new pronouncements and drafts thereof that are relevant to us. As a result of new standards, or changes and challenges to existing standards or their interpretation, we might be required to change our accounting policies, alter our operational policies or implement new or enhance existing systems so that they reflect new or amended financial reporting standards, or we may be required to restate our published financial statements. Such changes or challenges to existing standards or in their interpretation may have an adverse effect on our reputation, business, financial condition, and profit and loss, or cause an adverse deviation from our revenue and operating profit and loss target, which may negatively impact our results of operations.
We are currently undergoing an internal corporate reorganization for the purpose of consolidating our U.S. businesses. We may from time to time undertake other internal corporate reorganizations that may adversely impact our business and results of operations.
We are currently undertaking and from time to time, we may undertake internal corporate reorganizations in an effort to simplify our organizational structure, streamline our operations or for other operational reasons. Such internal reorganization involves and may involve, among other things, the combination or dissolution of certain of our existing subsidiaries and the creation of new subsidiaries. These transactions could be disruptive to our business, result in significant expense, require regulatory approvals, and fail to result in the intended or expected benefits, any of which could adversely impact our business and results of operations. See the section of this proxy statement/prospectus entitled “Description of Pre-Closing Transactions—Pagaya Internal Reorganization.”
Our reputation and brand are important to our success. If we are unable to continue developing our reputation and brand, or if our brand or reputation is compromised, our ability to retain existing and attract new Partners and Asset Investors and our ability to maintain and improve our relationship with regulators of our industry could be adversely affected. As a result, our business, financial condition and results of operations may suffer.
We believe maintaining a strong brand and trustworthy reputation is critical to our success and our ability to attract new Partners and Asset Investors. Factors that affect our brand and reputation include, among other things: perceptions of AI, our industry and our Company, including the quality and reliability of our AI technology, the accuracy of our AI technology, perceptions regarding the application of AI to consumer lending or other markets specifically, the funding component of our business, privacy and security practices, litigation, regulatory activity, and the overall user experience of our Partners and their customers. Negative publicity or negative public perception of these factors, even if inaccurate, could adversely affect our brand and reputation.
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Certain of the Partners’ arrangements have been criticized in government and media reports as “rent-a-charter” or “rent-a-bank” which has drawn the heightened attention of consumer advocacy groups, government officials and elected representatives. As a result, bank regulators have taken actions causing banks to exit third-party programs that the regulators determined involved unsafe and unsound practices. The payday and “short-term, small-dollar” loans that have been subject to more frequent criticism and challenge are different from assets facilitated with the assistance of our AI technology, in our view. If we are nevertheless associated because of the heightened attention with such payday or short-term, small-dollar consumer loans, or if we are associated with increased criticism of non-payday loan programs involving relationships between bank originators and non-bank lending networks and program managers, demand for loans or other assets could significantly decrease, which could cause our Partners to reduce their origination volumes or terminate their arrangements with us, impede our ability to attract new Partners or delay the onboarding of Partners, impede our ability to attract Asset Investors to participate in the funding component of our network or reduce the number of potential Partners that use our network. Any of the foregoing could adversely affect our results of operations and financial condition.
We may also become subject to lawsuits, including class action lawsuits, or other challenges such as government investigations, inquiries, enforcement or arbitration, against our Partners or us for obligations from our Partners through our AI technology. If there are changes in laws or in the interpretation or enforcement of existing laws affecting loans or other assets we place with the assistance our AI technology, or if we become subject to such lawsuits, investigations or inquiries, our business, financial condition and results of operations would be adversely affected.
Harm to our reputation can also arise from many other sources, including employee and independent contractor or former employee and independent contractor misconduct, misconduct or negligence by outsourced service providers or other counterparties, failure by us or our Partners to meet minimum standards of service and quality, and inadequate protection of borrower information and compliance failures and claims. If we are unable to protect our reputation and brand, our business, financial condition and results of operations would be adversely affected.
If we are unable to manage the risks associated with fraudulent activity, our brand and reputation, business, financial condition, and results of operations could be adversely affected and we could face material legal, regulatory and financial exposure (including fines and other penalties).
Fraud is prevalent in the financial services industry and is likely to increase as perpetrators become more sophisticated. We are subject to the risk of fraudulent activity associated with our Partners’ customers and third parties handling our Partners’ borrower information and, in limited situations, cover certain fraud losses of Partners and Asset Investors. Fraud rates could also increase in a down-cycle economy. While we perform initial and ongoing due diligence on our Partners’ fraud prevention and detection policies and procedures, we rely on our Partners to predict and otherwise validate or authenticate applicant-reported data and data derived from third-party sources and notify us if any fraud is detected. If such efforts are insufficient to accurately detect and prevent fraud, the level of fraud-related losses of products could increase, which would decrease confidence in our AI technology. There have been some instances of fraud by Partners’ customers in the past which have generally occurred at the origination of the asset in the normal course of business and are not material to the Company. If any such fraud is identified, the applicable Partner is typically required to repurchase the related asset.
A failure to accurately detect and prevent fraud may also lead to increased costs if we have to invest in developing new technology to defend against fraud, which, in turn may lead to decreased returns in Financing Vehicles and therefore decreased returns for Asset Investors. In addition, our Partners and Asset Investors may not be able to recover amounts disbursed on products made in connection with inaccurate statements, omissions of fact or fraud, which could erode the trust in our brand and negatively impact our ability to attract new Partners and Asset Investors.
High profile fraudulent activity within the financial services industry also could negatively impact our brand and reputation. In addition, significant increases in fraudulent activity could lead to regulatory intervention, which could increase our costs and also negatively impact our brand and reputation. Further, if there is any increase in fraudulent activity that increases the need for human intervention in screening application data, the level of automation on our network could decline and negatively affect our unit economics. If we are unable to manage these risks, our business, financial condition and results of operations could be adversely affected.
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We are subject to risks related to our dependency on our Founders, key personnel, employees and independent contractors, including highly-skilled technical experts, as well as attracting, retaining and developing human capital in a highly competitive market.
Our success and future growth depend upon the continued services of our management team and other key employees and independent contractors, including highly-skilled technical experts. In particular, the Founders who are members of our leadership team are critical to our overall management, as well as the continued development of our products and services, our culture and our strategic direction. From time to time, there may be changes in our management team resulting from the hiring or departure of executives, key employees and independent contractors, which could disrupt our business. The loss of one or more members of our senior management or key employees or independent contractors could harm our business, and we may not be able to find adequate replacements. We may not be able to retain the services of any members of our senior management, key employees or independent contractors, including high-skilled technical experts. From time to time, we rely on temporary independent contractor programs to scale our operations team. Failure to effectively implement and manage such programs could result in misclassification or other employment related claims or inquiries by governmental agencies. In addition, to execute our growth plan, we must attract and retain highly qualified personnel, including engineering and data analytics personnel. In order to continue to access top talent, we will likely continue to grow our footprint of office locations, which may add to the complexity and costs of our business operations. Competition for highly skilled technical experts, including engineering and data analytics personnel, is extremely intense, particularly in Israel where we are headquartered, which has experienced increased activity in technology startups. From time to time, we have experienced, and we expect to continue to experience, difficulty in hiring and retaining employees and independent contractors with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. In addition, prospective and existing employees and independent contractors often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our equity awards declines, experiences significant volatility or increases such that prospective employees or independent contractors believe there is limited or less upside to the value of our equity awards, it may adversely affect our ability to recruit and retain key employees and independent contractors. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects would be harmed. We generally enter into non-competition agreements with our employees and independent contractors. These agreements prohibit our employees and independent contractors, if they cease working for us, from competing directly with us or working for our competitors for a limited period. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees and independent contractors work, and it may be difficult for us to restrict our competitors from benefiting from the expertise our former employees and independent contractors developed while working for us.
The funding component of our business related to the Financing Vehicles is highly competitive.
The funding component of our business is highly competitive, with competition based on a variety of factors, including investment performance, the quality of assets provided to Asset Investors, investor liquidity and willingness to invest, vehicle terms (including fees), brand recognition and business reputation. The funding component of our business competes with a number of other specialized investment funds, hedge funds, funds of hedge funds, other managing pools of capital, securitizations by our Partners or other consumer credit originators, as well as corporate buyers, traditional asset managers, commercial banks, investment banks and other financial institutions (including sovereign wealth funds), and we expect that competition will continue to increase. For example, certain traditional asset managers have developed their own lending networks and are marketing other lending and credit strategies as alternatives to fund investments. Additionally, developments in financial technology, or fintech, such as distributed ledger technology, or blockchain, have the potential to disrupt the financial industry and change the way consumer lenders and other financial institutions do business. A number of factors serve to increase our competitive risks:
• | a number of our competitors in some of our businesses have greater financial, technical, marketing and other resources and more personnel than we do; |
• | some Financing Vehicles may not perform as well as competitors’ Financing Vehicles or other available investment products; |
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• | several of our competitors have significant amounts of capital, and many of them have similar investment objectives to ours, which may create additional competition for investment opportunities and may reduce the size and duration of pricing inefficiencies that many alternative investment strategies seek to exploit; |
• | some of our competitors may be subject to less regulation and accordingly may have more flexibility to undertake and execute certain investments, including in certain industries or businesses, than we can and/or bear less compliance expense than we do; |
• | some of our competitors may have more flexibility than us in raising certain types of Financing Vehicles under the contracts or terms they have negotiated with their investors; and |
• | some of our competitors may have higher risk tolerances, different risk assessments or lower return thresholds, which could allow them to consider a wider variety of investments and to bid more aggressively than us for investments that we want to make. |
We have historically competed primarily on the basis of the performance of Financing Vehicles, and not on the level of our fees or incentive fees relative to those of our competitors. However, there is a risk that fees and incentive fees in the alternative investment or securitization industry will decline, without regard to our historical performance. Fee or incentive fee income reductions on existing or future Financing Vehicles, without corresponding decreases in our cost structure, would adversely affect our business and revenues.
Maintaining our reputation is critical to attracting and retaining Asset Investors and for maintaining our relationships with our regulators. Negative publicity regarding our Company, our personnel or our Partners could give rise to reputational risk that could significantly harm our existing business and business prospects. Similarly, events could occur that damage the reputation of our industry generally, such as the insolvency or bankruptcy of large funds or lending networks or a significant number of funds or lending networks or highly publicized incidents of fraud or other scandals, any one of which could have a material adverse effect on our business, regardless of whether any of those events directly relate to the Financing Vehicles or the investments made by Financing Vehicles.
In addition, the attractiveness of Financing Vehicles relative to investments in other investment products could decrease depending on economic conditions. Furthermore, any new or incremental regulatory measures for the U.S. financial services and lending industries may increase costs and create regulatory uncertainty and additional competition for many Financing Vehicles. See “Risks Related to Our Legal and Regulatory Environment—As the political and regulatory framework for AI technology and machine learning evolves, our business, financial condition and results of operations may be adversely affected.”
This competitive pressure could adversely affect our ability to make successful investments and limit our ability to raise future Financing Vehicles, either of which would adversely impact our business and revenues.
Our failure to deal appropriately with conflicts of interest in the funding component of our business, related to our allocation of investment opportunities between Financing Vehicles could damage our reputation and adversely affect our businesses. Conflicts of interest may also arise in our allocation of costs and expenses, and we are subject to increased regulatory scrutiny and uncertainty with regard to those determinations.
As we have expanded and as we continue to expand the number and scope of our businesses, we increasingly confront potential conflicts of interest relating to the investment activities of the Financing Vehicles. Conflicts of interest continue to be a significant area of focus for regulators, investors and the media. Because of the variety of businesses and investment strategies that we pursue, we may face a higher degree of scrutiny compared with others that focus on fewer asset classes. We place assets across Financing Vehicles. In addition, certain Financing Vehicles may purchase an interest in one or more other Financing Vehicles. However, the risk that Asset Investors or regulators could challenge allocation decisions as inconsistent with our obligations under applicable law, governing agreements or our own policies cannot be eliminated. Further, the perception of non-compliance with such requirements or policies could harm our reputation with Asset Investors. A failure to appropriately deal with these, among other, potential conflicts, could negatively impact our reputation and ability to raise additional Financing Vehicles or result in potential litigation or regulatory action against us.
The investment activities or strategies used for certain Financing Vehicles may conflict with the transactions and strategies employed on behalf of other Financing Vehicles, and may affect the prices and availability of investments in which a Financing Vehicle may invest. Subject to any legal and regulatory obligations, the
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investment activities of our affiliates or a Financial Vehicle are carried out generally without reference to positions held by another Financing Vehicle and may have an effect on the value of the positions so held, or may result in an affiliate having an interest in an issuer adverse to that of a Financing Vehicle. Because the Financing Vehicles operate different businesses, the affiliates are subject to a number of potential and actual conflicts of interest, potentially greater regulatory oversight, and more legal and contractual restrictions than would be the case if the affiliates had only a single line of business.
In particular, Financing Vehicles may invest in the same types of assets in which the other Financing Vehicles currently invest and expect to continue to invest in the future. Although we anticipate that the Financing Vehicles will operate within a limited and defined set of parameters (e.g., time, scope and duration) when acquiring any such assets, a Financing Vehicle could encounter actual and potential conflicts to the extent that any such Financing Vehicle competes with others for investment opportunities or our resources (e.g., personnel). These activities can adversely affect the prices and availability of loans or other assets held by or potentially considered for purchase for the account of a Financing Vehicle.
Subject to the requirements of each Financing Vehicle’s governing documents, investment opportunities sourced by affiliates or Financing Vehicles will generally be placed among the accounts of the applicable Financing Vehicles in a manner that the applicable manager or sponsor believes to be appropriate given the factors that it believes to be relevant, such as each Financing Vehicle’s respective investment objectives, concentration limits, interest and asset coverage tests, collateral quality, liquidity and requirements tests, lender covenants, the amount of free cash each of them has available for investment, total capital and capital commitments, anticipated future cash flows and cash requirements, and other considerations and limitations of such Financing Vehicle.
We regularly make determinations to allocate costs and expenses both among Financing Vehicles and between such vehicles and their respective governing entities. Certain of those determinations are inherently subjective and virtually all of them are subject to regulatory oversight. Any determination or allegation of, or investigation into, a potential violation could cause reputational harm and a loss of investor confidence in our business. It could also result in regulatory lapses and applicable penalties, as well as increased regulatory oversight of our business. In addition, any determination to allocate fees to the applicable investment adviser or manager could negatively affect our net income, and ultimately decrease the value of Pagaya Ordinary Shares and our dividends to our shareholders.
We may need to raise additional funds in the future, including, but not limited to, through equity, debt, or convertible debt financings, to support business growth, and those funds may be unavailable on acceptable terms, or at all. As a result, we may be unable to meet our future capital requirements, which could limit our ability to grow and jeopardize our ability to continue our business.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new products and services, enhance our AI technology, scale and improve our operating infrastructure, or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity, debt or convertible debt financings to secure additional funds. If we raise additional funds by issuing equity securities or securities convertible into equity securities, our shareholders may experience dilution. Debt financing, such as credit facilities or corporate bonds, may involve covenants restricting our operations or our ability to incur additional debt. Debt financing may also require security arrangements including cash collateral agreements that restrict the availability of cash held as collateral which is the case for amounts we may borrow in the future under our existing Credit Agreement. In addition, future equity financing or replacement or refinancing of any debt financings may not be available on terms favorable to us or our shareholders, or at all, and the fact that debt holders are repaid first may reduce our ability to raise a later equity financing.
If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, we may be unable to pursue certain business opportunities and our ability to continue to support our business growth and to respond to business challenges could be impaired and our business may be harmed. In addition, we may be unable to access capital to fund the purchases of additional products or other assets through raising new and successor Financing Vehicles. For additional information, see “—Risks Related to Management of Financing Vehicles—The funding component of our network depends in large part on our ability to raise capital from third
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party Asset Investors. A failure to raise capital from third party Asset Investors on attractive fee terms or at all, would impact our ability to collect Network Fees or deploy such capital into investments and potentially collect performance fee revenues, which would materially reduce our revenue and cash flow and adversely affect our financial condition.”
Any legal proceedings, investigations or claims against us could be costly and time-consuming to defend and could harm our reputation regardless of the outcome. In addition, our business and operations could be negatively affected if they become subject to any securities litigation or shareholder activism, which could cause us to incur significant expense, hinder execution of business and growth strategy and impact our share price.
We are and may in the future become subject to legal proceedings, investigations and claims, including claims that arise in the ordinary course of business, such as claims brought by Asset Investors or Partners in connection with commercial disputes, claims by users, claims or investigations brought by regulators or employment claims made by our current or former employees and independent contractors. We are subject to claims in the ordinary course of business, including employment claims.
We are not currently a party to any pending or, to our knowledge, threatened litigation that will have a significant effect on our financial position or profitability. Any litigation, investigation or claim, whether meritorious or not, could harm our reputation, will increase our costs and may divert management’s attention, time and resources, which may in turn harm our business, financial condition and results of operations. Insurance might not cover such claims, might not provide sufficient payments to cover all the costs to resolve one or more such claims and might not continue to be available on terms acceptable to us. A claim brought against us for which we are uninsured or underinsured could result in unanticipated costs, potentially harming our business, financial position and results of operations.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Shareholder activism, which could take many forms or arise in a variety of situations, as well as the frequency of lawsuits against special purpose acquisition company (“SPAC”) sponsors, has been increasing recently, especially in the context of SPAC business combinations. Volatility in the share price of the Pagaya Class A Ordinary Shares or other reasons may in the future cause it to become the target of securities litigation or shareholder activism. Securities litigation and shareholder activism, including potential proxy contests, could result in substantial costs and divert management’s and the Pagaya Board’s attention and resources from Pagaya’s business. Additionally, such securities litigation and shareholder activism could give rise to perceived uncertainties as to Pagaya’s future, adversely affect its relationships with service providers and make it more difficult to attract and retain qualified personnel. Also, Pagaya may be required to incur significant legal fees and other expenses related to any securities litigation and activist shareholder matters. Further, Pagaya’s share price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any securities litigation and shareholder activism
Although we currently maintain insurance coverage, such coverage may not be sufficient to cover the types or extent of claims or loss that may be incurred or received. In addition, we may not maintain or procure insurance coverage in connection with the Merger that is sufficient to cover the types or extent of claims or loss that may be incurred or received.
We currently maintain insurance in connection with our business, including, among other coverages, directors and officers liability insurance, errors and omissions/professional liability insurance, employment practices liability insurance, fiduciary liability insurance, and cyber insurance. The scope and limits of such insurance may not be sufficient to cover the types or extent of claims or loss that may be incurred or received. In addition, there may be risks for which Pagaya does not maintain or procure insurance coverage or for which the insurance coverage may not respond.
We are growing rapidly, and our insurance coverage may not be sufficient to protect us from any loss now or in the future and we may not be able to successfully claim our losses under our current insurance policies on a timely basis, or at all. Our inability to obtain and maintain appropriate insurance coverage could cause a substantial business disruption, adverse reputational impact, and regulatory scrutiny.
If we incur any loss that is not covered by our insurance policies, or the compensated amount is significantly less than our actual loss, our business, financial condition and results of operations could be materially and adversely affected.
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Our risk management policies and procedures, and those of our third-party vendors upon which we rely, may not be fully effective in identifying or mitigating risk exposure. If our policies and procedures do not adequately protect us from exposure to these risks, we may incur losses that would adversely affect our financial condition, reputation and market share.
We have developed risk management policies and procedures and we continue to refine them as we conduct our business. Many of our procedures involve oversight of third-party vendors that provide us with critical services such as information technology systems and infrastructure, portfolio management, custody, market data expenses and fund accounting and administration and pricing services. Our policies and procedures to identify, monitor and manage risks may not be fully effective in mitigating our risk exposure. Further, as we expand into new lines of business, our risk management policies and procedures may not be able to adequately keep up with our current rapid rate of expansion, and may not be adequate or sufficient to mitigate risks. Moreover, we are subject to the risks of errors and misconduct by our employees and independent contractors, including fraud and non-compliance with policies. These risks are difficult to detect in advance and deter, and could harm our business, results of operations or financial condition. Although we maintain insurance and use other traditional risk-shifting tools, such as third-party indemnification, to manage certain exposures, they are subject to terms such as deductibles, coinsurance, limits and policy exclusions, as well as risk of counterparty denial of coverage, default or insolvency. If our policies and procedures do not adequately protect us from exposure, and our exposure is not adequately covered by insurance or other risk-shifting tools, we may incur losses that would adversely affect our business, financial condition and results of operations.
If there is a pledge of a substantial amount of Pagaya Ordinary Shares, a change of control could occur and could materially and adversely affect our financial condition, results of operation and cash flows.
Shareholders that beneficially own a significant interest in Pagaya may pledge a substantial portion of Pagaya Ordinary Shares that they own to secure loans made to them by financial institutions. If a shareholder defaults on any of its obligations under these pledge agreements or the related loan documents, these financial institutions may have the right to sell the pledged shares, subject to the lockup restrictions set forth in the Pagaya A&R Articles. Such a sale could cause our share price to decline. Many of the occurrences that could result in a foreclosure of the pledged shares are out of our control and are unrelated to our operations. Because these shares may be pledged to secure loans, the occurrence of an event of default could result in a sale of pledged shares that could cause a change of control of Pagaya, even when such a change of control may not be in the best interests of our shareholders, and it could also result in a default under certain material contracts to which we are a party, which could materially and adversely affect our financial condition, results of operations and cash flows.
Risks Related to Technology, Intellectual Property and Data
Regulators may assert, and courts may conclude, that certain AI technology leads to unintentional bias or discrimination.
Regulatory agencies have expressed concerns that certain AI technology may lead to unintentional bias or discrimination in an automated credit analysis process. Such concerns could subject us to legal or regulatory liability, reputational harm, and/or increase our legal and compliance expenses. For example, on March 29, 2021, the Consumer Financial Protection Bureau (the “CFPB”) and the federal prudential bank regulators issued a “Request for Information and Comment on Financial Institutions’ Use of Artificial Intelligence, Including Machine Learning.” These regulators asked for comments regarding, among other things, whether the use of AI technology and machine learning in consumer credit underwriting can lead to bias and discrimination. A number of publicly submitted comments have asserted that AI technology and machine learning in consumer credit underwriting can lead to discrimination in violation of, inter alia, the Equal Credit Opportunity Act and the Fair Housing Act. This request for information process may lead to a regulatory rulemaking that could restrict the use of AI technology and machine learning in consumer credit underwriting. The Equal Credit Opportunity Act and the Fair Credit Report Act require creditors to provide consumers with the reasons for denial of credit or other adverse action, and providing such reasons can be more difficult given the complexity of certain AI technology. In addition, the Federal Trade Commission (“FTC”) has brought enforcement actions related to the use of AI and automated credit analysis in circumstances where the FTC has determined that the use of such tools is insufficiently transparent to consumers. Our inability to comply, and enable our Partners and their customers to comply, with the requirements of existing laws or new interpretations of existing laws, or new regulatory rulemaking that restricts the use of AI technology in consumer credit underwriting or other markets, could
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adversely affect our business, financial condition, and results of operations. We may also be obligated to indemnify Partners or pay substantial settlement costs in connection with any such claim or litigation related to the use of our AI technology and automated credit analysis, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our AI technology could be costly and time consuming and divert the attention of our management and key personnel from our business operations.
We may be unable to sufficiently, and it may be difficult and costly to, obtain, maintain, protect, or enforce our intellectual property and other proprietary rights.
Our ability to operate our businesses depends, in part, upon our proprietary technology. We may be unable to protect our proprietary technology effectively, which would allow competitors to duplicate our AI technology and adversely affect our ability to compete with them. We rely on a limited combination of trade secret, trademark laws and other rights, as well as confidentiality procedures, contractual provisions and our information security infrastructure to protect our proprietary technology, processes and other intellectual property. The steps we take to protect our intellectual property rights may be inadequate. For example, a third party may attempt to reverse engineer or otherwise obtain and use our proprietary technology without our consent. The pursuit of a claim against a third party for infringement of our intellectual property could be costly, and any such efforts may not be successful. Our failure to secure, protect and enforce our intellectual property rights could adversely affect our brand and adversely impact our business.
Our proprietary technology, including our AI technology, may be alleged to infringe upon third-party intellectual property, and we may face intellectual property challenges from such other parties. We may not be successful in defending against any such challenges or in obtaining licenses to avoid or resolve any intellectual property disputes. If we are unsuccessful, such claim or litigation could result in a requirement that we pay significant damages or licensing fees, or we could in some circumstances be required to make changes to our business to avoid such infringement, which would negatively impact our financial performance. We may also be obligated to indemnify parties or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to modify applications or refund fees, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time consuming and divert the attention of our management and key personnel from our business operations.
Moreover, it has become common in recent years for individuals and groups to purchase intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from companies such as ours. Even in instances where we believe that claims and allegations of intellectual property infringement against us are without merit, defending against such claims is time consuming and expensive and could result in the diversion of time and attention of our management, employees and independent contractors. In addition, although in some cases a third party may have agreed to indemnify us for such costs, such indemnifying party may refuse or be unable to uphold its contractual obligations. In other cases, our insurance may not cover potential claims of this type adequately or at all, and we may be required to pay monetary damages, which may be significant.
Furthermore, our technology may become obsolete or inadequate, and we may not be able to successfully develop, obtain or use new technologies to adapt our models and systems to compete with other technologies as they develop. If we cannot protect our proprietary technology from intellectual property challenges, or if our technology becomes obsolete or inadequate, our ability to maintain our model and systems or facilitate products could be adversely affected.
Our technology relies in part on third-party open-source software components, and failure to comply with the terms of the underlying open-source software licenses could restrict our ability to utilize our technology and increase our costs.
Our AI technology, including our computational infrastructure, relies on software licensed to us by third-party authors under “open-source” licenses. Some open-source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open-source software we use. If we combine our proprietary software with open-source software in a certain manner, we could, under certain open-source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar solutions with less development effort and time and ultimately put us at a competitive disadvantage.
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Although we monitor our use of open-source software to avoid subjecting our products to conditions we do not intend, the terms of many open-source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our services. Moreover, our processes for controlling our use of open-source software may not be effective. If we are held to have breached the terms of an open-source software license, we could be required to seek licenses from third parties to continue operating our network on terms that are not economically favorable or feasible, to re-engineer our network or the supporting computational infrastructure to discontinue use of certain code, or to make generally available, in source code form, portions of our proprietary code.
Further, in addition to risks related to license requirements, use of certain open source software carries greater technical and legal risks than does the use of third-party commercial software. For example, open source software is generally provided as-is without any support or warranties or other contractual protections regarding infringement or the quality of the code, including the existence of security vulnerabilities. To the extent that our network depends upon the successful operation of open source software, any undetected errors or defects in open source software that we use could prevent the deployment or impair the functionality of our systems and harm our reputation. In addition, the public availability of such software may make it easier for attackers to target and compromise our network through cyber-attacks. Any of the foregoing risks could materially and adversely affect our business, financial condition and results of operations.
Our proprietary AI technology relies in part on the use of our Partners’ borrower data and third-party data, and if we lose the ability to use such data, or if such data contains gaps or inaccuracies, our business could be adversely affected.
We rely on our proprietary AI technology, which includes statistical models built using a variety of datasets. Our AI technology relies on a wide variety of data sources, including data collected from our Partners’ customers and applicants, credit bureau data and our credit experience gained through monitoring the payment performance of our Partners’ customers over time. If we are unable to access and use data collected from our Partners’ customers and applicants, data received from credit bureaus, repayment data collected as part of the funding component of our network, or other third-party data used in our AI technology, or our access to such data is limited, our ability to accurately evaluate our Partners’ potential customers, detect fraud and verify applicant data would be compromised. Any of the foregoing could negatively impact the accuracy and effectiveness of our AI technology and the volume of products facilitated with the assistance of our network.
Third-party data sources on which we rely include the consumer reporting agencies regulated by the CFPB and other data sources. Such data is electronically obtained from third parties and used in our AI technology to process our Partners’ applicants. Data from national credit bureaus and other consumer reporting agencies and other information that we receive from third parties about a Partner’s applicant or borrower, may be inaccurate or may not accurately reflect the applicant’s or borrower’s creditworthiness for a variety of reasons, including inaccurate reporting by creditors to the credit bureaus, errors, staleness or incompleteness.
In addition, if third-party data used to improve our AI technology or train the AI model is inaccurate, or access to such third-party data is limited or becomes unavailable to us, the efficacy of our AI technology and our ability to continue to improve our AI technology would be adversely affected. Any of the foregoing could, for our Partners, result in sub-optimally and inefficiently evaluated assets, incorrect evaluation of transactions, or higher than expected losses, which in turn could adversely affect our ability to attract new Asset Investors and Partners or increase our Partners’ volume of financial products and adversely affect our business, financial condition and results of operations.
Cyberattacks and security breaches of our technology, or those impacting our users or third parties, could adversely impact our brand and reputation and our business, operating results and financial condition.
We are dependent on information technology systems and infrastructure to operate our business. In the ordinary course of our business, we collect, process, transmit and store large amounts of sensitive information, including personal information, credit information and other sensitive data of our Partners’ customers and other consumers providing their data to a Partner. It is critical that we do so in a manner designed to maintain the confidentiality, integrity and availability of such sensitive information. We also have arrangements in place with certain of our third-party vendors that require us to share consumer information. We rely on third parties to assist in our operations, and as a result, we manage a number of third-party vendors that may have access to our computer
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networks and sensitive or confidential information. In addition, many of those third parties turn to subcontractors or rely on their own service providers in outsourcing some of their responsibilities. As a result, our information technology systems, including the functions of third parties that are involved or have access to those systems, are large and complex, with many points of entry and access. While all information technology operations are inherently vulnerable to inadvertent or intentional security breaches, incidents, attacks and exposures, the size, complexity, accessibility and distributed nature of our information technology systems, and the large amounts of sensitive information stored on those systems make such systems potentially vulnerable to unintentional or malicious, internal and external attacks. Vulnerabilities may be exploited from inadvertent or intentional actions of our employees, independent contractors, third-party service providers, Partners, Asset Investors or by malicious third parties that may result in actual or attempted unauthorized access, mishandling or misuse of information, computer viruses or malware, cyberattacks that could lead to unauthorized persons obtaining confidential information, destruction of data, disruption or deterioration of service, sabotaged or damaged systems, as well as distributed denial of service attacks, data breaches and other infiltration, exfiltration or other similar events. Attacks of this nature are increasing in their frequency, levels of persistence, sophistication and intensity, and are being conducted by sophisticated and organized groups and individuals with a wide range of motives (including, but not limited to, industrial espionage) and expertise, including organized criminal groups, “hacktivists,” nation states and others. In addition to the extraction of sensitive information, such attacks could include the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of information and systems. Further, our shift to a remote working environment due to the COVID-19 pandemic could increase the risk of a security breach. Significant disruptions of our, our Partners’ and third-party service providers’ and/or other business partners’ information technology systems or other similar data security incidents could adversely affect our business operations and result in the loss, misappropriation, or unauthorized access, use or disclosure of, or the prevention of access to, sensitive information, which could result in financial, legal, regulatory, business and reputational harm to us. Further, our systems, policies and procedures may not be able to adequately keep up with our rapid expansion, and may not be adequate or sufficient to mitigate risks. In addition, many governments have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. These mandatory disclosures regarding a security breach are costly to implement and often lead to widespread negative publicity following a breach, which may cause our Partners’ customers and potential customers to lose confidence in the effectiveness of our data security measures related to our AI technology and business. Any security breach, whether actual or perceived, would harm our reputation and ability to attract new Partners and Asset Investors.
In addition, similar vulnerabilities may arise in the future as we continue to expand the features and functionalities of our network and introduce new products and services on our network, and we expect to continue investing substantially to protect against security vulnerabilities and incidents.
We rely on third-party service providers for a substantial portion of our business activities and for Financing Vehicles, and any disruption of service experienced by such third-party service providers or our failure to manage and maintain existing relationships or identify other high-quality, third-party service providers could harm our reputation, business, results of operations and growth prospects. We also depend on third-party property managers to manage our real property investments on a day-to-day basis, and there can be no assurance that they will operate such investments successfully.
We rely on a variety of third-party service providers in connection with a substantial portion of the operation of our business and Financing Vehicles. Any performance issues, errors, bugs or defects in third-party software or services could result in errors, defects or a failure of our solutions, which could materially and adversely affect our reputation, business, financial condition and results of operations. Many of our third-party service providers attempt to impose limitations on their liability for such performance issues, errors, bugs or defects, and if enforceable, we may have additional liability to our Partners, Asset Investors or to other third parties that could harm our reputation and increase our operating costs. Additionally, in the future, we might need to license other software or services to enhance our solutions and meet evolving Partner and Asset Investor demands and requirements, which may be unavailable to us on commercially reasonable terms or at all. Any limitations on our ability to use or obtain third-party software or services could significantly increase our expenses and otherwise result in delays, a reduction in functionality or errors or failures of our solutions until equivalent technology or content is either developed by us or, if available, identified, obtained through purchase or licensed and integrated into our solutions, which could adversely affect our business. In addition, third-party software and services may
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expose us to increased risks, including risks associated with the integration of new technology, the diversion of resources from the development of our own proprietary technology and our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs, all of which may increase our expenses and materially and adversely affect our business, financial condition and results of operations. We will need to maintain our relationships with third-party service providers and obtain software and services from such providers that do not contain any material errors or defects. Any failure to do so could adversely affect our ability to deliver effective solutions to Partners and Asset Investors and adversely affect our business.
Although the manager monitors the performance of each real property investment, it is primarily the responsibility of third-party property managers to manage the properties on a day-to-day basis. A Financing Vehicle’s results of operations, including its ability to make payments on any indebtedness, depend in large part on the ability of these third-party property managers to operate and lease the properties on economically favorable terms. There can be no assurance that the third-party property management firms employed by a Financing Vehicle will be able to operate each investment successfully. Moreover, the risks of dependence on third-party property management firms are different by property type and by investment stage (for example, properties in development or redevelopment have a greater dependence on the leasing abilities of a third-party manager or leasing agent). Property managers may receive fee based upon gross revenues and such fee arrangements may create an incentive for the relevant investment to be managed in a manner that is not consistent with the applicable Financing Vehicle’s objectives.
Under applicable employment laws, we may not be able to enforce covenants not to compete.
We generally enter into non-competition agreements as part of our employment agreements with our employees. These agreements generally prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors, Partners or Asset Investors for a limited period. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work and it may be difficult for us to restrict our competitors from benefitting from the expertise our former employees or consultants developed while working for us. For example, Israeli labor courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the protection of a company’s trade secrets or other proprietary knowhow.
Risks Related to Dual Class Structure
The dual class structure of Pagaya Ordinary Shares has the effect of concentrating voting power with certain shareholders—in particular, our Founders—which will effectively eliminate your ability to influence the outcome of many important determinations and transactions, including a change in control.
Pagaya Class A Ordinary Shares, which are the shares that are being listed, have one vote per share, and Pagaya Class B Ordinary Shares have 10 votes per share. At the Closing, the Founders, and any Permitted Class B Owners, are expected to receive all of the Pagaya Class B Ordinary Shares that will be issued and outstanding. By virtue of their holdings of Pagaya Class B Ordinary Shares, the Founders are expected to, in the aggregate, hold approximately 81% of Pagaya’s voting power immediately following the Closing in the no redemption scenario. In addition, the Founders hold Pagaya Options which, if exercised in full and assuming no dilution of their holdings, would be expected to result in the Founders’ holding, in the aggregate, approximately 85% of Pagaya’s voting power immediately following the Closing in the no redemption scenario. This percentage may increase if additional shares are issued to our Founders based on increases in the market capitalization of Pagaya following the Closing as a result of the vesting of stock options. See “Risk Factors—Risks Related to EJFA.” All outstanding Pagaya Class B Ordinary Shares held by a Founder and any Permitted Class B Owners will automatically be converted into an equal number of Pagaya Class A Ordinary Shares (and therefore will have one rather than ten votes per share) on the earliest to occur of (i) (A) such Founder’s employment as an officer of Pagaya being terminated not for cause, such Founder resigning as an officer of Pagaya, death or permanent disability of such Founder or such Founder’s bankruptcy and (B) such Founder no longer serving on the Pagaya Board; (ii) 90 days after such Founder is terminated for cause, subject to certain exceptions, or (iii) the earliest to occur of (A) such time as the Founders and their permitted transferees first collectively hold less than 10% of the total issued and outstanding ordinary share capital of Pagaya and (B) the 15th anniversary of the Closing. See the section titled “Description of Pagaya Securities—Pagaya Ordinary Shares—Pagaya Class B Ordinary Shares” for further discussion of the terms of the Pagaya A&R Articles that will be in effect immediately prior to the