Monroe Capital settles with SEC over SPAC disclosure claims

Monroe Capital will pay a $1 million penalty to the Securities and Exchange Commission, which alleged the middle market credit shop failed to properly disclose conflicts of interest related to SPACs sponsored by some of its personnel.

The SEC and other agencies are bringing closer scrutiny on private equity through a bevy of new regulations that could change the way the industry operates. The agency’s settlement with Monroe also connects to the SPAC craze of a few years ago, which provides companies a speedy way to access public markets.

Monroe, in the settlement, did not admit or deny wrongdoing. “We are pleased to have successfully resolved this matter relating to disclosures pertaining to certain SPAC-related investments. Further, we have enhanced our related internal policies and procedures in keeping with our commitment to holding ourselves to the highest standards of regulatory compliance,” Monroe Capital said through a spokesperson.

While pertaining to SPACs, which have faded in popularity in the changed market, the principles remain relevant amid pressure to deploy capital, according to Igor Rozenblit, founder and partner of compliance consultancy Iron Road Partners.

“This case is incredibly relevant today because even though SPAC transactions have disappeared so have some sources of credit. Just like deSPACs became difficult to complete, today LBOs can be challenging to close and there could be pressure on firms that manage both credit and equity funds to lend to companies where they also own the equity. This would create the same exact conflict,” Rozenblit said.

A special purpose acquisition company is a shell company that raises money from investors and looks for a private company to merge with and turn public. SPAC sponsors range from wealthy individuals to private equity firms, which have approached SPAC sponsorship in different ways, including by putting the SPAC into an actual PE fund.

Monroe Capital is a Chicago private credit shop that manages about $15.6 billion, according to its Form ADV. From around June 2018 to February 2021, Monroe Capital personnel were involved in the formation or were members of the sponsors of three SPACs: Thunder Bridge I, Thunder Bridge II and MCAP. Firm personnel or affiliates shared about 25 percent, 20 percent and 60 percent of I, II and MCAP, the SEC said.

As part of the sponsors of the SPACs, the personnel were entitled to sponsor compensation and had “material conflicts of interest that … could cause Monroe Capital to render advice that was not disinterested,” according to the SEC’s complaint.

Monroe Capital contributed financing into the private funding alongside the SPAC investments (known as PIPE funding), the SEC said. Monroe Capital funds invested $25 million, $7.5 million and $5 million into the PIPE financings for the SPACs, the SEC said. As well, Monroe funds acquired about $15 million of MCAP common stock prior to the closing of its investment, SEC said.

Despite the alleged conflicts, Monroe did not consult with its limited partner advisory committees on the SPAC formation or PIPE deals, the SEC said. It also failed to adopt and implement written compliance policies to prevent violations of disclosure rules, according to the SEC.

In addition to the $1 million penalty, the SEC also censured Monroe Capital and ordered the manager to cease and desist from any future violations of the Advisers Act and Exchange Act.

Chris Witkowsky contributed to this report.