KAP Kcap Financial 7.375% Senior Notes Due 2019 (delisted)

Vote Required for Proposal 2

The approval of the issuance of shares upon conversion of the Convertible Notes into more than 20% of our common stock outstanding issued at a discount to the Company’s net asset value per share under applicable Nasdaq rules requires the affirmative vote of a majority of the total votes cast on the proposal at the Special Meeting, either in person or by proxy. Holders of the Convertible Notes are not eligible to vote on Proposal 2 as described in this proxy statement in accordance with Nasdaq Listing Rules. Abstentions and broker “non-votes” will have no effect with respect to the approval of Proposal 2.

Additional Solicitation

If there are not enough votes to approve the proposals at the Special Meeting, the shareholders who are represented may adjourn the Special Meeting to permit the further solicitation of proxies. Any adjournment will require the affirmative vote of a majority of those shares that are represented at the Special Meeting in person or by proxy, whether or not a quorum is present. The persons named as proxies will vote those proxies for such adjournment, unless marked to be voted against proposals, to permit the further solicitation of proxies. Abstentions and broker non-votes, if any, will not have any effect on the result of the vote for adjournment. If the proposals are not approved, the Board will consider alternatives available at that time.

PROPOSAL 1: TO AUTHORIZE THE COMPANY, WITH APPROVAL OF ITS BOARD OF DIRECTORS, TO SELL SHARES OF ITS COMMON STOCK OR WARRANTS, OPTIONS OR RIGHTS TO ACQUIRE COMMON STOCK AT A PRICE BELOW THE THEN CURRENT NET ASSET VALUE PER SHARE OF SUCH COMMON STOCK, SUBJECT TO CERTAIN LIMITATIONS DESCRIBED IN THIS PROXY STATEMENT

The Company is an internally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company (a “ BDC ”) under the 1940 Act. The 1940 Act prohibits the Company from selling shares of its Common Stock or warrants, options or rights to acquire its Common Stock at a price below the then current net asset value per share of such Common Stock, subject to certain exceptions. One of these exceptions permits the sale of Common Stock or warrants, options or rights to acquire Common Stock at a price below the then current net asset value per share of such Common Stock if the sale is approved by holders of a majority of the Company’s outstanding voting securities and by the holders of a majority of the Company’s outstanding voting securities who are not “affiliated persons” (as defined in the 1940 Act) of the Company within one year immediately prior to any such sale.

Pursuant to Proposal 1, the Company is seeking the approval of its shareholders so that it may, in one or more public or private offerings of its Common Stock, sell or otherwise issue shares of its Common Stock or warrants, options or rights to acquire its Common Stock at a price below the then current net asset value per share of such Common Stock, subject to certain conditions discussed below. Such a sale may be to third parties, current shareholders or affiliates of the Company. If approved, the authorization would be effective for a period expiring on the one-year anniversary of the date of the shareholder approval. If the Company issues any warrants, options or rights to acquire Common Stock, the issuance of any Common Stock upon the exercise of any such warrants, options or rights may only be effected within one year of such shareholder approval to the extent such issuance would result in an acquisition of Common Stock at a price below the then current net asset value per share of such Common Stock. There is no limitation on the number of shares of Common Stock the Company may issue pursuant to this Proposal. If any warrants, options or rights to acquire the Company’s Common Stock are issued, the terms of such securities, including dividend or interest rates, conversion prices, voting rights, redemption prices, maturity dates and similar matters, will be determined by the Board.

Reasons to Offer Common Stock or Warrants, Options or Rights to Acquire Common Stock at a Price Below Net Asset Value

Beginning in 2007, the U.S. capital markets entered into a period of disruption as evidenced by a lack of liquidity in the debt capital markets, significant write-offs, the re-pricing of credit risk and the failure of major financial institutions. These factors accelerated during the last half of 2008, and the number of investors selling assets because they had to repay debt or meet equity redemption requirements or other obligations increased significantly during the last half of 2008 and first half of 2009. This created forced selling that negatively impacted valuations of debt securities in most markets. While the valuation of debt securities has improved since this time, the prolonged recession and stagnant economy continue to negatively impact valuations. For capital providers such as the Company, this has made access to capital more challenging. However, the change in market conditions also has had beneficial effects for capital providers, including, in certain cases, more reasonable pricing of risk and more appropriate contractual terms. Accordingly, for firms that continue to have access to capital, the current environment may provide attractive investment opportunities. The Company’s ability to take advantage of these opportunities is dependent upon its access to equity capital.

As a BDC and a regulated investment company (“ RIC ”) for tax purposes, the Company is dependent on its ability to raise capital through the issuance of Common Stock. RICs generally must distribute substantially all of their earnings to shareholders as dividends in order to achieve pass-through tax treatment, which prevents the Company from using those earnings to support new investments. Further, BDCs must maintain a debt to equity ratio of less than 1:1, which requires the Company to finance its investments with at least as much equity as debt in the aggregate. The Company maintains sources of liquidity through a portfolio of liquid assets, and other means available to it from time to time, but generally attempts to remain close to fully invested and does not hold substantial cash for the purpose of making new investments. To continue to build the Company’s investment portfolio, and thereby support maintenance and growth of the Company’s dividends, the Company will need access to capital through the public and private equity markets enabling it to take advantage of investment opportunities as they arise.

The following table sets forth the range of high and low closing prices of our Common Stock as reported on The Nasdaq Global Select Market since our initial public offering and the closing sales price as a percentage of net asset value. On May 6, 2013, the last reported closing sale price of our Common Stock was $[___] per share.

The stock quotations are inter-dealer quotations and do not include markups, markdowns or commissions and as such do not necessarily represent actual transactions.

Although the Company has in the past experienced a share price above the net asset value, there can be no assurance that this will occur, and, in fact, in recent periods the Company’s share price has been well below net asset value. The credit market dislocation and the recent recession impacting the U.S. and global economy has led to significant stock market volatility, particularly with respect to the stock of financial services companies. During times of increased price volatility, the Company’s Common Stock may periodically trade at a smaller premium or below its net asset value, which is not uncommon for BDCs like the Company. The Company’s Common Stock at various times has traded below the net asset value. However, we believe that we may continue to have favorable opportunities to invest, including opportunities that, all else being equal, may increase net asset value over the longer-term, even if financed with the issuance of Common Stock or warrants, options or rights to acquire the Company’s Common Stock at below net asset value. Shareholder approval of Proposal 1 will provide the Company with greater flexibility to invest in such opportunities.

The Board believes that having the flexibility to issue its Common Stock or warrants, options or rights to acquire the Company’s Common Stock at below net asset value in certain instances is in the best interests of shareholders. If the Company were unable to access the capital markets as attractive investment opportunities arise, the Company’s ability to grow over time and continue to pay steady or increasing dividends to shareholders could be adversely affected. It could also have the effect of forcing the Company to sell assets that the Company would not otherwise sell, and such sales could occur at disadvantageous times.

Example of Dilutive Effect of the Issuance of Shares Below Net Asset Value

Before voting on Proposal 1 or giving proxies with regard to this matter, shareholders should consider the potentially dilutive effect on the net asset value of the issuance of shares of our Common Stock at a price less than net asset value. Any sale of Common Stock at a price below net asset value would result in an immediate dilution to existing shareholders on a per share basis. This dilution would include reduction in the net asset value as a result of the issuance of shares at a price below the net asset value and a decrease in a shareholder’s per share interest in the earnings and assets of the Company and per share voting interest in the Company. The Board has considered the potential dilutive effect of the issuance of shares at a price below the net asset value and will consider again such dilutive effect when considering whether to authorize any specific issuance of shares of Common Stock below net asset value. In the past, the Board has determined not to proceed with offerings of shares at a price below NAV in reliance on similar shareholder approval in circumstances where the Board believed that the then trading price of the Company’s common stock would result in excessive dilution to existing investors.

The 1940 Act establishes a connection between market price and net asset value because, when stock is sold at a market price below net asset value, the resulting increase in the number of outstanding shares is not accompanied by a proportionate increase in the net assets of the issuer. Shareholders should also consider that they will have no subscription, preferential or preemptive rights to additional shares of Common Stock proposed to be authorized for issuance, and thus any future issuance of Common Stock at a price below net asset value would dilute a shareholder’s holdings of Common Stock as a percentage of shares outstanding to the extent the shareholder does not purchase sufficient shares in the offering or otherwise to maintain the shareholder’s percentage interest. Further, if the shareholder does not purchase, or is unable to purchase, any shares to maintain the shareholder’s percentage interest, regardless of whether such offering is at a price above or below the then current net asset value, the shareholder’s voting power will be diluted.

The precise extent of any such dilution cannot be estimated before the terms of a Common Stock offering are set. As a general proposition, however, the amount of potential dilution will increase as the size of the offering increases. Another factor that will influence the amount of dilution in an offering is the amount of net proceeds that we receive from such offering. The Board would expect that the net proceeds to us will be equal to the price that investors pay per share, less the amount of any underwriting discounts and commissions and expenses of the offering.

As previously discussed, the Board evaluated a full range of offering sizes. The following example indicates how an offering would immediately affect the net asset value of our Common Stock based on the assumptions set forth below. It does not include any effects or influence on market share price due to changes in investment performance over time, dividend policy, increased trading volume or other qualitative aspects of the shares our Common Stock.

Examples of Dilutive Effect of the Issuance of Shares Below Net Asset Value

The following table illustrates the level of net asset value dilution that would be experienced by a nonparticipating shareholder in three different hypothetical common stock offerings of different sizes and levels of discount from net asset value per share, although it is not possible to predict the actual level of market price decline below net asset value per share that may occur. Actual sales prices and discounts may differ from the presentation below.

The examples assume that Company XYZ has 1,000,000 shares of common stock outstanding, $15,000,000 in total assets and $5,000,000 in total liabilities. The current net asset value and net asset value per share are thus $10,000,000 and $10.00, respectively. The table below illustrates the dilutive effect on nonparticipating shareholder A of (1) an offering of 50,000 shares (5% of the outstanding shares) at $9.50 per share after offering expenses and commission (a 5% discount to net asset value); (2) an offering of 100,000 shares (10% of the outstanding shares) at $9.00 per share after offering expenses and commissions (a 10% discount to net asset value); and (3) an offering of 200,000 shares (20% of the outstanding shares) at $8.00 per share after offering expenses and commissions (a 20% discount to net asset value).

Net asset value is only one determinant of market value. We expect the market price of shares of Common Stock will incorporate a discount or premium factor based on the market assessment of a number of factors, including future earnings and the likelihood of those earnings supporting growth in our dividend yield.

Notwithstanding the dilutive effect of any equity financing on our net asset value, the Board has considered our need to obtain additional capital for investment and other factors discussed in this proxy statement. With more capital to invest, the Board believes that we would be able to make investments with more significant earnings and growth potential. The Board further believes that over time the value of the incremental assets available for investment, taken together with the other factors previously discussed, may be reflected positively in the market price of our shares and that such increases may exceed the initial dilutive effects that we are likely to experience in our net asset value due to offerings of shares of our Common Stock in accordance with Proposal 1. In our view, the secondary market price of our Common Stock serves as an important indicator of the true economic impact on shareholders of any equity offering.

Conditions to Sales Below Net Asset Value

If shareholders approve Proposal 1, the Company will only sell shares of its Common Stock or warrants, options or rights to acquire its Common Stock at a price below the then current net asset value per share of such Common Stock if the following conditions are met:

A “ required majority ” of directors means both a majority of the Company’s directors who have no “financial interest” in the transaction and a majority of the Directors who are not “interested persons” of the Company within the meaning of Section 2(a)(19) of the 1940 Act (the “ Independent Directors ”). For these purposes, Directors will not be deemed to have a financial interest solely by their ownership of Company stock.

The Board may determine to issue shares of the Company’s Common Stock below net asset value of such Common Stock in a registered public offering or in a private placement either with or without an obligation to seek to register the resale thereof at the request of the holders. The Board may also determine to use an underwriter or placement agent to assist in selling such shares of Common Stock if it concludes that doing so would assist in marketing such securities on favorable terms.

Even if Proposal 1 is approved, the Company will not be required to sell any Common Stock or warrants, options or rights to acquire its Common Stock.

Key Shareholder Considerations

Before voting on Proposal 1 or giving proxies with regard to this matter, shareholders should consider the potentially dilutive effect of the issuance of shares of the Company’s Common Stock or warrants, options or rights to acquire its Common Stock at a price below the then current net asset value per share of such Common Stock. Any sale of Common Stock or warrants, options or rights to acquire Common Stock at a price below the then current net asset value per share of such Common Stock would result in an immediate dilution to existing common shareholders. This dilution would include reduction in the net asset value per share as a result of the issuance of shares at a price below the net asset value per share and a proportionately greater decrease in a shareholder’s interest in the earnings and assets of the Company and voting interest in the Company than the increase in the assets of the Company resulting from such issuance. The Board will consider the potential dilutive effect when considering whether to authorize any such issuance. In the past, the Board has determined not to proceed with offerings of shares at a price below NAV in reliance on similar shareholder approval in circumstances where the Board believed that the then trading price of the Company’s common stock would result in excessive dilution to existing investors.

Shareholders should also consider that they will have no subscription, preferential or preemptive rights to additional shares of the Common Stock or warrants, options or rights to acquire Common Stock proposed to be authorized for issuance, and thus any future issuance of Common Stock or warrants, options or rights to acquire Common Stock may dilute such shareholders’ holdings of Common Stock as a percentage of shares outstanding to the extent shareholders do not purchase sufficient shares in the offering or otherwise to maintain their percentage interest. Further, if current shareholders of the Company do not purchase any shares to maintain their percentage interest, regardless of whether such offering is above or below the then current net asset value, their voting power will be diluted.

If Proposal 1 is approved by the shareholders, the Company will be permitted, but not required or otherwise obligated, to sell shares of its Common Stock or warrants, options or rights to acquire its Common Stock at a price below the then current net asset value per share of such Common Stock until the one-year anniversary of the date of the shareholder approval. If the Company issues any warrants, options or rights to acquire Common Stock, the issuance of any Common Stock upon the exercise of any such warrants, options or rights may only be effected within one year of such shareholder approval to the extent such issuance would result in an acquisition of Common Stock AT A PRICE below the then current net asset value per share of such Common Stock. If Proposal 1 is not approved, the Company may be unable to raise capital when it would be beneficial and desirable, or may be limited in the manner in which it raises capital (for example, by being required to utilize a rights offering).

The affirmative vote of:

For purposes of Proposal 1, the 1940 Act defines “a majority of the outstanding shares” as: (i) 67% or more of the voting securities present at the Special Meeting if the holders of more than 50% of the outstanding voting securities of the Company are present or represented by proxy; or (ii) 50% of the outstanding voting securities of the Company, whichever is less.

Abstentions will be considered present at the Special Meeting and will have the effect of a vote against Proposal 1. Broker non-votes (if any) will be treated as not present at the Special Meeting and, as a result, will have no effect on the Company’s ability to obtain the approval of 67% or more of the voting securities present at the Special Meeting but would have the same effect as a vote against Proposal 1 if the Company did not obtain the approval of 67% or more of the voting securities present and instead were seeking to obtain the affirmative vote of 50% of the outstanding voting securities of the Company. Unless otherwise indicated, the persons named in the proxy will vote all proxies in favor of Proposal 1.

The Board recommends a vote “FOR” the proposal to authorize the company, subject to certain limitations described in this proxy statement, to sell shares of its common stock during the next year at a price below the Company’s then current net asset value per share of such common stock.

PROPOSAL 2. TO APPROVE THE ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE NOTES INTO MORE THAN 20% OF OUR COMMON STOCK OUTSTANDING ISSUED AT A DISCOUNT TO THE COMPANY’S NET ASSET VALUE PER SHARE UNDER APPLICABLE NASDAQ RULES

Background

On March 16, 2011, we sold approximately $60.0 million in aggregate principal amount of 8.75% Convertible Senior Notes due 2016 (the “ Convertible Notes ”) to certain investors under an Indenture by and between KCAP Financial and U.S. Bank National Association, as Trustee (the “ Indenture ”), dated as of March 16, 2011. Holders of the Convertible Notes may convert their notes into shares of our common stock at their option at any time prior to the close of business on the business day immediately preceding March 15, 2016. The conversion rate for the Convertible Notes was initially 118.5255 shares per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $8.437 per share of common stock. The conversion rate is subject to adjustment upon the occurrence of any of the following:

The conversion rate of the Convertible Notes as of December 31, 2012 was approximately 122.5638 shares of our common stock per $1,000 principle amount of Convertible Notes, equivalent to a conversion price of approximately $8.159 per share of our common stock. Under certain limited circumstances, we may elect to deliver cash in lieu of shares otherwise deliverable upon conversion in order to comply with certain listing standards of The Nasdaq Global Select Market.

Nasdaq Shareholder Approval Requirement

Because our common stock is listed on The Nasdaq Global Select Market, we are subject to the Nasdaq Rules. Under Nasdaq Listing Rule 5635(d), prior shareholder approval is required for the issuance, other than in a public offering, of shares of common stock upon conversion or exercise of securities convertible into common stock at a price less than the greater of book or market value (i.e., net asset value) of the common stock if the securities are convertible into 20% or more of a company’s common stock (the “ Nasdaq Private Placement Rule ”).

Under certain limited circumstances, we may elect to deliver cash in lieu of shares otherwise deliverable upon conversion in order to comply with certain listing standards of The Nasdaq Global Select Market. Pursuant to the Indenture, if holders of the Convertible Notes elect to convert their notes into shares of our common stock in an amount that is 20% or more of the Company’s common stock at conversion rate that is below the Company’s net asset value per share, the Company must elect to deliver cash to such holders in lieu of shares of our common stock in accordance with applicable Nasdaq Rules. The conversion rate of the Convertible Notes as of December 31, 2012 was approximately 122.5638 shares of our common stock per $1,000 principle amount of Convertible Notes, equivalent to a conversion price of approximately $8.159 per share of our common stock. As of December 31, 2012, the Company’s net asset value per share was $7.85.

Shareholder Considerations

As described above, the Indenture contains provisions for the adjustment of the conversion rate of the Convertible Notes that could result in the conversion rate being reduced in the future to an amount that is less than the net asset value per share of our common stock upon conversion of the Convertible Notes. Without shareholder approval of this proposal, if holders of the Convertible Notes elect to convert their notes into an amount of shares of our common stock that is more than 20.0% of our total outstanding shares and if the conversion rate is below our net asset value per share we will be required to deliver cash in lieu of shares otherwise deliverable upon conversion in order to comply with the listing standards of The Nasdaq Global Select Market. Assuming all holders of the Convertible Notes elected to convert their notes, and based on a conversion rate of $8.159 per share and $60.0 million in aggregate principal amount of Convertible Notes outstanding as of December 31, 2012, we would be required to deliver an amount equal to $[ Ÿ ] million to the holders of the Convertible Notes. If Proposal 2 is approved, we may issuance common stock upon conversion of the Convertible Notes in an amount that may exceed 20% of our common stock currently outstanding rather than being required under the terms of the Indenture to deliver cash in lieu of shares of our common stock. Accordingly, we seek your approval of the Proposal 2 to approve the issuance of shares upon conversion of the Convertible Notes into more than 20% of our common stock outstanding issued at a discount to the Company’s net asset value per share in order to satisfy the requirements of the Nasdaq Private Placement Rule.

Vote Required

The approval of the issuance of shares upon conversion of the Convertible Notes into more than 20% of our common stock outstanding issued at a discount to the Company’s net asset value per share under applicable Nasdaq Rules requires the affirmative vote of a majority of the total votes cast on the proposal at the Special Meeting, either in person or by proxy. Holders of the Convertible Notes are not eligible to vote on Proposal 2 as described in this proxy statement in accordance with Nasdaq Rules. Abstentions and broker “non-votes” will have no effect with respect to the approval of Proposal 2.

The Board recommends a vote “FOR” the proposal to approve the issuance of shares upon conversion of the Convertible Notes into more than 20% of our common stock outstanding issued at a discount to the Company’s net asset value per share under applicable Nasdaq Rules.