Filed Pursuant to Rule 497
Registration No. 333-218596

PROSPECTUS SUPPLEMENT
(to Prospectus dated July 21, 2017)

$50,000,000
6.125% Notes due 2022

We are an internally managed, non-diversified closed-end investment company that is regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). We have three principal areas of investment.

First, we originate, structure, and invest in senior secured term loans, mezzanine debt and selected equity securities primarily in privately-held middle market companies (the “Debt Securities Portfolio”).

Second, we have invested in asset management companies Katonah Debt Advisors, L.L.C and Trimaran Advisors, L.L.C. (collectively the “Asset Manager Affiliates”).

Third, we invest in debt and equity securities issued by collateralized loan obligation funds (“CLO Funds”) managed by our Asset Manager Affiliates or by other asset managers (the “CLO Fund”).

In our Debt Securities Portfolio, our investment objective is to generate current income and, to a lesser extent, capital appreciation from the investments made in senior secured term loans, mezzanine debt and selected equity investments in privately-held middle market companies. We define the middle market as comprising companies with earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $10 million to $50 million and/or total debt of $25 million to $150 million. We primarily invest in first and second lien term loans which, because of their priority in a company’s capital structure, we expect will have lower default rates and higher rates of recovery of principal if there is a default and therefore we expect them to generate a stable stream of interest income. The investments in our Debt Securities Portfolio are all or predominantly below investment grade, which are often referred to as “junk,” and have speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. While our primary investment focus is making loans to, and selected equity investments in, privately-held middle market companies, we may also invest in other investments such as loans to smaller companies or larger, publicly-traded companies, high-yield bonds and distressed debt securities. We may also receive warrants or options to purchase common stock in connection with our debt investments.

With respect to our Asset Manager Affiliates investment, we expect to receive recurring cash distributions and to generate capital appreciation through the addition of new CLO Funds managed by our Asset Manager Affiliates. The Asset Manager Affiliates manage CLO Funds that invest in broadly syndicated loans, high-yield bonds and other credit instruments. Collectively, the Asset Manager Affiliates had approximately $2.7 billion of par value assets under management as of June 30, 2017. The Asset Manager Affiliates are registered under the Investment Advisers Act of 1940, and are managed independently from the Company by a separate portfolio management team.

In addition, our investments in CLO Fund Securities, which are primarily made up of minority investments in the subordinated securities or preferred stock of CLO Funds raised and managed by our Asset Manager Affiliates, are anticipated to provide the Company with recurring cash distributions and complement the growth of our Asset Manager Affiliates.

We are offering $50 million in aggregate principal amount of 6.125% notes due 2022, which we refer to as the “Notes.” The Notes will mature on September 30, 2022. We will pay interest on the Notes on March 30, June 30, September 30 and December 30, beginning on September 30, 2017. We may redeem the Notes in whole or in part at any time, or from time to time on or after September 30, 2019, at the redemption price of par, plus accrued interest, as discussed under the caption “Description of the Notes — Optional Redemption.” The Notes will be issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.

The Notes will be our direct unsecured obligations and rank pari passu with, or equal to, all outstanding and future unsecured unsubordinated indebtedness issued by us, including our 7.375% notes due 2019 (the “7.375% Notes Due 2019”). Because the Notes will not be secured by any of our assets, they will be effectively subordinated to all of our existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness. The Notes will be structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries and financing vehicles since the Notes are obligations exclusively of KCAP Financial, Inc. and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the Notes and the Notes will not be required to be guaranteed by any subsidiary we may acquire or create in the future. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes, and any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors, including holders of the Notes.

As of the offering date of the Notes, the Notes will rank pari passu with, or equal to, $27,000,000 principal amount of our 7.375% Notes Due 2019, plus accrued interest. The Notes will also rank pari passu with, or equal to, our general liabilities. In total, these general liabilities were $4,372,201 as of June 30, 2017. We currently do not have outstanding debt that is subordinated to the Notes and do not currently intend to issue indebtedness that expressly provides that it is subordinated to the Notes. Therefore, the Notes will not be senior to any of our indebtedness or obligations.

We intend to list the Notes on the NASDAQ Global Select Market and we expect trading to commence thereon within 30 days of the original issue date under the trading symbol “KCAPL.” The Notes are expected to trade “flat.” This means that purchasers will not pay, and sellers will not receive, any accrued and unpaid interest on the Notes that is not included in the trading price. Currently, there is no public market for the Notes and there can be no assurance that one will develop.

Please read this prospectus supplement and the accompanying prospectus before investing and keep it for future reference. This prospectus supplement and the accompanying prospectus contain important information about us that a prospective investor should know before investing in our Notes. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission. This information is available free of charge by contacting us at 295 Madison Avenue, 6th Floor, New York, New York 10017, by telephone at (212) 455-8300, or on our website at http://www.kcapinc.com . The information on our website is not incorporated by reference into this prospectus supplement or the accompanying prospectus, and you should not consider that information to be part of this prospectus supplement or the accompanying prospectus. The SEC also maintains a website at www.sec.gov that contains such information.

Investing in the Notes is speculative and involves numerous risks, including the risks associated with the use of leverage. For more information regarding these risks, please see “Supplementary Risk Factors” beginning on page S-17 of this prospectus supplement and “Risk Factors” beginning on page 15 of the accompanying prospectus.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or determined if either this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

	Per Note			Total
Public offering price		100.0	%	$	50,000,000
Underwriting discount (sales load)		3.0	%	$	1,500,000
Proceeds to us before expenses(1)		97.0	%	$	48,500,000

(1) Before deducting expenses payable by us related to this offering, estimated at $315,420.

The underwriters may also purchase up to an additional $7,500,000 total aggregate principal amount of Notes offered hereby, within 30 days of the date of this prospectus supplement. If the underwriters exercise this option to purchase additional Notes in full, the total public offering price will be $57,500,000, the total underwriting discount (sales load) paid by us will be $1,725,000, and total proceeds, before expenses, will be $55,775,000.

THE NOTES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

Delivery of the Notes in book-entry form only through The Depository Trust Company will be made on or about August 14, 2017.

Joint Book-Running Managers

Keefe, Bruyette & Woods            A Stifel Company	Janney Montgomery Scott	Ladenburg Thalmann

Co-Managers

BB&T Capital Markets	Wunderlich

The date of this prospectus supplement is August 8, 2017.

You should rely only on the information contained in this prospectus supplement and the accompanying prospectus. We have not authorized any dealer, salesperson or other person to provide you with different information or to make representations as to matters not stated in this prospectus supplement or the accompanying prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus supplement is not an offer to sell, or a solicitation of an offer to buy, any securities by any person in any jurisdiction where it is unlawful for that person to make such an offer or solicitation or to any person in any jurisdiction to whom it is unlawful to make such an offer or solicitation. The information in this prospectus supplement and the accompanying prospectus is accurate only as of their respective dates, and under no circumstances should the delivery of this prospectus supplement or the accompanying prospectus or the sale of any securities imply that the information in this prospectus supplement or the accompanying prospectus is accurate as of any later date or that the affairs of KCAP Financial, Inc., have not changed since the date hereof or thereof. We will update the information in these documents to reflect material changes only as required by law.

TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT

About This Prospectus Supplement		S-iii
Prospectus Supplement Summary		S-1
Summary of the Specific Terms of The Notes and the Offering		S-10
Selected Financial and Other Data		S-15
Supplementary Risk Factors		S-17
Forward-Looking Statements		S-21
Use of Proceeds		S-23
Capitalization		S-24
Ratio of Earnings to Fixed Charges		S-25
Management’s Discussion and Analysis of Financial Condition and Results of Operations		S-26
Certain U.S. Federal Income Tax Considerations		S-47
Description of the Notes		S-52
Underwriting		S-62
Legal Matters		S-65
Independent Registered Public Accounting Firm		S-65
Available Information		S-65
Index to Financial Statements		SF-1

PROSPECTUS

Prospectus Summary		1
The Offering		10
Fees and Expenses		12
Selected Financial and Other Data		14
Risk Factors		15
Forward-Looking Statements		42
Use of Proceeds		43
Price Range of Common Stock and Distributions		44
Ratios of Earnings to Fixed Charges		46

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Management’s Discussion and Analysis of Financial Condition and Results of Operations		47
Senior Securities Table		72
Business		73
Determination of Net Asset Value		81
Portfolio Companies		83
Management		91
Executive Compensation		98
Certain Relationships and Related Transactions		115
Control Persons and Principal Stockholders		115
Sales of Common Stock Below Net Asset Value		117
Dividend Reinvestment Plan		122
Regulation		123
Certain U.S. Federal Income Tax Considerations		127
Description of Our Common Stock		137
Description of Our Preferred Stock		141
Description of Our Warrants		142
Description of Our Debt Securities		144
Plan of Distribution		157
Brokerage Allocation and Other Practices		159
Custodian, Transfer and Dividend Paying Agent and Registrar		159
Legal Matters		159
Independent Registered Public Accounting Firm		159
Available Information		159
Privacy Notice		160
Index to Financial Statements		F-1

KCAP Financial, Inc., our logo and other trademarks of KCAP Financial, Inc., mentioned in this prospectus supplement and the accompanying prospectus are the property of KCAP Financial, Inc. All other trademarks or trade names referred to in this prospectus supplement and the accompanying prospectus are the property of their respective owners.

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ABOUT THIS PROSPECTUS SUPPLEMENT

This document is in two parts. The first part is the prospectus supplement, which describes the terms of this offering of Notes and also adds to and updates information contained in the accompanying prospectus. The second part is the accompanying prospectus, which gives more general information and disclosure about the securities which we may offer from time to time, some of which may not apply to the Notes offered by this prospectus supplement. For information about the Notes, see “Summary of the Specific Terms of the Notes and the Offering” and “Description of the Notes” in this prospectus supplement and “Description of Our Debt Securities” in the accompanying prospectus.

To the extent the information contained in this prospectus supplement differs from or adds to the information contained in the accompanying prospectus, you should rely only on the information contained in this prospectus supplement. The information contained in this prospectus supplement supersedes any inconsistent information included in the accompanying prospectus. In various places in this prospectus supplement and the accompanying prospectus, we refer you to other sections of such documents for additional information by indicating the caption heading of such other sections. The page on which each principal caption included in this prospectus supplement and the accompanying prospectus can be found is listed in the table of contents above. All such cross references in this prospectus supplement are to captions contained in this prospectus supplement and not in the accompanying prospectus, unless otherwise stated.

Please carefully read this prospectus supplement and the accompanying prospectus together with the additional information described under the headings “Available Information” and “Supplementary Risk Factors” included in this prospectus supplement and under “Available Information” and “Risk Factors” in the accompanying prospectus before investing in the Notes.

U.S. Bank National Association, the trustee under the indenture governing the Notes, has not participated in the preparation of this prospectus supplement and assumes no responsibility for its content.

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PROSPECTUS SUPPLEMENT SUMMARY

This summary highlights some of the information in this prospectus supplement and may not contain all of the information that is important to you. You should read carefully the more detailed information set forth under “Risk Factors” and “Supplementary Risk Factors” and the other information included in this prospectus supplement and the accompanying prospectus. In this prospectus supplement, unless the context otherwise requires, “Company,” “KCAP Financial,” “we,” “us” and “our” refer to KCAP Financial, Inc., in each case together with its wholly-owned portfolio companies Katonah Debt Advisors, L.L.C. and Trimaran Advisors, L.L.C. “Katonah Debt Advisors” refers to Katonah Debt Advisors, L.L.C. and related affiliates controlled by us. “Trimaran Advisors” refers to Trimaran Advisors, L.L.C. and related affiliates controlled by us.

Overview

We are an internally managed, non-diversified closed-end investment company that is regulated as a Business Development Company, or “BDC”, under the Investment Company Act of 1940 (the “1940 Act”). We have three principal areas of investments:

First, we originate, structure, and invest in senior secured term loans and mezzanine debt primarily in privately-held middle market companies (the “Debt Securities Portfolio”). In addition, from time to time we may invest in the equity securities of privately held middle market companies.

Second, we have invested in asset management companies Katonah Debt Advisors, L.L.C. and Trimaran Advisors L.L.C. (collectively the “Asset Manager Affiliates”) that manage collateralized loan obligation funds (“CLO Funds”).

Third, we invest in debt and subordinated securities issued by CLOs (“CLO Fund Securities”). These CLO Fund Securities are primarily managed by our Asset Manager Affiliates, but from time to time we make investments in CLO Fund Securities managed by other asset managers. The CLO Funds typically invest in broadly syndicated loans, high-yield bonds and other credit instruments.

The structure of CLO Funds, which are highly levered, is extremely complicated. Since we primarily invest in securities representing the residual interests of CLO Funds, our investments are much riskier than the risk profile of the loans by which such CLO Funds are collateralized. Our investments in CLO Funds may be riskier and less transparent to us and our stockholders than direct investments in the underlying loans. The CLO Funds in which we invest have debt that ranks senior to our investment. For a more detailed discussion of the risks related to our investments in CLO Funds, please see “Risk Factors — Risks Related to Our Investments — Our investments may be risky, and you could lose all or part of your investment.”

We may also invest in other investments such as loans to publicly-traded companies, high-yield bonds and distressed debt securities. We may also receive warrants or options to purchase common stock in connection with its debt investments.

In our Debt Securities Portfolio, our investment objective is to generate current income and, to a lesser extent, capital appreciation from the investments in senior secured term loans, mezzanine debt and selected equity investments in privately-held middle market companies. We define the middle market as comprising companies with earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $10 million to $50 million and/or total debt of $25 million to $150 million. We primarily invest in first and second lien term loans which, because of their priority in a company’s capital structure, we expect will have lower default rates and higher rates of recovery of principal if there is a default and which we expect will create a stable stream of interest income. The investments in our Debt Securities Portfolio are all or predominantly below investment grade, and have speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. While our primary investment focus is on making loans to, and selected equity investments in, privately-held middle market companies, we may also invest in other investments such as loans to smaller private companies or publicly-traded companies, high-yield bonds and distressed debt securities. We may also receive warrants or options to purchase common stock in connection with our debt investments.

From our Asset Manager Affiliates investment, we expect to receive recurring cash distributions and generate capital appreciation through the addition of new CLO Funds managed by our Asset Manager

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Affiliates. We may also seek to monetize our investment in the Asset Manager Affiliates if and when business conditions warrant. The Asset Manager Affiliates manage CLO Funds that invest in broadly syndicated loans, high-yield bonds and other credit instruments. The Asset Manager Affiliates are registered under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and are each managed independently from KCAP by a separate management team (however, certain of our executive officers also act in similar capacities for one or both of the Asset Manager Affiliates).

In addition, our investments in CLO Fund Securities, which are primarily made up of minority investments in the subordinated securities or preferred stock of CLO Funds raised and managed by our Asset Manager Affiliates, are anticipated to provide us with recurring cash distributions and complement our investment in the Asset Manager Affiliates.

Because we are internally managed by our executive officers under the supervision of our Board of Directors and do not depend on a third party investment adviser, we do not pay investment advisory fees, but instead incur the operating costs associated with employing investment and portfolio management professionals.

As a BDC, we are required to comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and expect to continue to, finance our investments through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The 1940 Act also generally prohibits us from declaring any cash dividend or distribution on any class of our capital stock if our asset coverage is below 200% at the time of the declaration of the dividend or distribution.

Subject to market conditions, we intend to grow our portfolio of assets by raising additional capital, including through the prudent use of leverage available to us. Because we also recognize the need to have funds available for operating our business and to make investments, we seek to have adequate liquidity at all times to cover normal cyclical swings in funding availability and to allow us to meet abnormal and unexpected funding requirements. As a result, we may hold varying amounts of cash and other short-term investments from time to time for liquidity purposes.

We have elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code (the “Code”) and intend to operate in a manner to maintain our RIC tax treatment. Accordingly, we generally will not pay corporate-level U.S. federal income taxes on any net ordinary tax-basis taxable income or capital gains that we timely distribute to our shareholders as dividends. To maintain our RIC tax treatment, we must meet the specified source-of-income and asset diversification requirements and distribute to our stockholders annually at least 90% of our net ordinary tax-basis taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for each year.

We were formed in August 2006, as Kohlberg Capital Corporation. In December 2006, we completed our initial public offering (“IPO”), which raised net proceeds of approximately $200 million after the exercise of the underwriters’ over-allotment option. In connection with our IPO, we issued an additional 3,484,333 shares of our common stock in exchange for the ownership interests of Katonah Debt Advisors, L.L.C. and certain CLO Fund Securities.

In April 2008, we completed a rights offering that resulted in the issuance of 3.1 million shares of our common stock, and net proceeds of $27 million.

On February 29, 2012, we purchased Trimaran Advisors, L.L.C. (“Trimaran Advisors”), an asset manager similar to Katonah Debt Advisors, L.L.C. (“Katonah Debt Advisors”), for total consideration of $13.0 million in cash and 3,600,000 shares of our common stock. Contemporaneous with the acquisition of Trimaran Advisors, we acquired from Trimaran Advisors equity interests in certain CLO Funds managed by Trimaran Advisors for an aggregate purchase price of $12.0 million in cash. As of March 31, 2017, the Asset Manager Affiliates had approximately $2.8 billion of par value assets under management.

On July 11, 2012, we changed our name from Kohlberg Capital Corporation to KCAP Financial, Inc.

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On February 14, 2013, we completed a public offering of 5,232,500 shares of common stock, which included the underwriters’ full exercise of their option to purchase up to 682,500 shares of common stock, at a price of $9.75 per share, raising approximately $51.0 million in gross proceeds. In conjunction with this offering, we also sold 200,000 shares of common stock to a member of our Board of Directors, at a price of $9.31125 per share, raising approximately $1.9 million in gross proceeds.

On October 6, 2014, we priced a follow-on public offering of 3.0 million shares of our common stock at a price of $8.02 per share. The offering raised net proceeds of approximately $23.8 million, net of underwriting discounts and offering expenses.

Including employees of our Asset Manager Affiliates, we employ an experienced team of 15 investment professionals and 25 total staff members. Dayl W. Pearson, our President and Chief Executive Officer, and one of our directors, has been in the financial services industry for nearly 40 years. During the past 26 years, Mr. Pearson has focused almost exclusively on the middle market and has originated, structured and underwritten over $7 billion of debt and equity securities. R. Jon Corless, our Chief Investment Officer with primary responsibility for the Debt Securities Portfolio, has managed investment portfolios in excess of $4 billion at several institutions and has been responsible for managing portfolios of leveraged loans, high-yield bonds, mezzanine securities and middle market loans. Dominick J. Mazzitelli is the President and portfolio manager of the Asset Manager Affiliates. He has over 20 years of experience within the credit markets, with most of his career focused on the leveraged finance markets. Edward U. Gilpin, our Chief Financial Officer, Secretary and Treasurer, has been in financial services for over 30 years, with significant experience in overseeing the financial operations and reporting for asset management businesses, including the fair value accounting of CLO securities owned by them.

Our common stock is traded on The NASDAQ Global Select Market under the symbol “KCAP.” The net asset value per share of our common stock at March 31, 2017 was $5.14. On August 4, 2017, the last reported sale price of a share of our common stock on The NASDAQ Global Select Market was $3.37. In addition, our 7.375% Notes Due 2019 are traded on the New York Stock Exchange under the symbol “KAP.” On August 4, 2017 the last reported price of our 7.375% Notes Due 2019, which have a par value of $25.00, was $25.35.

Investment Portfolio

Our investment portfolio generates investment income, which is generally used to pay principal and interest on our borrowings, operating expenses, and to fund our distributions to our stockholders. Our investment portfolio consists of three primary components: the Debt Securities Portfolio, the CLO Fund Securities and our investment in our wholly owned Asset Manager Affiliates.

Debt Securities Portfolio.  We target privately-held middle market companies that have strong historical cash flows, experienced management teams and identifiable and defendable market positions in industries with positive dynamics. We generally target companies that generate positive cash flows because we look to cash flows as the primary source for servicing debt.

We employ a disciplined approach in the selection and monitoring of our investments. Generally, we target investments that will generate a current return through interest income to provide for stability in our shareholder distributions and place less reliance on realized capital gains from our investments. Our investment philosophy is focused on preserving capital with an appropriate return profile relative to risk. Our investment due diligence and selection generally focuses on an underlying issuer’s net cash flow after capital expenditures to service its debt rather than on multiples of net income, valuations or other broad benchmarks which frequently miss the nuances of an issuer’s business and prospective financial performance. We also generally avoid concentrations in any one industry or issuer. We manage risk by following our internal credit policies and procedures.

When we extend senior and junior secured term loans, we will generally take a security interest in the available assets of the portfolio company, including the equity interests of its subsidiaries, which we expect to help mitigate the risk that we will not be repaid. Nonetheless, there is a possibility that our lien could be subordinated to claims of other creditors. Structurally, mezzanine debt ranks subordinate in priority of payment to senior term loans and is often unsecured. Relative to equity, mezzanine debt ranks senior to common and preferred equity in a borrower’s capital structure. Typically, mezzanine debt has elements of both

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debt and equity instruments, offering the fixed returns in the form of interest payments associated with a loan, while providing an opportunity to participate in the capital appreciation of a borrower, if any, through an equity interest that is typically in the form of equity purchased at the time the mezzanine loan is originated or warrants to purchase equity at a future date at a fixed cost. Mezzanine debt generally earns a higher return than senior secured debt due to its higher risk profile and usually less restrictive covenants. The warrants associated with mezzanine debt are typically detachable, which allows lenders to receive repayment of their principal on an agreed amortization schedule while retaining an equity interest in the borrower. Mezzanine debt also may include a “put” feature, which permits the holder to sell its equity interest back to the borrower at a price determined through an agreed formula.

Below are summary attributes for our Debt Securities Portfolio as of and for the period ended June 30, 2017:

• represented approximately 69% of total investment portfolio;

• contained credit instruments issued by corporate borrowers;

• primarily comprised of senior secured and junior secured loans (84% and 16% of Debt Securities Portfolio, respectively);

• spread across 24 different industries and 96 different entities;

• average par balance per investment of approximately $2.6 million;

• two of our investments were on non-accrual status;

• weighted average interest rate of 7.4% on income producing debt investments;

• total net asset value return per share was 1.9%; and

• total market return based on stock price was -5.3%.

Our investments generally average between $1 million to $20 million, although particular investments may be larger or smaller. The size of individual investments will vary according to their priority in a company’s capital structure, with larger investments in more secure positions in an effort to maximize capital preservation. The size of our investments and maturity dates may vary as follows:

• senior secured term loans from $2 to $20 million maturing in five to seven years;

• second lien term loans from $5 to $15 million maturing in six to eight years;

• senior unsecured loans from $5 to $23 million maturing in six to eight years;

• mezzanine loans from $5 to $15 million maturing in seven to ten years; and

• equity investments from $1 to $5 million.

Asset Manager Affiliates.  We expect to receive recurring cash distributions and seek to generate capital appreciation from our investment in our Asset Manager Affiliates. We may also seek to monetize our investment the Asset Manager Affiliates if and when business conditions warrant. As a manager of CLO Funds, our Asset Manager Affiliates receive contractual and recurring management fees from the CLO Funds for their management and advisory services. In addition, our Asset Manager Affiliates may also earn income related to net interest on assets accumulated for future CLO issuances on which they have provided a first loss guaranty in connection with loan warehouse arrangements for their future CLO Funds.

The periodic management fees that our Asset Manager Affiliates receive are generally based on a fixed percentage of the par value of assets under management and are recurring in nature for the term of the CLO Fund, so long as the Asset Manager Affiliate manages the fund. As a result, the management fees earned by our Asset Manager Affiliates are not subject to market value fluctuations in the underlying collateral. The management fees that our Asset Manager Affiliates receive generally have three contractual components: a senior management fee, a subordinated management fee and the possibility of an incentive management fee if certain conditions are met. Currently, all CLO Funds managed by the Asset Manager Affiliates are paying both

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their senior and subordinated management fees on a current basis. During 2016, two CLO Funds achieved the minimum investment return threshold and our Asset Manager Affiliates received incentive fees from those CLO Funds.

Subject to the conditions of the capital markets, we expect to continue to make investments in CLO Funds managed by our Asset Manager Affiliates, which we believe will provide us with a current cash investment return. We believe that these investments will provide our Asset Manager Affiliates with greater opportunities to access new sources of capital, which will ultimately increase our Asset Manager Affiliates’ assets under management and resulting management fee income. See “Risk Factors” for a discussion of the risks relating to our ability to access the capital markets and the impact of certain risk retention rules which require that we or our Asset Manager Affiliates make and maintain certain minimum investments in CLO Funds managed by the Asset Manager Affiliates.

The after-tax net free cash flow that our Asset Manager Affiliates generate through the fees they receive for managing CLO Funds and after paying their expenses pursuant to an overhead allocation agreement with us associated with their operations, including compensation of their employees, may be distributed to us. Distributions from our Asset Manager Affiliates’ tax basis earnings and profits are recorded as “Dividends From Asset Manager Affiliates” in our financial statements when declared. From time to time our Asset Manager Affiliates may distribute cash in excess of tax basis earnings and profits. This excess is deemed a return of capital and is recorded in “unrealized gains (losses)” on the statement of operations.

Below are summary attributes for our Asset Manager Affiliates, as of and for the period ended June 30, 2017:

• represented approximately 11% of total investment portfolio;

• had approximately $2.7 billion par value of assets under management;

• receive contractual and recurring asset management fees based on par value of managed investments;

• may receive an incentive management fee from a CLO Fund, provided that the CLO Fund achieves a minimum designated return on investment. In 2016, two such funds paid incentive fees to our Asset Manager Affiliates;

• distributions paid by our Asset Manager Affiliates are an additional source of cash to pay our distributions to our stockholders and service our debt obligations; and

• for the six month period ended June 30, 2017, we received a cash distribution of approximately $1.3 million, which was recognized as a return of capital.

CLO Fund Securities.  Subject to the conditions of the capital markets, we expect to continue to make investments in the CLO Funds managed by our Asset Manager Affiliates, which we believe will provide us with a current cash investment return. We believe that these investments will provide our Asset Manager Affiliates with greater opportunities to access new sources of capital which will ultimately increase our Asset Manager Affiliates’ assets under management and resulting management fee income.

Below are summary attributes for our CLO Fund Securities, as of and for the period ended June 30, 2017, unless otherwise specified:

• CLO Fund Securities represented approximately 15% of total investment portfolio;

• 97% of CLO Fund Securities Portfolio represented investments in subordinated securities or equity securities issued by CLO Funds and 3% of CLO Fund Securities Portfolio was a rated note;

• all CLO Funds invested primarily in credit instruments issued by corporate borrowers;

• GAAP-basis investment income of $5.9 million; cash distributions received of approximately $5.9 million (approximately $4.7 million taxable distributable income, $1.2 million return of capital to KCAP).

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RISK FACTORS

Investing in us involves significant risks. The following is a summary of certain risks that you should carefully consider before investing in us. For a further discussion of these risk factors, please see “Supplementary Risk Factors” beginning on page S-17 of this prospectus supplement and “Risk Factors” beginning on page 15 of the accompanying prospectus.

Risks Related to Economic Conditions

• Economic recessions or downturns may have a material adverse effect on our business, financial condition and results of operations, and could impair the ability of our portfolio companies to repay loans.

• The capital markets may experience periods of disruption and instability. Such market conditions may materially and adversely affect debt and equity capital markets, which may have a negative impact on our business and operations.

Risks Related to Our Business and Structure

• Ineffective internal controls could impact our business and operating results.

• We are dependent upon our senior management for our future success, and if we are unable to hire and retain qualified personnel or if we lose any member of our senior management team, our ability to achieve our investment objective could be significantly harmed.

• We operate in a highly competitive market for investment opportunities.

• If we are unable to source investments effectively, we may be unable to achieve our investment objectives and provide returns to stockholders.

• Our business model depends to a significant extent upon strong referral relationships, and our inability to maintain or develop these relationships, as well as the failure of these relationships to generate investment opportunities, could adversely affect our business.

• We may have difficulty paying distributions required to maintain our RIC status if we recognize income before or without receiving cash equal to such income.

• Our Asset Manager Affiliates may incur losses as a result of “first loss” agreements that they may enter into from time to time in connection with warehousing credit arrangements which may be put in place prior to raising a CLO Fund and pursuant to which they would typically agree to reimburse credit providers for a portion of losses (if any) on warehouse investments.

• Any unrealized losses we experience on our loan portfolio may be an indication of future realized losses, which could reduce our income available to make distributions.

• We may experience fluctuations in our quarterly and annual operating results and credit spreads.

• We are exposed to risks associated with changes in interest rates and spreads.

• We borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.

• Uncertainty relating to the LIBOR calculation process may adversely affect the value of our portfolio of LIBOR-indexed, floating-rate debt securities.

• Our indebtedness could adversely affect our financial health and our ability to respond to changes in our business.

• Because we intend to continue to distribute substantially all of our income and net realized capital gains to our stockholders, we will need additional capital to finance our growth.

• We may from time to time expand our business through acquisitions, which could disrupt our business and harm our financial condition.

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• Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval.

• Pending legislation may allow us to incur additional leverage.

• Our businesses may be adversely affected by litigation and regulatory proceedings.

• Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital.

• Changes in the laws or regulations governing our business and the business of our Asset Manager Affiliates, or changes in the interpretations thereof, and any failure by us or our Asset Manager Affiliates to comply with these laws or regulations, could negatively affect the profitability of our operations.

• If we do not invest a sufficient portion of our assets in certain qualifying assets, we could be precluded from investing according to our current business strategy.

• Our ability to enter into transactions with our affiliates is restricted.

• A failure on our part to maintain our status as a BDC would significantly reduce our operating flexibility.

• Our business and operations could be negatively affected if we become subject to any securities litigation or stockholder activism, which could cause us to incur significant expense, hinder execution of investment strategy and impact our stock price.

• We will be subject to corporate-level U.S. federal income taxes if we are unable to qualify as a RIC under Subchapter M of the Code.

• Our investments in CLO vehicles may be subject to special anti-deferral provisions that could result in us incurring tax or recognizing income prior to receiving cash distributions related to such income.

• Proposed regulations may impact our ability to qualify as a RIC if we do not receive timely distributions from our CLO investments.

• If a CLO vehicle in which we invest fails to comply with certain U.S. tax disclosure requirements, such CLO may be subject to withholding requirements that could materially and adversely affect our operating results and cash flows.

Risks Associated with Our Information Technology Systems

• Disruptions in current systems or difficulties in integrating new systems.

• If we are unable to maintain the availability of our electronic data systems and safeguard the security of our data, our ability to conduct business may be compromised, which could impair our liquidity, disrupt our business, damage our reputation and cause losses.

Risks Related to Our Investments

• Our investments may be risky, and you could lose all or part of your investment.

• Our portfolio investments for which there is no readily available market, including our investment in our Asset Manager Affiliates and our investments in CLO Funds, are recorded at fair value as determined in good faith by our Board of Directors. As a result, there is uncertainty as to the value of these investments.

• We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we may invest a significant portion of our assets in a relatively small number of issuers, which subjects us to a risk of significant loss if any of these issuers defaults on its obligations under any of its debt instruments or as a result of a downturn in the particular industry.

• Defaults by our portfolio companies could harm our operating results.

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• When we are a debt or minority equity investor in a portfolio company, which generally is the case, we may not be in a position to control the entity, and its management may make decisions that could decrease the value of our investment.

• We may have limited access to information about privately held companies in which we invest.

• Prepayments of our debt investments by our portfolio companies could negatively impact our operating results.

• We may be unable to invest the net proceeds raised from offerings and repayments from investments on acceptable terms, which would harm our financial condition and operating results.

• Our portfolio companies may incur debt that ranks equal with, or senior to, our investments in such companies.

• Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.

• There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.

• Our investments in equity securities involve a substantial degree of risk.

• The lack of liquidity in our investments may adversely affect our business.

• Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments.

• The disposition of our investments may result in contingent liabilities.

• We may not receive any return on our investment in the CLO Funds in which we have invested and the Asset Manager Affiliates may be unable to raise additional CLO Funds.

• If our Asset Manager Affiliates do not meet certain risk retention requirements, they may not be able to sponsor and manage new CLOs, which would negatively impact our results of operations and financial conditions.

Risks Related to Our Notes

• The Notes will be unsecured and therefore will be effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future and rank pari passu with, or equal to, all outstanding and future unsecured unsubordinated indebtedness issued by us and our general liabilities.

• The Notes will be structurally subordinated to the indebtedness and other liabilities of our current and future subsidiaries and the portfolio companies with respect to which we hold equity investments, including the Asset Manager Affiliates.

• The indenture under which the Notes will be issued contains limited protection for holders of the Notes.

• There is no existing trading market for the Notes and, even if the NASDAQ Global Select Market approves the listing of the Notes, an active trading market for the Notes may not develop, which could limit your ability to sell the Notes or the market price of the Notes.

• Our amount of debt outstanding may increase as a result of this offering, and if we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes.

• We may be unable to invest a significant portion of the net proceeds from this offering, which could harm our financial condition and operating results.

• We may choose to redeem the Notes when prevailing interest rates are relatively low.

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Our Corporate Information

Our principal executive offices are located at 295 Madison Avenue, 6^th Floor, New York, New York 10017, and our telephone number is (212) 455-8300. We maintain a website on the Internet at http://www.kcapfinancial.com. The information contained in our website is not incorporated by reference into this prospectus supplement or the accompanying prospectus. We make available on or through our website certain reports and amendments to those reports that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934 (the “Exchange Act”). These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC.

Recent Developments

On July 19, 2017, we formed a joint venture with Freedom 3 Opportunities LLC, an affiliate of Freedom 3 Capital LLC, to create KCAP Freedom 3 LLC (the “KCAP-F3 Joint Venture”). We and Freedom 3 Opportunities LLC contributed approximately $35 million and $25 million, respectively, in assets to the KCAP-F3 Joint Venture, which in turn used the assets to capitalize a new fund (the “Fund”) managed by one of our wholly-owned investment advisers. In addition, the Fund used cash on hand and borrowings under a credit facility to purchase approximately $183 million of loans from us and we used the cash from such sale to redeem approximately $148 million in debt. The KCAP-F3 Joint Venture may originate loans from time to time and sell them to the Fund.

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SPECIFIC TERMS OF THE NOTES AND THE OFFERING

Issuer

KCAP Financial, Inc.

Title of the securities

6.125% Notes due 2022

Initial aggregate principal amount being offered

$50,000,000

Option to purchase additional notes

The underwriters may also purchase from us from time to time up to an additional $7,500,000 aggregate principal amount of Notes within 30 days of the date of this prospectus supplement.

Initial public offering price

100% of the aggregate principal amount

Principal payable at maturity

100% of the aggregate principal amount; the principal amount of each Note will be payable on its stated maturity date at the office of the Trustee, Paying Agent, Registrar and Transfer Agent for the Notes or at such other office in New York, New York as we may designate.

Type of Note

Fixed rate note

Listing

We intend to list the Notes on the NASDAQ Global Select Market, within 30 days of the original issue date under the trading symbol “KCAPL.”

Interest Rate

6.125% per year

Day count basis

360-day year of twelve 30-day months

Original issue date

August 14, 2017

Stated maturity date

September 30, 2022

Date interest starts accruing

August 14, 2017

Interest payment dates

Every March 30, June 30, September 30 and December 30, beginning on September 30, 2017. If an interest payment date falls on a non-business day, the applicable interest payment will be made on the next business day and no additional interest will accrue as a result of such delayed payment.

Interest periods

The initial interest period will be the period from and including August 14, 2017, to, but excluding, the initial interest payment date, and the subsequent interest periods will be the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be.

Regular record dates for interest

March 15, June 15, September 15 and December 15, beginning on September 15, 2017.

Specified currency

U.S. Dollars

Place of payment

New York City

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Ranking of Notes

The Notes will be our direct unsecured obligations and will rank:

•  

pari passu with our existing and future senior unsecured indebtedness, including our 7.375% Notes Due 2019;

•  

senior to any of our future indebtedness that expressly provides it is subordinated to the Notes;

•  

effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness; and

•  

structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries and portfolio companies with respect to which we hold equity investments, including, without limitation, indebtedness of KCAP Funding and the Asset Manager Affiliates.

Denominations

We will issue the Notes in denominations of $25 and integral multiples of $25 in excess thereof.

Business day

Each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in New York City are authorized or required by law or executive order to close.

Optional redemption

The Notes may be redeemed in whole or in part at any time or from time to time at our option on or after September 30, 2019 upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount of the Notes to be redeemed plus accrued and unpaid interest payments otherwise payable thereon for the then-current quarterly interest period accrued to the date fixed for redemption.

You may be prevented from exchanging or transferring the Notes when they are subject to redemption. In case any Notes are to be redeemed in part only, the redemption notice will provide that, upon surrender of such Note, you will receive, without a charge, a new Note or Notes of authorized denominations representing the principal amount of your remaining unredeemed Notes.

Any exercise of our option to redeem the Notes will be done in compliance with the 1940 Act.

If we redeem only some of the Notes, the Trustee will determine the method for selection of the particular Notes to be redeemed, in accordance with the 1940 Act, and in accordance with the rules of any national securities

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exchange or quotation system on which the Notes are listed. Unless we default in payment of the redemption price, on and after the date of redemption, interest will cease to accrue on the Notes called for redemption.

Sinking fund

The Notes will not be subject to any sinking fund.

Repayment at option of Holders

Holders will not have the option to have the Notes repaid prior to the stated maturity date.

Defeasance

The Notes are subject to defeasance by us.

Covenant defeasance

The Notes are subject to covenant defeasance by us.

Form of Notes

The Notes will be represented by global securities that will be deposited and registered in the name of The Depository Trust Company (“DTC”) or its nominee. This means that, except in limited circumstances, you will not receive certificates for the Notes. Beneficial interests in the Notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Investors may elect to hold interests in the Notes through either DTC, if they are a participant, or indirectly through organizations that are participants in DTC.

Trustee, Paying Agent, Registrar, and Transfer Agent

U.S. Bank National Association

Other covenants

In addition to any covenants described elsewhere in this prospectus supplement, the following covenants shall apply to the Notes:

•  

We agree that for the period of time during which the Notes are outstanding, we will not violate (regardless of whether we are subject to) Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to us by the SEC. These provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowings.

•  

We agree that for the period of time during which the Notes are outstanding, we will not violate (regardless of whether we are subject to) Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, giving effect to (i) any exemptive relief granted to us by the SEC and (ii) no-action relief granted by the SEC to another BDC (or to the Company if it

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determines to seek such similar no-action or other relief) permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act in order to maintain the BDC's status as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986. These provisions generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, is below 200% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase.

•  

We agree that, if, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, or the Exchange Act, to file any periodic reports with the SEC, we agree to furnish to holders of the Notes and the Trustee, for the period of time during which the Notes are outstanding, our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with applicable United States generally accepted accounting principles.

Events of default

You will have rights if an Event of Default occurs with respect to the Notes and is not cured.

The term “Event of Default” in respect of the Notes means any of the following:

•  

We do not pay the principal of any Note on its due date.

•  

We do not pay interest on any Note when due, and such default is not cured within 30 days.

•  

We remain in breach of any other covenant with respect to the Notes for 60 days after we receive a written notice of default stating we are in breach. The notice must be sent by either the Trustee or holders of at least 25.0% of the principal amount of the Notes.

•  

The default by us with respect to any mortgage, agreement or other instrument under which there may be outstanding, or by which there

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may be secured or evidenced, any indebtedness for money borrowed in excess of $10 million in the aggregate (i) resulting in such indebtedness becoming or being declared due and payable or (ii) constituting a failure to pay the principal or interest of any such debt when due and payable at its stated maturity, upon required repurchase, upon declaration of acceleration or otherwise, unless such default is not cured within 30 days;

•  

A final judgment for the payment of $15 million or more (excluding any amounts covered by insurance) rendered against us, which judgment is not discharged or stayed within 60 days after (i) the date on which the right to appeal thereof has expired if no such appeal has commenced, or (ii) the date on which all rights to appeal have been extinguished;

•  

We file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and in the case of certain orders or decrees entered against us under any bankruptcy law, such order or decree remains undischarged or unstayed for a period of 90 days.

•  

On the last business day of each of twenty-four consecutive calendar months, the Notes have an asset coverage, as defined in the 1940 Act, of less than 100%.

Global Clearance and Settlement Procedures

Interests in the Notes will trade in DTC’s Same Day Funds Settlement System, and any permitted secondary market trading activity in such Notes will, therefore, be required by DTC to be settled in immediately available funds. None of the Company, the Trustee or the Paying Agent will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

Use of Proceeds

We estimate that the net proceeds we will receive from the sale of the Notes will be approximately $48.2 million ($55.5 million if the underwriters exercise their option to purchase additional Notes in full) after deducting underwriting discounts and commissions and estimated offering expenses. We expect to use the net proceeds from this offering for general corporate purposes, which include investing in portfolio companies and CLO funds in accordance with our investment objective and strategies described elsewhere in this prospectus supplement. See “Use of Proceeds.”

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SELECTED FINANCIAL AND OTHER DATA

The following selected financial and other data for the years ended December 31, 2016, 2015, 2014, 2013 and 2012 is derived from our audited financial statements and for the six months ended June 30, 2017 is derived from our unaudited financial statements. The data should be read in conjunction with our financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included in this prospectus supplement and the accompanying prospectus. The historical data is not necessarily indicative of results to be expected for any future period.

	Six Months Ended June 30, 2017			Year Ended December 31, 2016			Year Ended December 31, 2015(1)			Year Ended December 31, 2014(1)			Year Ended December 31, 2013(1)			Year Ended December 31, 2012(1)
Income Statement Data:
Interest and related portfolio income:
Interest and Dividends	$	15,270,005		$	34,131,571		$	39,811,558		$	34,802,690		$	33,144,195		$	29,821,676
Fees and other income		164,124			668,527			366,859			934,871			305,376			304,882
Dividends from Asset Manager Affiliates		—			1,400,000			5,348,554			5,467,914			5,735,045			1,214,998
Total interest and related portfolio income		15,434,129			36,200,098			45,526,971			41,205,475			39,184,616			31,341,556
Expenses:
Interest and amortization of debt issuance costs		4,418,289			9,110,603			11,727,880			11,538,179			10,116,271			6,976,018
Compensation		2,401,030			4,103,558			3,843,799			4,951,745			4,630,481			3,172,814
Other		2,787,902			4,495,942			5,772,502			4,594,983			4,563,749			4,344,611
Total operating expenses		9,607,221			17,710,103			21,344,181			21,084,907			19,310,501			14,493,443
Net Investment Income		5,826,908			18,489,995			24,182,790			20,120,568			19,874,115			16,848,113
Realized and unrealized gains (losses) on investments:
Net realized gains (losses)		(965,405	)		(6,341,678	)		(6,647,478	)		(11,132,491	)		(12,627,314	)		(3,232,974	)
Net change in unrealized gains (losses)		(1,846,951	)		(13,188,048	)		(36,169,870	)		6,045,517			9,976,171			12,510,641
Total net gains (losses)		(2,812,356	)		(19,529,726	)		(42,817,348	)		(5,086,974	)		(2,651,143	)		9,277,667
Net increase (decrease) in net assets resulting from operations	$	2,907,276		$	(1,039,731	)	$	(18,634,558	)	$	15,033,594		$	17,222,972		$	26,125,779
Per Share:
Earnings per common share — basic	$	0.08		$	(0.03	)	$	(0.50	)	$	0.44		$	0.53		$	1.00
Earnings per common share — diluted	$	0.08		$	(0.03	)	$	(0.50	)	$	0.43		$	0.53		$	0.95
Net investment income per share — basic	$	0.16		$	0.50		$	0.65		$	0.59		$	0.62		$	0.65
Net investment income per share —  diluted	$	0.16		$	0.50		$	0.65		$	0.58		$	0.62		$	0.64
Distributions declared per common share	$	0.24		$	0.57		$	0.78		$	1.00		$	1.06		$	0.94
Taxable Distributable Income per basic share	$	0.12		$	0.40		$	0.63		$	0.78		$	0.70		$	0.77
Balance Sheet Data:
Investment assets at fair value	$	354,763,619		$	366,471,304		$	409,570,495		$	479,706,494		$	440,549,994		$	312,044,763
Total assets	$	363,895,292		$	381,371,983		$	421,204,697		$	505,180,218		$	453,340,638		$	316,277,452
Total debt outstanding(1)	$	169,910,128		$	175,584,570		$	201,103,761		$	218,618,014		$	186,760,623		$	98,416,979
Stockholders' equity	$	189,612,963		$	194,924,925		$	216,100,470		$	255,316,701		$	250,369,693		$	207,875,659
Net asset value per common share	$	5.10		$	5.24		$	5.82		$	6.94		$	7.51		$	7.85
Common shares outstanding at end of period		37,167,622			37,178,294			37,100,005			36,775,127			33,332,123			26,470,408
Other Data:
Investments funded	$	60,293,176		$	75,724,590		$	130,954,741		$	235,905,130		$	243,966,586		$	123,165,150
Principal collections related to investment repayments or sales	$	69,846,940		$	129,191,854		$	129,793,338		$	193,554,964		$	94,197,886		$	104,556,500
Number of portfolio investments at period end		109			125			130			141			126			88
Weighted average interest rate on income producing debt investments(2)		7.4	%		7.0	%		7.4	%		7.3	%		7.3	%		7.5	%
Total net asset value return(3)		1.9	%		0.2	%		(7.2	)%		5.7	%		9.1	%		11.9	%
Total market return(4)		(5.3	)%		12.3	%		(31.2	)%		(3.1	)%		(0.7	)%		60.5	%

(1) Amounts for years 2015 and prior have been restated in accordance with accounting standard update 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” Also, as discussed in “Prospectus Supplement Summary — Recent Developments,” the Company repaid approximately $148 million in debt on July 19, 2017 in connection with the KCAP-F3 Joint Venture transaction.

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(2) The weighted average interest rate on income producing debt investments is calculated as the sum of contractual annual interest income for each income producing debt investment, before the payment of all of our expenses, divided by sum of the par value of those investments. There can be no assurance that the weighted average interest rate on income producing debt investments will remain at its current level.

(3) Total net asset value return (not annualized) equals the change in the net asset value per share over the beginning of period net asset value per share plus distributions, divided by the beginning net asset value per share.

(4) Total market return (not annualized) equals the change in the ending market price, over the beginning of period price per share plus distributions, divided by the beginning market price.

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SUPPLEMENTARY RISK FACTORS

Investing in our Notes involves a high degree of risk. Before you invest in our Notes, you should be aware of various significant risks, including those described below. You should carefully consider these risks, together with all of the other information included in this prospectus supplement and the accompanying prospectus, before you decide whether to make an investment in our Notes. The risks set forth below are not the only risks we face. If any of the following risks occur, our business, financial condition and results of our operations could be materially adversely affected. In such case, you could lose all or part of your investment.

Risks Related to Our Notes

The Notes will be unsecured and therefore will be effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future and will rank pari passu with, or equal to, all outstanding and future unsecured unsubordinated indebtedness issued by us and our general liabilities.

The Notes will not be secured by any of our assets or any of the assets of any of our current subsidiaries, any subsidiaries we may form in the future or the Asset Manager Affiliates. As a result, the Notes will effectively be subordinated to any secured indebtedness we or our current subsidiaries have (or any future subsidiaries may have) or our Asset Manager Affiliates have outstanding as of the date of this prospectus supplement or that they may incur in the future (or any indebtedness that is initially unsecured as to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness or secured indebtedness of our current subsidiaries, of any future subsidiaries or the Asset Manager Affiliates may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes.

As of the offering date of the Notes, the Notes will rank pari passu with, or equal to, $27,000,000 in aggregate principal amount of our 7.375% Notes Due 2019, plus accrued interest thereon. The Notes will also rank pari passu with, or equal to, our general liabilities. In total, these general liabilities were $4,372,201 as of June 30, 2017. We currently do not have outstanding debt that is subordinated to the Notes and do not currently intend to issue indebtedness that expressly provides that it is subordinated to the Notes. Therefore, the Notes will not be senior to any indebtedness or obligations.

The Notes will be structurally subordinated to the indebtedness and other liabilities of our current and future subsidiaries and portfolio companies with respect to which we hold equity investments, including the Asset Manager Affiliates.

The Notes will be obligations exclusively of KCAP Financial, Inc., and not of any of our current or future subsidiaries or the Asset Manager Affiliates. None of our current or future subsidiaries or the Asset Manager Affiliates will be a guarantor of the Notes and the Notes will not be required to be guaranteed by any subsidiary or asset management firm we may acquire or create in the future. Any assets of our subsidiaries and the Asset Manager Affiliates will not be directly available to satisfy the claims of our creditors, including holders of the Notes. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such entities (and therefore the claims of our creditors, including holders of the Notes) with respect to the assets of such entities. Even if we are recognized as a creditor of one or more of these entities, our claims would still be effectively subordinated to any security interests in the assets of any such entity and to any indebtedness or other liabilities of any such entity senior to our claims. Consequently, the Notes will be structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries and portfolio companies with respect to which we hold equity investments, including the Asset Manager Affiliates and any subsidiaries of the Asset Manager Affiliates that we may in the future acquire or establish. These entities may incur substantial indebtedness in the future, all of which would be structurally senior to the Notes.

The indenture under which the Notes will be issued contains limited protection for holders of the Notes.

The indenture under which the Notes will be issued offers limited protection to holders of the Notes. The terms of the indenture and the Notes do not restrict our, our current subsidiaries’, any of our future subsidiaries’ or the Asset Manager Affiliates’ ability to engage in, or otherwise be a party to, a variety of

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corporate transactions, circumstances or events that could have a material adverse impact on your investment in the Notes. In particular, the terms of the indenture and the Notes will not place any restrictions on our, our current subsidiaries’, our future subsidiaries’ or the Asset Manager Affiliates’ ability to:

• issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries or the Asset Manager Affiliates and which therefore is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries or the Asset Manager Affiliates that would be senior to our equity interests in those entities and therefore rank structurally senior to the Notes with respect to the assets of our subsidiaries and the Asset Manager Affiliates, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to us by the SEC. These provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowings;

• pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the Notes, including subordinated indebtedness, in each case other than dividends, purchases, redemptions or payments that would cause a violation of Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, giving effect to (i) any exemptive relief granted to us by the SEC and (ii) no-action relief granted by the SEC to another BDC (or to the Company if it determines to seek such similar no-action or other relief) permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act in order to maintain the BDC's status as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986. These provisions generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, is below 200% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase;

• sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);

• enter into transactions with affiliates;

• create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;

• make investments; or

• create restrictions on the payment of dividends or other amounts to us from our subsidiaries.

In addition, the indenture (as defined in “Description of the Notes”) will not require us to make an offer to purchase the Notes in connection with a change of control or any other event.

Furthermore, the terms of the indenture and the Notes do not protect holders of the Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, if any, as they do not require that we, our current subsidiaries or any of our future subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity other than as described under “Description of the Notes — Events of Default” elsewhere herein.

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Our ability to recapitalize, incur additional debt (including additional debt that matures sooner than the Notes), and take a number of other actions that are not limited by the terms of the Notes may have important consequences for you as a holder of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes or negatively affecting the trading value of the Notes.

Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the Notes.

There is no existing trading market for the Notes and, even if the NASDAQ Global Select Market approves the listing of the Notes, an active trading market for the Notes may not develop, which could limit your ability to sell the Notes or the market price of the Notes.

The Notes will be a new issue of debt securities for which there initially will not be a trading market. We intend to list the Notes on the NASDAQ Global Select Market within 30 days of the original issue date under the symbol “KCAPL.” However, there is no assurance that the Notes will be approved for listing on the NASDAQ Global Select Market.

Moreover, even if the listing of the Notes is approved, we cannot provide any assurances that an active trading market will develop for the Notes or that you will be able to sell your Notes. If the Notes are traded after their initial issuance, they may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, if any, general economic conditions, our financial condition, performance and prospects and other factors. The underwriters have advised us that they intend to make a market in the Notes, but they are not obligated to do so. The underwriters may discontinue any market-making in the Notes at any time at their sole discretion.

Accordingly, we cannot assure you that the Notes will be approved for listing on the NASDAQ Global Select Market, that a liquid trading market will develop for the Notes, that you will be able to sell your Notes at a particular time or that the price you receive if you sell will be favorable. To the extent an active trading market does not develop, the liquidity and trading price for the Notes may be harmed. Accordingly, you may be required to bear the financial risk of an investment in the Notes for an indefinite period of time.

Our amount of debt outstanding will increase as a result of this offering, and if we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes.

Any default under the agreements governing our indebtedness, including a default under the 7.375% Notes Due 2019 or other indebtedness to which we may be a party that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the Notes and substantially decrease the market value of the Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lender under debt we may incur in the future could elect to terminate its commitment, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. Our ability to generate sufficient cash flow in the future is, to some extent, subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that future borrowings will be available to us, in an amount sufficient to enable us to meet our payment obligations under the Notes and our other debt and to fund other liquidity needs.

If our operating performance declines and we are not able to generate sufficient cash flow to service our debt obligations, we may in the future need to refinance or restructure our debt, including any Notes sold, sell assets, reduce or delay capital investments, seek to raise additional capital or seek to obtain waivers from the lenders under or holders of debt that we may incur in the future to avoid being in default. If we are unable to

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implement one or more of these alternatives, we may not be able to meet our payment obligations under the Notes and our other debt. If we breach our covenants under any of our debt and seek a waiver, we may not be able to obtain a waiver from the required lenders or holders thereof. If this occurs, we would be in default, the lenders or holders could exercise rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations could proceed against the collateral securing the debt. Because the 7.375% Notes Due 2019 have, and any future debt we issue will likely have, customary cross-default provisions, if the indebtedness under the Notes or any of our current or future debt is accelerated, we may be unable to repay or finance the amounts due.

We may be unable to invest a significant portion of the net proceeds from this offering, which could harm our financial condition and operating results.

Delays in investing the net proceeds raised in this offering may cause our performance to be worse than that of other fully invested BDCs or other lenders or investors pursuing comparable investment strategies. We cannot assure you that we will be able to identify any investments that meet our investment objective or that any investment that we make will produce a positive return. We may be unable to invest the net proceeds of this offering on acceptable terms within the time period that we anticipate or at all, which could harm our financial condition and operating results.

We anticipate that, depending on market conditions and the amount of the capital, it may take us a substantial period of time to invest substantially all of the net proceeds from this offering in investments meeting our investment objective. During this period, we plan to invest the capital primarily in high quality, short-term debt securities consistent with our BDC election and our election to be taxed as a RIC, which may produce returns that are significantly lower than the returns which we expect to achieve when our portfolio is fully invested in investments meeting our investment objective.

We may choose to redeem the Notes when prevailing interest rates are relatively low.

On or after September 30, 2019, we may choose to redeem the Notes from time to time, especially if prevailing interest rates are lower than the rate borne by the Notes. If prevailing rates are lower at the time of redemption, and we redeem the Notes, you likely would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the interest rate on the Notes being redeemed. Our redemption right also may adversely impact your ability to sell the Notes as the optional redemption date or period approaches.

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FORWARD-LOOKING STATEMENTS

This prospectus supplement and the accompanying prospectus include forward-looking statements. The matters discussed in this prospectus supplement and the accompanying prospectus, as well as in future oral and written statements by management of the Company that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. Important assumptions include our ability to acquire or originate new investments, achieve certain margins and levels of profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this prospectus supplement and the accompanying prospectus should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this prospectus supplement and the accompanying prospectus include statements as to:

• our future operating results;

• our business prospects and the prospects of our existing and prospective portfolio companies;

• the return or impact of current and future investments;

• our contractual arrangements and other relationships with third parties;

• the dependence of our future success on the general economy and its impact on the industries in which we invest;

• the financial condition and ability of our existing and prospective portfolio companies to achieve their objectives;

• our expected financings and investments;

• our regulatory structure and tax treatment;

• our ability to operate as a BDC and a RIC, including the impact of changes in laws or regulations governing our operations, the operations of the Asset Manager Affiliates or the operations of our portfolio companies;

• the adequacy of our cash resources and working capital;

• the timing of cash flows, if any, from the operations of our portfolio companies, including our Asset Manager Affiliates;

• the impact of a protracted decline in the liquidity of credit markets on our business;

• the impact of fluctuations in interest rates on our business;

• the valuation of our investments in portfolio companies, particularly those having no liquid trading market;

• our ability to recover unrealized losses;

• market conditions and our ability to access additional capital; and

• the timing, form and amount of any distributions.

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There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. For a discussion of factors that could cause our actual results to differ from forward-looking statements contained in this prospectus supplement and the accompanying prospectus, please see the discussion under “Supplementary Risk Factors” in this prospectus supplement and “Risk Factors” in the accompanying prospectus. You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this prospectus supplement and the accompanying prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this prospectus supplement or the accompanying prospectus.

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from the sale of the $50 million aggregate principal amount of Notes in this offering will be approximately $48.2 million (or approximately $55.5 million if the underwriters fully exercise their option to purchase additional Notes), in each case at the public offering price of 100% of par, after deducting the underwriting discounts and commissions of $1,500,000 (or $1,725,000 if the underwriters fully exercise their option to purchase additional Notes) payable by us and estimated offering expenses of approximately $315,420 payable by us.

We intend to use the net proceeds from the sale of the Notes for general corporate purposes, which includes investing in portfolio companies and CLO funds in accordance with our investment objective and strategies described elsewhere in this prospectus supplement. We anticipate that substantially all of the net proceeds of the offering of the Notes pursuant to this prospectus supplement will be used for the above purposes within six to nine months of any such offering, depending on the availability of appropriate investment opportunities consistent with our investment objective and strategies and market conditions.

Pending the uses described above, we intend to invest the net proceeds of the offering in cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment. These securities may earn yields substantially lower than the income that we anticipate receiving once we are fully invested in accordance with our investment objective. See “Regulation —  Temporary Investments” in the accompanying prospectus for additional information about temporary investments we may make while waiting to make longer-term investments in pursuit of our investment objective.

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2017, actual and as adjusted for the sale of $57.5 million aggregate principal amount of the Notes offered hereby (assuming the underwriters fully exercise their option to purchase additional Notes) at an assumed public offering price of 100% of par, after deducting the underwriting discounts and commissions of $1,725,000 payable by us and estimated offering expenses of approximately $315,420 payable by us. This table should be read in conjunction with “Use of Proceeds” included in this prospectus supplement and our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and notes thereto included in this prospectus supplement and the accompanying prospectus.

	As of June 30, 2017
	Actual			As Adjusted
	(Unaudited)			(Unaudited)
Cash	$	2,395,844		$	57,855,424
Borrowings		169,910,128			82,108,039	(1)
Stockholders’ equity:
Common stock, par value $0.01 per share; 100,000,000 common shares authorized, 37,167,622 shares outstanding		371,672			371,672
Capital in excess of par value		354,052,507			354,052,507
Excess distribution of net investment income		(17,670,890	)		(21,759,221	)
Accumulated net realized losses on investments		(89,564,576	)		(89,564,576	)
Net unrealized depreciation on investments		(57,575,750	)		(57,575,750	)
Total stockholders’ equity	$	189,612,963		$	185,524,632
Total Liabilities and Stockholders’ Equity	$	363,895,292		$	276,093,203

(1) As disclosed in“Prospectus Supplement Summary — Recent Developments,” the Company repaid approximately $148 million in debt on July 19, 2017 in connection with the KCAP-F3 Joint Venture transaction. As a result, the “as adjusted” column in this table takes into account such repayment.

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RATIOS OF EARNINGS TO FIXED CHARGES

For purposes of computing the ratios of earnings to fixed charges, earnings represent net increase in net assets resulting from operations plus (or minus) income tax provision (benefit) including excise tax expense plus fixed charges. Fixed charges include interest and credit facility fees and amortization of deferred financing fees.

For the six months ended June 30, 2017 and the years ended December 31, 2016, 2015, 2014, 2013, and 2012, the ratios of earnings to fixed charges of the Company, computed as set forth below, were as follows:

	Six Months Ended June 30, 2017		Year Ended December 31, 2016		Year Ended December 31, 2015			Year Ended December 31, 2014		Year Ended December 31, 2013		Year Ended December 31, 2012
Earnings to Fixed Charges(1)		1.66		0.89		(0.59	)		2.30		2.70		4.75

(1) Earnings include net realized and unrealized gains or losses. Net realized and unrealized gains or losses can vary substantially from period to period.

For purposes of computing the ratios of earnings to fixed charges, earnings represent net increase in net assets resulting from operations plus (or minus) income tax expense (benefit) including excise tax expense plus fixed charges. Fixed charges include interest and amortization of debt issuance costs.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this prospectus supplement and the accompanying prospectus. In addition to historical information, the following discussion and other parts of this prospectus supplement and the accompanying prospectus contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under “Risk Factors” and “Forward-Looking Statements” appearing elsewhere in this prospectus supplement and the accompanying prospectus.

GENERAL

We are an internally managed, non-diversified closed-end investment company that is regulated as a business development company, or BDC, under the Investment Company Act of 1940 (the “1940 Act”). We have three principal areas of investments:

First, the Company originates, structures, and invests in senior secured term loans and mezzanine debt primarily in privately-held middle market companies (the “Debt Securities Portfolio”). In addition, from time to time the Company may invest in the equity securities of privately held middle market companies.

Second, the Company has invested in asset management companies (Katonah Debt Advisors and Trimaran Advisors, collectively the “Asset Manager Affiliates”) that manage collateralized loan obligation funds (“CLO Funds”).

Third, the Company invests in debt and subordinated securities issued by collateralized loan obligation funds (“CLO Fund Securities”). These CLO Fund Securities are primarily managed by our Asset Manager Affiliates, but from time to time the Company makes investments in CLO Fund Securities managed by other asset managers. The CLO Funds typically invest in broadly syndicated loans, high-yield bonds and other credit instruments.

The structure of CLO Funds, which are highly levered, is extremely complicated. Since we primarily invest in securities representing the residual interests of CLO Funds, our investments are much riskier than the risk profile of the loans by which such CLO Funds are collateralized. Our investments in CLO Funds may be riskier and less transparent to us and our stockholders than direct investments in the underlying loans. The CLO Funds in which we invest have debt that ranks senior to our investment.

The Company may also invest in other investments such as loans to publicly-traded companies, high-yield bonds and distressed debt securities. The Company may also receive warrants or options to purchase common stock in connection with its debt investments.

In our Debt Securities Portfolio, our investment objective is to generate current income and, to a lesser extent, capital appreciation from the investments made by our middle market business in senior secured term loans, mezzanine debt and selected equity investments in privately-held middle market companies. We define the middle market as comprising of companies with earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $10 million to $50 million and/or total debt of $25 million to $150 million. We primarily invest in first and second lien term loans which, because of their priority in a company’s capital structure, we expect will have lower default rates and higher rates of recovery of principal if there is a default and which we expect will create a stable stream of interest income. The investments in our Debt Securities Portfolio are all or predominantly below investment grade, and have speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. While our primary investment focus is on making loans to, and selected equity investments in, privately-held middle market companies, we may also invest in other investments such as loans to smaller private companies or publicly-traded companies, high-yield bonds and distressed debt securities. We may also receive warrants or options to purchase common stock in connection with our debt investments.

From our Asset Manager Affiliates investment, we expect to receive recurring cash distributions and to generate capital appreciation through the addition of new CLO Funds managed by our Asset Manager Affiliates. We may also seek to monetize our investment in the Asset Manager Affiliates if and when business conditions warrant. The Asset Manager Affiliates manage CLO Funds that invest in broadly syndicated loans,

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high-yield bonds and other credit instruments. Collectively, the Asset Manager Affiliates have approximately $2.7 billion of par value assets under management as of June 30, 2017. The Asset Manager Affiliates are registered under the Investment Advisers Act of 1940, and are each managed independently from KCAP by a separate management team (however, certain of the Company’s executive officers also act in similar capacities for one or both of the Asset Manager Affiliates).

In addition, our investments in CLO Fund Securities, which are primarily made up of a minority investment in the subordinated securities or preferred stock of CLO Funds raised and managed by our Asset Manager Affiliates, are anticipated to provide the Company with recurring cash distributions and complement our investment in the Asset Manager Affiliates.

Subject to market conditions, we intend to grow our entire portfolio of investments by raising additional capital, including through the prudent use of leverage available to us. As a BDC, we are limited in the amount of leverage we can incur under the 1940 Act. We are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing.

We have elected to be treated for U.S. federal income tax purposes as a RIC and intend to operate in a manner to maintain our RIC status. As a RIC, we intend to distribute to our stockholders substantially all of our net ordinary taxable income and the excess of realized net short-term capital gains over realized net long-term capital losses, if any, for each year. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. Pursuant to this election, we generally will not have to pay corporate-level U.S. federal income taxes on any income that we timely distribute to our stockholders.

PORTFOLIO AND INVESTMENT ACTIVITY

Our primary investments are: (1) lending to and investing in middle-market businesses through investments in senior secured loans, junior secured loans, subordinated/mezzanine debt investments, and other equity investments, which may include warrants, (2) our investments in our Asset Manager Affiliates, which manage portfolios of broadly syndicated loans, high-yield bonds and other credit instruments, and (3) CLO Fund Securities.

Total portfolio investment activity (excluding activity in time deposit and money market investments) for the six months ended June 30, 2017 (unaudited) and for the year ended December 31, 2016 was as follows:

	Debt Securities			CLO Fund Securities			Equity Securities			Asset Manager Affiliates			Total Portfolio
Fair Value at December 31, 2015	$	284,639,244		$	55,872,382		$	9,548,488		$	57,381,000		$	407,441,114
2016 Activity:
Purchases/originations/draws		74,584,952			10,140,000			—			—			84,724,952
Sales/Pay-downs/Return of Capital		(123,240,416	)		(4,200,000	)		(4,563,521	)		(1,250,000	)		(133,253,937	)
Net accretion (amortization)		407,492			(2,192,071	)		—			—			(1,784,579	)
Net realized (losses) gains		(540,649	)		(10,111,560	)		4,484,742			—			(6,167,467	)
Net increase (decrease) in fair value		2,492,707			4,665,599			(4,413,354	)		(15,933,000	)		(13,188,048	)
Fair Value at December 31, 2016		238,343,330			54,174,350			5,056,355			40,198,000			337,772,035
Year to Date 2017 Activity:
Purchases/originations/draws		60,293,073			—			1			—			60,293,074
Sales/Pay-downs/Return of Capital		(56,731,233	)		—			—			(1,300,000	)		(58,031,233	)
Net accretion (amortization)		256,363			(21,741	)		—			—			234,622
Net realized gains (losses)		(965,405	)		—			—			—			(965,405	)
Net increase (decrease) in fair value		2,413,571			(2,399,711	)		(419,811	)		(1,441,000	)		(1,846,951	)
Fair Value at June 30, 2017	$	243,609,699		$	51,752,898		$	4,636,545		$	37,457,000		$	337,456,142

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The level of investment activity for investments funded and principal repayments for our investments can vary substantially from period to period depending on the number and size of investments that we invest in or divest of, and many other factors, including the amount and competition for the debt and equity securities available to middle market companies, the level of merger and acquisition activity for such companies and the general economic environment.

The following table shows the Company’s portfolio by security type at June 30, 2017 and December 31, 2016:

	June 30, 2017 (unaudited)							December 31, 2016
Security Type	Cost/Amortized Cost		Fair Value		%(1)			Cost/Amortized Cost		Fair Value		%(1)
Money Market Accounts(2)		17,307,477	$	17,307,477		5			28,699,269	$	28,699,269		8
Senior Secured Loan		207,622,375		202,272,386		57			207,701,078		200,322,152		55
Junior Secured Loan		40,191,888		38,773,666		11			37,251,776		35,444,440		10
First Lien Bond		3,054,337		1,058,394		—			3,060,919		1,089,338		—
Senior Secured Bond		1,504,434		1,505,250		—			1,506,461		1,487,400		—
CLO Fund Securities		76,829,575		51,752,901		15			76,851,317		54,174,350		15
Equity Securities		10,389,007		4,636,545		1			10,389,007		5,056,355		1
Asset Manager Affiliates(3)		54,041,230		37,457,000		11			55,341,230		40,198,000		11
Total	$	410,940,323	$	354,763,619		100	%	$	420,801,057	$	366,471,304		100	%

(1) Represents percentage of total portfolio at fair value.

(2) Includes restricted cash held under employee benefit plans.

(3) Represents the equity investment in the Asset Manager Affiliates.

The industry-related information, based on the fair value of the Company’s investment portfolio as of June 30, 2017 and December 31, 2016, for our investment portfolio were as follows:

	June 30, 2017 (unaudited)							December 31, 2016
Industry Classification	Cost/Amortized Cost		Fair Value		%(1)			Cost/Amortized Cost		Fair Value		%(1)
Aerospace and Defense	$	8,358,648	$	8,231,839		2	%	$	8,394,633	$	8,450,106		2	%
Asset Management Company(2)		54,041,230		37,457,000		11			55,341,230		40,198,000		11
Automotive		7,751,269		7,740,953		2			6,322,551		6,196,154		2
Banking, Finance, Insurance & Real Estate		5,585,742		5,560,869		1			6,805,514		6,782,010		2
Beverage, Food and Tobacco		15,002,028		14,451,010		4			15,198,830		14,703,372		4
Capital Equipment		9,655,431		8,892,136		3			6,185,129		5,575,048		2
Chemicals, Plastics and Rubber		6,391,014		6,366,999		2			6,421,909		6,444,073		2
CLO Fund Securities		76,829,575		51,752,901		15			76,851,317		54,174,350		15
Construction & Building		5,864,273		5,949,494		2			5,919,158		5,929,606		2
Consumer goods: Durable		10,337,009		8,292,890		2			12,319,905		10,118,736		3
Consumer goods: Non-durable		14,876,629		14,804,415		4			14,766,390		14,452,096		4
Ecological		—		—		—			1,741,292		1,760,783		—
Energy: Electricity		3,887,209		3,914,471		1			3,904,453		3,937,247		1
Energy: Oil & Gas		14,872,992		10,051,515		3			14,493,835		8,805,761		2
Environmental Industries		13,666,574		12,924,304		4			12,279,924		12,185,239		3
Forest Products & Paper		4,184,554		4,255,460		1			4,192,889		4,192,907		1

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	June 30, 2017 (unaudited)							December 31, 2016
Industry Classification	Cost/Amortized Cost		Fair Value		%(1)			Cost/Amortized Cost		Fair Value		%(1)
Healthcare & Pharmaceuticals		56,578,981		53,483,702		15			58,769,668		53,594,534		15
High Tech Industries		10,889,657		10,966,899		2			9,854,093		9,936,109		3
Hotel, Gaming & Leisure		4,360,690		3,990,948		1			400,000		1,000		—
Media: Advertising, Printing & Publishing		12,395,852		12,192,690		3			11,712,682		11,453,447		3
Media: Broadcasting & Subscription		2,977,500		2,978,527		1			8,273,174		8,372,984		2
Retail		—		—		—			1,415,457		759,581		—
Services: Business		25,315,597		24,421,038		7			16,125,481		16,230,486		4
Services: Consumer		5,889,352		5,882,817		2			6,212,108		6,204,889		2
Telecommunications		6,015,390		5,967,221		2			12,809,799		12,767,823		3
Time Deposit and Money Market Accounts(3)		17,307,477		17,307,477		5			28,699,269		28,699,269		8
Transportation: Cargo		10,241,457		9,976,558		3			7,557,315		7,190,135		2
Transportation: Consumer		2,273,040		2,197,339		1			2,412,614		2,324,516		1
Utilities: Electric		5,391,153		4,752,147		1			5,420,438		5,031,043		1
Total	$	410,940,323	$	354,763,619		100	%	$	420,801,057	$	366,471,304		100	%

(1) Calculated as a percentage of total portfolio at fair value.

(2) Represents the equity investment in the Asset Manager Affiliates.

(3) Includes restricted cash held under employee benefit plans.

Debt Securities Portfolio

At June 30, 2017 and December 31, 2016, our investments in income producing debt securities portfolio, excluding CLO Fund securities, had a weighted average interest rate of approximately 7.4% and 7.0%, respectively. For the six months ended June 30, 2017, our total net asset value return per share was 1.9% and our total market return based on stock price was (5.3)%. For the year ended December 31, 2016, our total net asset value return per share was 0.2% and our total market return based on stock price was 12.3%. Total net asset value return per share and total market return based on stock price do not reflect the sales load paid by stockholders.

The investment portfolio (excluding the Company’s investment in Asset Manager Affiliates and CLO Funds) at June 30, 2017 was spread across 24 different industries and 96 different entities with an average balance per entity of approximately $2.6 million. As of June 30, 2017, all but two of our portfolio companies were current on their debt service obligations.

We may invest up to 30% of our investment portfolio in “Non-qualifying” opportunistic investments such as high-yield bonds, debt and equity securities of CLO Funds, foreign investments, and distressed debt or equity securities of large cap public companies. At June 30, 2017 and December 31, 2016, the total amount of non-qualifying assets were approximately 18% and 17% of the total investment portfolio, respectively. The majority of non-qualifying assets were foreign investments which were approximately 15% and 14% of the Company’s total investment portfolio, respectively (including the Company’s investments in CLO Funds, which are typically domiciled outside the U.S. and represented approximately 14% and 14% of its total assets on such dates, respectively). The investments in our Debt Securities Portfolio are all or predominantly below investment grade, and therefore have speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal.

Asset Manager Affiliates

The Asset Manager Affiliates are our wholly-owned asset management companies that manage CLO Funds that invest in broadly syndicated loans, high yield bonds and other credit instruments. The CLO Funds

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managed by our Asset Manager Affiliates consist primarily of credit instruments issued by corporations. As of June 30, 2017 and December 31, 2016, our Asset Manager Affiliates had approximately $2.7 billion and $3.0 billion of par value respectively, of assets under management on which they earn management fees, and were valued at approximately $37.5 million and $40.2 million, respectively.

All CLO Funds managed by the Asset Manager Affiliates are currently paying all senior and subordinate management fees. In addition, in the six months ended in 2017 our Asset Manager Affiliates recognized $3.0 million of incentive fees from one fund.

CLO Fund Securities

We typically make a minority investment in the subordinated securities or preferred stock of CLO Funds raised and managed by our Asset Manager Affiliates and may selectively invest in securities issued by CLO Funds managed by other asset management companies. As of June 30, 2017, we had approximately $52 million invested in CLO Fund Securities, issued primarily by funds managed by our Asset Manager Affiliates.

The CLO Funds invest primarily in broadly syndicated non-investment grade loans, high-yield bonds and other credit instruments of corporate issuers. The underlying assets in each of the CLO Fund Securities in which we have an investment are generally diversified secured or unsecured corporate debt.

Our CLO Fund Securities as of June 30, 2017 and December 31, 2016 are as follows:

	Investment		%(1)			June 30, 2017				December 31, 2016
CLO Fund Securities						Cost/Amortized Cost		Fair Value		Cost/Amortized Cost		Fair Value
Grant Grove CLO, Ltd.(3)		Subordinated Securities		22.2	%	$	2,485,886	$	1,000	$	2,485,886	$	1,000
Katonah III, Ltd.(3)		Preferred Shares		23.1			1,287,155		369,000		1,287,155		369,000
Katonah 2007-I CLO Ltd.(2)		Preferred Shares		100.0			30,032,022		21,992,562		28,022,646		20,453,099
Trimaran CLO VII, Ltd.(2)		Income Notes		10.5			383,021		10,000		1,643,920		1,195,152
Catamaran CLO 2012-1 Ltd.(2)		Subordinated Notes		24.9			5,685,012		2,437,426		5,919,933		2,819,412
Catamaran CLO 2013-1 Ltd.(2)		Subordinated Notes		23.5			4,886,919		3,965,998		5,237,222		4,918,807
Catamaran CLO 2014-1 Ltd.(2)		Subordinated Notes		24.9			7,464,287		3,778,905		7,818,484		4,546,682
Catamaran CLO 2014-1 Ltd.(2)		Class E Notes		15.1			1,447,816		1,410,000		1,441,727		1,310,000
Dryden 30 Senior Loan Fund		Subordinated Notes		7.5			1,285,369		1,543,571		1,343,467		1,895,566
Catamaran CLO 2014-2 Ltd.(2)		Subordinated Notes		24.9			6,782,873		4,637,430		6,967,560		5,092,087
Catamaran CLO 2015-1 Ltd.(2)		Subordinated Notes		9.9			4,441,173		3,041,821		4,543,317		3,223,255
Catamaran CLO 2016-1 Ltd.(2)		Subordinated Notes		24.9			10,648,043		8,565,188		10,140,000		8,350,290
Total						$	76,829,576	$	51,752,898	$	76,851,317	$	54,174,350

(1) Represents percentage of class held.

(2) A CLO Fund managed by an Asset Manager Affiliate.

(3) As of June 30, 2017, this CLO Fund security was not providing a distribution.

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The following tables detail the ten largest portfolio investments (at fair value) as of June 30, 2017 and December 31, 2016:

	June 30, 2017 (unaudited)
Investment	Cost/Amortized Cost		Fair Value		% of FMV
Asset Manager Affiliates	$	54,041,230	$	37,457,000		11	%
Katonah 2007-I CLO Ltd.		30,032,022		21,992,562		6
US Bank Money Market Account(1)		17,293,209		17,293,209		5
Grupo HIMA San Pablo, Inc.		9,831,462		9,125,200		3
Catamaran CLO 2016-1 Ltd.		10,648,044		8,565,188		2
Tank Partners Holdings, LLC		12,199,921		7,973,756		2
Roscoe Medical, Inc.		6,672,767		6,432,000		2
GK Holdings, Inc. (aka Global Knowledge)		5,883,886		5,894,412		2
Weiman Products, LLC		5,678,204		5,692,226		2
Harland Clarke Holdings Corp.		5,230,476		5,299,893		1
Total	$	157,511,211	$	125,725,446		36	%

	December 31, 2016
Investment	Cost/Amortized Cost		Fair Value		% of FMV
Asset Manager Affiliates	$	55,341,230	$	40,198,000		11	%
US Bank Money Market Account(1)		28,685,001		28,685,001		8
Katonah 2007-I CLO Ltd.		28,022,646		20,453,099		6
Grupo HIMA San Pablo, Inc.		9,828,619		9,113,125		2
Catamaran CLO 2016-1 Ltd.		10,140,000		8,350,290		2
Tank Partners Holdings, LLC		11,822,180		6,552,311		2
Roscoe Medical, Inc.		6,666,733		6,499,000		2
Weiman Products, LLC		5,462,647		5,321,809		1
Nielson & Bainbrige, LLC		5,326,136		5,199,447		1
Catamaran CLO 2014-2 Ltd.		6,967,560		5,092,087		1
Total	$	168,262,752	$	135,464,169		36	%

(1) Related party loan — See Note 5 to Consolidated Financial Statements.

The following tables detail the ten largest portfolio companies (at fair value) as of June 30, 2017 and December 31, 2016:

Excluding the Asset Manager Affiliates and CLO Fund Securities, the Company’s ten largest portfolio companies represented approximately 16% and 13% of the total fair value of the Company’s investments at June 30, 2017 and December 31, 2016, respectively.

RESULTS OF OPERATIONS

The principal measure of our financial performance is the net increase (decrease) in stockholders’ equity resulting from operations, which includes net investment income (loss) and net realized and unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, distributions, fees, and other investment income and our operating expenses. Net realized gain (loss) on investments, is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net change in unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio.

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Set forth below is a discussion of our results of operations for the three and six months ended June 30, 2017 and 2016.

Revenue

Revenues consist primarily of investment income from interest and dividends on our investment portfolio and various ancillary fees related to our investment holdings.

Interest from Investments in Debt Securities.  We generate interest income from our investments in debt securities that consist primarily of senior and junior secured loans. Our Debt Securities Portfolio is spread across multiple industries and geographic locations, and as such, we are broadly exposed to market conditions and business environments. As a result, although our investments are exposed to market risks, we continuously seek to limit concentration of exposure in any particular sector or issuer.

Investment Income on Investments in CLO Fund Securities.  We generate investment income from our investments in the securities (typically preferred shares or subordinated securities) of CLO Funds managed by our Asset Manager Affiliates and select investments in securities issued by CLO Funds managed by other asset management companies. CLO Funds managed by our Asset Manager Affiliates and those managed by non-affiliates invest primarily in broadly syndicated non-investment grade loans, high-yield bonds and other credit instruments of corporate issuers. The Company distinguishes CLO Funds managed by its Asset Manager Affiliates as “CLO Fund Securities Managed by Affiliates”, in its financial consolidated statements. The underlying assets in each of the CLO Funds in which we have an investment are generally diversified secured or unsecured corporate debt. Our CLO Fund Securities that are subordinated securities or preferred shares (“junior securities”) are subordinated to senior note holders who typically receive a return on their investment at a fixed spread relative to the LIBOR index. The CLO Funds are leveraged funds and any excess cash flow or “excess spread” (interest earned by the underlying securities in the fund less payments made to senior bond holders and less fund expenses and management fees) is paid to the holders of the CLO Fund’s subordinated securities or preferred shares. The level of excess spread from CLO Fund Securities can be impacted by the timing and level of the resetting of the benchmark interest rate for the underlying assets (which reset at various times throughout the quarter) in the CLO Fund and the related CLO Fund note liabilities (which reset at each quarterly distribution date); in periods of short-term and volatile changes in the benchmark interest rate, the levels of excess spread and resulting cash distributions to us can vary significantly.

Interest income on investments in CLO equity investments is recorded using the effective interest method in accordance with the provisions of ASC 325-40, Beneficial Interests in Securitized Financial Assets (“ASC 325-40”), based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated projected future cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield prospectively over the remaining life of the investment from the date the estimated yield was changed. Accordingly, investment income recognized on CLO equity securities in the GAAP statement of operations differs from both the tax-basis investment income and from the cash distributions actually received by the Company during the period. As a RIC, the Company anticipates a timely distribution of its tax-basis taxable income.

For non-junior class CLO Fund Securities, such as our investment in the Class E notes of Catamaran CLO 2014-1 Ltd, interest is earned at a fixed spread relative to the LIBOR index.

Distributions from Asset Manager Affiliates.  We receive cash distributions from our investment in our Asset Manager Affiliates, which are wholly-owned and manage CLO Funds that invest primarily in broadly syndicated non-investment grade loans, high yield bonds and other credit instruments issued by corporations. As managers of CLO Funds, our Asset Manager Affiliates receive contractual and recurring management fees from the CLO Funds for their management and advisory services. In addition, our Asset Manager Affiliates may also earn income related to net interest on assets accumulated for future CLO issuances on which they have taken a first loss position in connection with loan warehouse arrangements for their CLO Funds. The annual management fees that our Asset Manager Affiliates receive are generally based on a fixed percentage of the par value of assets under management and are recurring in nature for the term of the CLO Fund so long as the Asset Manager Affiliates manage the fund. As a result, the annual management fees earned by our Asset

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Manager Affiliates generally are not subject to market value fluctuations in the underlying collateral. Our Asset Manager Affiliates may receive incentive fees provided such CLO Funds have achieved a minimum investment return to holders of their subordinated securities or preferred shares as per the terms of each CLO Fund management agreement. During the three and six months ended June 30, 2017, the Asset Manager Affiliates received incentive fees from one fund.

The Asset Manager Affiliates are expected to pay future distributions to the Company based upon their after-tax free cash flow, which generally will be dependent upon the maintenance and growth in their assets under management and incentive fees. As a result of tax-basis goodwill amortization and certain other tax-related adjustments, portions of distributions received may be deemed return of capital. As amortizing funds which are paying incentive fees are redeemed, we expect incentive fees available for distribution to diminish. The fair value of our investment in our Asset Manager Affiliates was approximately $37.5 million at June 30, 2017, with an unrealized loss during the six months ended June 30, 2017 of approximately $1.4 million. For the three months ended June 30, 2016, we recognized dividend income of approximately $850,000 from the Asset Manager Affiliates, while cash distributions received were $650,000 and $850,000 for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2016, we recognized dividend income of approximately $1.4 million from the Asset Manager Affiliates, while cash distributions received were approximately $1.3 million and $1.9 million for the six months ended June 30, 2017 and 2016, respectively. All of the $1.3 million of distributions received by the Company from the Asset Manager Affiliates during the six months ended June 30, 2017 are treated as a return of capital. The difference between cash distributions received and the tax-basis earnings and profits is recorded as an adjustment to the cost basis of the Asset Manager Affiliates investments. For interim periods, the Company estimates the tax attributes of any distributions as being either tax-basis earnings and profits (i.e., dividend income) or return of capital (i.e., adjustment to the Company’s cost basis in the Asset Manager Affiliates). The final determination of the tax attributes of distributions from our Asset Manager Affiliates is made on an annual (full calendar year) basis at the end of the year based upon taxable income and distributions for the full-year. Therefore, any estimate of tax attributes of distributions made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year. CLO Funds typically have automatic orderly wind-down features following an initial period of reinvestment. Thus, with all else being equal, as managed CLO Fund portfolios age, projected future assets under management (and associated management fees) will naturally decline, resulting in a reduction in fair value of our Asset Manager Affiliates. On the other hand, mandates to manage new CLO Fund portfolios will generally result in an increase in the fair value of our investment in our Asset Manager Affiliates. The aggregate of par value of assets under management by our Asset Manager Affiliates was $2.7 billion and $3.0 billion as of June 30, 2017 and December 31, 2016, respectively.

Capital Structuring Service Fees.  We may earn ancillary structuring and other fees related to the origination, investment, disposition or liquidation of debt and investment securities.

Investment Income

Investment income for the three months ended June 30, 2017 and 2016 was approximately $7.7 million and $9.6 million, respectively. Of these amounts, approximately $4.8 million and $5.2 million was attributable to interest income on our Debt Securities Portfolio.

Investment income for the six months ended June 30, 2017 and 2016 was approximately $15.4 million and $19.1 million, respectively. Of these amounts, approximately $9.3 million and $10.9 million was attributable to interest income on our Debt Securities Portfolio.

The weighted average interest rate on our income producing Debt Securities Portfolio was 7.4% and 7.0% as of June 30, 2017 and December 31, 2016, respectively. For the six months ended June 30, 2017, our total net asset value return per share was 1.9% and our total market return based on stock price was (5.3)%. For the year ended December 31, 2016, our total net asset value return per share was 0.2% and our total market return based on stock price was 12.3%. Total net asset value return per share and total market return based on stock price do not reflect the sales load paid by stockholders.

Investment income is primarily dependent on the composition and credit quality of our investment portfolio. Generally, our Debt Securities Portfolio is expected to generate predictable, recurring interest income in accordance with the contractual terms of each loan. Corporate equity securities may pay a dividend

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and may increase in value for which a gain may be recognized; generally such dividend payments and gains are less predictable than interest income on our loan portfolio.

For the three months ended June 30, 2017 and 2016, approximately $2.8 million and $3.4 million, respectively, of investment income was attributable to investments in CLO Fund Securities. For the six months ended June 30, 2017 and 2016, approximately $5.9 million and $6.6 million, respectively, of investment income was attributable to investments in CLO Fund Securities. On a tax-basis, the Company recognized $2.4 million and $4.6 million of taxable distributable income on distributions from our CLO Fund Securities during the three and six months ended June 30, 2017, respectively. Distributions from CLO Fund Securities are dependent on the performance of the underlying assets in each CLO Fund; interest payments, principal amortization and prepayments of the underlying loans in each CLO Fund are primary factors which determine the level of distributions on our CLO Fund Securities. The level of excess spread from CLO Fund Securities can be impacted by the timing and level of the resetting of the benchmark interest rate for the underlying assets (which reset at various times throughout the quarter) in the CLO Fund and the related CLO Fund bond liabilities (which reset at each quarterly distribution date); in periods of short-term and volatile changes in the benchmark interest rate, the levels of excess spread and distributions to us can vary significantly.

Expenses

Because we are internally managed, we directly incur the cost of management and operations. As a result, we pay no investment management fees or other fees to an external advisor. Our expenses consist primarily of interest expense on outstanding borrowings, compensation expense and general and administrative expenses, including professional fees. Interest and compensation expense are typically our largest expenses each period.

Interest and Amortization of Debt Issuance Costs.  Interest expense is dependent on the average outstanding balance on our borrowings and, the base index rate for the period. Debt issuance costs represent fees, and other direct costs incurred in connection with the Company’s borrowings. These amounts are capitalized and amortized ratably over the expected term of the borrowing.

Compensation Expense.  Compensation expense includes base salaries, bonuses, stock compensation, employee benefits and employer-related payroll costs. The largest components of total compensation costs are base salaries and bonuses; generally, base salaries are expensed as incurred and annual bonus expenses are estimated and accrued. Our compensation arrangements with our employees contain a profit sharing and/or performance based bonus component. Therefore, as our net revenues increase, our compensation costs may also rise. In addition, our compensation expenses may also increase to reflect increased investment in personnel as we grow our products and businesses.

Professional Fees and General and Administrative Expenses.  The balance of our expenses includes professional fees (primarily legal, accounting, valuation and other professional services), occupancy costs and general administrative and other costs.

Total expenses for the three months ended June 30, 2017 and 2016 were approximately $5.1 million and $4.5 million, respectively. Interest expense and amortization on debt issuance costs for the periods, were approximately $2.2 million and $2.3 million, respectively, on average debt outstanding of $180 million and $188 million, respectively.

For the three months ended June 30, 2017 and 2016, approximately $1.2 million and $1.0 million, respectively, of expenses were attributable to employee compensation, including salaries, bonuses, employee benefits, payroll taxes and stock-based compensation expense. For the three months ended June 30, 2017 and 2016, respectively, professional fees and insurance expenses totaled approximately $1.3 million and $669,000. Administrative costs, which include occupancy expense, technology and other office expenses, totaled approximately $364,000 and $491,000 for the three months ended June 30, 2017 and 2016, respectively.

Total expenses for the six months ended June 30, 2017 and 2016 were approximately $9.6 million and $9.2 million, respectively. Interest expense and amortization on debt issuance costs for the periods, were approximately $4.4 million and $4.8 million, respectively, on average debt outstanding of $181 million and $196 million, respectively.

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For the six months ended June 30, 2017 and 2016, approximately $2.4 million and $2.0 million, respectively, of expenses were attributable to employee compensation, including salaries, bonuses, employee benefits, payroll taxes and stock-based compensation expense. For the six months ended June 30, 2017 and 2016, respectively, professional fees and insurance expenses totaled approximately $1.9 million and $1.4 million. Administrative costs, which include occupancy expense, technology and other office expenses, totaled approximately $870,000 and $938,000 for the six months ended June 30, 2017 and 2016, respectively.

Net Investment Income and Net Realized Gains (Losses)

Net investment income and net realized gains (losses) represents the net change in stockholder’s equity before net unrealized appreciation or depreciation on investments. For the three months ended June 30, 2017, net investment income and net realized losses were approximately $1.6 million, or $0.04 per share. For the three months ended June 30, 2016, net investment income and net realized losses were approximately $2.2 million or $0.06 per share. For the six months ended June 30, 2017, net investment income and net realized losses were approximately $4.9 million, or $0.13 per share. For the six months ended June 30, 2016, net investment income and net realized losses were approximately $821,000 or $(0.02) per share. Net investment income represents the income earned on our investments less operating and interest expense before net realized gains or losses and unrealized appreciation or depreciation on investments. On February 29, 2016, Katonah X CLO Ltd. was fully liquidated and all of its outstanding obligations were satisfied. The Company received approximately $1.0 million in connection therewith related to its investment in the subordinated securities issued by Katonah X CLO Ltd. Accordingly, the Company recorded a realized loss during the first quarter of 2016 of approximately $6.6 million on its investment in Katonah X CLO Ltd. and a corresponding unrealized gain of the same amount in order to reverse the approximately $6.6 million of previously recorded unrealized depreciation with respect to the investment. For the three months ended June 30, 2017 and 2016, GAAP-basis net investment income was approximately $2.6 million or $0.07 per share, and $5.1 million or $0.14 per share, respectively, while tax-basis distributable income was approximately $2.2 million or $0.06 per share and $4.3 million or $0.12 per share, respectively. For the six months ended June 30, 2017 and 2016, GAAP-basis net investment income was approximately $5.8 million or $0.16 per share, and $9.9 million or $0.27 per share, respectively, while tax-basis distributable income was approximately $4.6 million or $0.12 per share and $10.3 million or $0.28 per share, respectively.

Net Unrealized (Depreciation) Appreciation on Investments

During the three months ended June 30, 2017, our total investments had net unrealized appreciation of approximately $1.0 million. During the three months ended June 30, 2016, our total investments had net unrealized appreciation of approximately $853,000. For the three months ended June 30, 2017, our Asset Manager Affiliates had net unrealized appreciation of approximately $1.2 million. For the three months ended June 30, 2016, our Asset Manager Affiliates had net unrealized depreciation of approximately $5.1 million. For the three months ended June 30, 2017, our portfolio of debt securities and equity securities had net unrealized appreciation of approximately $945,000, compared with net unrealized appreciation of $2.1 million during the second quarter of 2016. For the three months ended June 30, 2017, our CLO Fund Securities had net unrealized depreciation of approximately $1.1 million compared with net unrealized appreciation of $3.8 million during the second quarter of 2016.

During the six months ended June 30, 2017, our total investments had net unrealized depreciation of approximately $1.8 million. During the six months ended June 30, 2016, our total investments had net unrealized depreciation of approximately $2.9 million. For the six months ended June 30, 2017, our Asset Manager Affiliates had net unrealized depreciation of approximately $1.4 million. For the six months ended June 30, 2016, our Asset Manager Affiliates had net unrealized depreciation of approximately $11.6 million. For the six months ended June 30, 2017, our portfolio of debt securities and equity securities had net unrealized appreciation of approximately $2.0 million, compared with net unrealized appreciation of $1.8 million during the six months ended June 30, 2016. For the six months ended June 30, 2017, our CLO Fund Securities had net unrealized depreciation of approximately $2.4 million compared with net unrealized appreciation of $6.9 million during the six months ended June 30, 2016.

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Net Change in Stockholder’s Equity Resulting From Operations

The net increase in stockholders’ equity resulting from operations for the three months ended June 30, 2017 was $2.5 million, or $0.07 per share. Net decrease in stockholders’ equity resulting from operations for the three months ended June 30, 2016 was $3.0 million, or $0.08 per share.

The net increase in stockholders’ equity resulting from operations for the six months ended June 30, 2017 was $2.9 million, or 0.08 per share. Net decrease in stockholders’ equity resulting from operations for the six months ended June 30, 2016 was $3.8 million, or $(0.10) per share.

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, pay distributions to our stockholders and other general business needs. We recognize the need to have funds available for operating our business and to make investments. We seek to have adequate liquidity at all times to cover normal cyclical swings in funding availability and to allow us to meet irregular and unexpected funding requirements. We plan to satisfy our liquidity needs through normal operations with the goal of avoiding unplanned sales of assets or emergency borrowing of funds.

As of June 30, 2017 and December 31, 2016 the fair value of investments and cash were as follows:

	Investments at Fair Value
Security Type	June 30, 2017		December 31, 2016
Cash	$	2,395,844	$	1,307,257
Restricted Cash		4,626,678		8,528,298
Money Market Accounts		17,307,477		28,699,269
Senior Secured Loan		202,272,389		200,322,152
Junior Secured Loan		38,773,666		35,444,440
First Lien Bond		1,058,394		1,089,338
Senior Secured Bond		1,505,250		1,487,400
CLO Fund Securities		51,752,898		54,174,350
Equity Securities		4,636,545		5,056,355
Asset Manager Affiliates		37,457,000		40,198,000
Total	$	361,786,141	$	376,306,859

We use borrowed funds, known as “leverage,” to make investments and to attempt to increase returns to our shareholders by reducing our overall cost of capital. As a BDC, we are limited in the amount of leverage we can incur under the 1940 Act. We are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. As of June 30, 2017, we had approximately $174.4 million of par value of outstanding borrowings and our asset coverage ratio of total assets to total borrowings was 206%, compliant with the minimum asset coverage level of 200% generally required for a BDC by the 1940 Act. We may also borrow amounts of up to 5% of the value of our total assets for temporary purposes.

On March 15, 2016, the Convertible Notes matured and were repaid in full.

On October 10, 2012, the Company issued $41.4 million in aggregate principal amount of unsecured 7.375% Notes Due 2019. The net proceeds for the 7.375% Notes Due 2019, following underwriting expenses, were approximately $39.9 million. Interest on the 7.375% Notes Due 2019 is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a rate of 7.375%, commencing December 30, 2012. The 7.375% Notes Due 2019 mature on September 30, 2019, and are senior unsecured obligations of the Company. In addition, due to the coverage test applicable to the Company as a BDC and a covenant that the Company agreed to in connection with the issuance of the 7.375% Notes Due 2019, the Company is limited in its ability to make distributions if its asset coverage, as defined in the 1940 Act, is below 200% at the time of the declaration of the distribution. At June 30, 2017, the Company was in compliance with all of its debt covenants. The indenture governing the 7.375% Notes Due 2019 contains certain restrictive covenants, including compliance with certain provisions of the 1940 Act relating to borrowing and dividends. During the

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second quarter of 2016, the Company repurchased approximately $2.4 million par value of the 7.375% notes due 2019 at a weighted average price of $25.23 per $25.00 note, resulting in a realized loss on extinguishment of $71,190. During the third quarter of 2016, $5.0 million par value of the 7.375% Notes due 2019 was redeemed by the Company, resulting in a realized loss on extinguishment of $88,015. During the fourth quarter of 2016, $469,000 par value of the 7.375% Notes due 2019 was redeemed by the Company, resulting in a realized loss on extinguishment of $15,000. During the second quarter of 2017, the Company redeemed $6.5 million par value of the 7.375% Notes due 2019. KCAP subsequently surrendered all of these notes to the Trustee for cancellation.

On June 18, 2013, KCAP Senior Funding I, LLC, a specialty finance subsidiary of the Company, was capitalized through the issuance of $140 million of notes (the “KCAP Senior Funding I Notes”). The KCAP Senior Funding I Notes are backed by a diversified portfolio of bank loans. The Company invested in the most junior class of the notes, issued in the approximate amount of $35 million, representing the Company’s primary exposure to the performance of the assets acquired from the proceeds of the issuance of the KCAP Senior Funding I Notes. On December 8, 2014, the Company completed the sale of additional KCAP Senior Funding I Notes for $56 million. The issuance of additional notes was pro-rata across all existing classes of notes originally issued. KCAP purchased an additional $13.9 million in the most junior class of notes. As of June 30, 2017 and December 31, 2016, these junior notes eliminate in consolidation and the remaining notes with a par value of $147.4 million are reflected on our consolidated balance sheet, net of $2.0 million and $2.3 million of unamortized discount and $2.1 million and $2.5 million of debt offering costs, respectively. The indenture governing the KCAP Senior Funding I Notes contains an event of default that is triggered in the event that certain coverage tests are not met.

On October 6, 2014, the Company priced a follow-on public offering of 3.0 million shares of its common stock at a price of $8.02 per share. The offering raised net proceeds were approximately $23.8 million, after deducting underwriting discounts and offering expenses.

Subject to prevailing market conditions, we intend to grow our portfolio of assets by raising additional capital, including through the prudent use of leverage available to us. However, we may face difficulty in obtaining a new debt and equity financing as a result of current market conditions. In this regard, because our common stock has traded at a price below our current net asset value per share over the last year or so and we are limited in our ability to sell our common stock at a price below net asset value per share without stockholder approval (which we currently do not have), we have been and may continue to be limited in our ability to raise equity capital. From time to time, we may seek to retire, repurchase, or exchange debt securities in open market purchases or by other means dependent on market conditions, liquidity, contractual obligations, and other matters. In addition, we evaluate strategic opportunities available to us and/or the Asset Manager Affiliates, including mergers, divestures, spin-offs, joint ventures and other similar transactions from time to time.

Stockholder Distributions

We intend to continue to make quarterly distributions to our stockholders. To avoid certain excise taxes imposed on RICs, we generally endeavor to distribute during each calendar year an amount at least equal to the sum of:

• 98% of our ordinary net taxable income for the calendar year;

• 98.2% of our capital gains, if any, in excess of capital losses for the one-year period ending on October 31 of the calendar year; and

• any net ordinary income and net capital gains for the preceding year that were not distributed during such year and on which we do not pay corporate-level U.S. federal income tax.

We may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a nondeductible 4% U.S. federal excise tax on such income, to the extent required.

The amount of our declared distributions, as evaluated by management and approved by our Board of Directors, is based primarily on our evaluation of our distributable taxable income and the after-tax free cash flow from our Asset Manager Affiliates.

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We will be prohibited by the 1940 Act and the indenture governing our 7.375% Notes from making distributions on our common stock if our asset coverage, as defined in the 1940 Act, falls below 200%. In any such event, we would be prohibited from making distributions required in order to maintain our status as a RIC.

The following table sets forth the quarterly distributions declared by us since for the two most recently completed fiscal years and the current fiscal year to date.

	Distribution		Declaration Date		Record Date		Pay Date
2017:
Second quarter	$	0.12		6/20/2017		7/7/2017		7/27/2017
First quarter		0.12		3/21/2017		4/7/2017		4/28/2017
Total declared in 2017	$	0.24
2016:
Fourth quarter	$	0.12		12/14/2016		1/6/2017		1/27/2017
Third quarter		0.15		9/20/2016		10/14/2016		10/27/2016
Second quarter		0.15		6/21/2016		7/7/2016		7/28/2016
First quarter		0.15		3/18/2016		4/7/2016		4/28/2016
Total declared in 2016	$	0.57
2015:
Fourth quarter	$	0.15		12/16/2015		1/6/2016		1/28/2016
Third quarter		0.21		9/22/2015		10/14/2015		10/27/2015
Second quarter		0.21		6/23/2015		7/6/2015		7/27/2015
First quarter		0.21		3/24/2015		4/6/2015		4/27/2015
Total declared in 2015	$	0.78

(1) Since the record date of this distribution is subsequent to year-end, it is a subsequent year tax event.

OFF-BALANCE SHEET ARRANGEMENTS

We are a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the needs of the Company’s investment objectives. Such instruments include commitments to extend credit and may involve, in varying degrees, elements of credit risk in excess of amounts recognized on our balance sheet. Prior to extending such credit, we attempt to limit our credit risk by conducting extensive due diligence, obtaining collateral where necessary and negotiating appropriate financial covenants. As of June 30, 2017 and December 31, 2016, the Company had approximately $507,000 and $565,000 of commitments to make such investments, respectively.

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual cash obligations and other commercial commitments as of June 30, 2017:

Contractual Obligations	Payments Due by Period
	Total		Less than one year		1 – 3 years		3 – 5 years		More than 5 years
Long-term debt obligations	$	174,350,000	$	—	$	27,000,000	$	—	$	147,350,000

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements are based on the selection and application of critical accounting policies, which require management to make significant estimates and assumptions. Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management’s most difficult, complex, or subjective judgments. Our critical accounting policies are those applicable to the basis of presentation, valuation of investments, and certain revenue

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recognition matters as discussed below. See Note 2 to our consolidated financial statements, contained elsewhere herein: Significant Accounting Policies — Investments.

Valuation of Portfolio Investments

The most significant estimate inherent in the preparation of our consolidated financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded.

Value, as defined in Section 2(a)(41) of 1940 Act, is (1) the market price for those securities for which a market quotation is readily available and (2) for all other securities and assets, fair value as determined in good faith by our Board of Directors pursuant to procedures approved by our Board of Directors. Our valuation policy is intended to provide a consistent basis for determining the fair value of the portfolio based on the nature of the security, the market for the security and other considerations including the financial performance and enterprise value of the portfolio company. Because of the inherent uncertainty of valuation, the Board of Directors’ determined values may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

Pursuant to the AICPA Guide, we reflect our investments on our balance sheet at their determined fair value with unrealized gains and losses resulting from changes in fair value reflected as a component of unrealized gains or losses on our statements of operations. Fair value is the amount that would be received to sell the investments in an orderly transaction between market participants at the measurement date (i.e., the exit price).

See Note 4 to the consolidated financial statements for the additional information about the level of market observability associated with investments carried at fair value.

The Company follows the provisions of ASC 820: Fair Value, which among other matters, requires enhanced disclosures about investments that are measured and reported at fair value. This standard defines fair value and establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring investments at fair value and expands disclosures about assets and liabilities measured at fair value. ASC 820: Fair Value defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This fair value definition focuses on an exit price in the principal, or most advantageous market, and prioritizes, within a measurement of fair value, the use of market-based inputs (which may be weighted or adjusted for relevance, reliability and specific attributes relative to the subject investment) over entity-specific inputs. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. Subsequent to the adoption of ASC 820: Fair Value, the FASB has issued various staff positions clarifying the initial standard (see Note 2 to the consolidated financial statements: “Significant Accounting Policies — Investments”).

ASC 820: Fair Value establishes the following three-level hierarchy, based upon the transparency of inputs to the fair value measurement of an asset or liability as of the measurement date:

• Level I — Unadjusted quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include listed equities and listed securities. As required by ASC 820: Fair Value, the Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably affect the quoted price.

• Level II — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. Such inputs may be quoted prices for similar assets or liabilities, quoted markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full character of the financial

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instrument, or inputs that are derived principally from, or corroborated by, observable market information. Investments which are generally included in this category include illiquid debt securities and less liquid, privately held or restricted equity securities, for which some level of recent trading activity has been observed.

• Level III — Pricing inputs are unobservable for the investment and includes situations where there is little, if any, market activity for the investment. The inputs may be based on the Company’s own assumptions about how market participants would price the asset or liability or may use Level II inputs, as adjusted, to reflect specific investment attributes relative to a broader market assumption. These inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data for comparable performance or valuation measures (earnings multiples, discount rates, other financial/valuation ratios, etc.) are available, such investments are grouped as Level III if any significant data point that is not also market observable (private company earnings, cash flows, etc.) is used in the valuation methodology.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the investment. The majority of the Company’s investments are classified as Level III. The Company evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value. Inputs that are backed by actual transactions, those that are highly correlated to the specific investment being valued and those derived from reliable or knowledgeable sources will tend to have a higher weighting in determining fair value. The Company’s fair value determinations may include factors such as an assessment of each underlying investment, its current and prospective operating and financial performance, consideration of financing and sale transactions with third parties, expected cash flows and market-based information, including comparable transactions, performance factors, and other investment or industry specific market data, among other factors.

We have valued our investments, in the absence of observable market prices, using the valuation methodologies described below applied on a consistent basis. For some investments little market activity may exist; management’s determination of fair value is then based on the best information available in the circumstances, and may incorporate management’s own assumptions and involves a significant degree of management’s judgment.

Our investments in CLO Fund Securities are carried at fair value, which is based either on (i) the present value of the net expected cash inflows for interest income and principal repayments from underlying assets and the cash outflows for interest expense, debt paydown and other fund costs for the CLO Funds which are approaching or past the end of their reinvestment period and therefore are selling assets and/or using principal repayments to pay-down CLO Fund debt, and for which there continue to be net cash distributions to the class of securities we own, or (ii) a discounted cash flow model that utilizes prepayment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow and comparable yields for similar securities or preferred shares to those in which the Company has invested, or (iii) indicative prices provided by the underwriters or brokers who arrange CLO Funds. We recognize unrealized appreciation or depreciation on our investments in CLO Fund Securities as comparable yields in the market change and/or based on changes in net asset values or estimated cash flows resulting from changes in prepayment or loss assumptions in the underlying collateral pool. As each investment in CLO Fund Securities ages, the expected amount of losses and the expected timing of recognition of such losses in the underlying collateral pool are updated and the revised cash flows are used in determining the fair value of the CLO Fund Securities. We determine the fair value of our investments in CLO Fund Securities on a security-by-security basis.

The Company’s investments in its wholly-owned Asset Manager Affiliates are carried at fair value, which is primarily determined utilizing a discounted cash flow model which incorporates different levels of discount rates depending on the hierarchy of fees earned (including the likelihood of realization of senior, subordinate and incentive fees) and prospective modeled performance (“Discounted Cash Flow”). Such valuation takes

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into consideration an analysis of comparable asset management companies and a percentage of assets under management. The Asset Manager Affiliates are classified as a Level III investment (as described above). Any change in value from period to period is recognized as net change in unrealized appreciation or depreciation.

Fair values of other investments for which market prices are not observable are determined by reference to public market or private transactions or valuations for comparable companies or assets in the relevant asset class and/or industry when such amounts are available. Generally these valuations are derived by multiplying a key performance metric of the investee company or asset (e.g., EBITDA) by the relevant valuation multiple observed for comparable companies or transactions, adjusted by management for differences between the investment and the referenced comparable. Such investments may also be valued at cost for a period of time after an acquisition as the best indicator of fair value. If the fair value of such investments cannot be valued by reference to observable valuation measures for comparable companies, then the primary analytical method used to estimate the fair value is a discounted cash flow method and/or cap rate analysis. A sensitivity analysis is applied to the estimated future cash flows using various factors depending on the investment, including assumed growth rates (in cash flows), capitalization rates (for determining terminal values) and appropriate discount rates to determine a range of reasonable values or to compute projected return on investment.

For bond rated note tranches of CLO Fund Securities (those above the junior class) without transactions to support a fair value for the specific CLO Fund and tranche, fair value is based on discounting estimated bond payments at current market yields, which may reflect the adjusted yield on the leveraged loan index for similarly rated tranches, as well as prices for similar tranches for other CLO Funds and also other factors such as indicative prices provided by underwriters or brokers who arrange CLO Funds, and the default and recovery rates of underlying assets in the CLO Fund, as may be applicable. Such model assumptions may vary and incorporate adjustments for risk premiums and CLO Fund specific attributes.

We derive fair value for our illiquid loan investments that do not have indicative fair values based upon active trades primarily by using the Income Approach, and also consider recent loan amendments or other activity specific to the subject asset as described above. Other significant assumptions, such as coupon and maturity, are asset-specific and are noted for each investment in the Schedules of Investments.

The determination of fair value using this methodology takes into consideration a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance and financing transactions subsequent to the acquisition of the investment. This valuation methodology involves a significant degree of management’s judgment.

Our Board of Directors may consider other methods of valuation to determine the fair value of investments as appropriate in conformity with GAAP.

Interest Income

Interest income, including amortization of premium and accretion of discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected. We generally place a loan on non-accrual status and cease recognizing interest income on such loan or security when a loan or security becomes 90 days or more past due or if we otherwise do not expect the debtor to be able to service its debt obligations. Non-accrual loans remain in such status until the borrower has demonstrated the ability and intent to pay contractual amounts due or such loans become current. As of June 30, 2017, two issuers representing 1% of the Company’s total investments at fair value were on a non-accrual status, and one of our investments, representing 2% of the Company’s investments at fair value, was on partial non-accrual status, whereby we have recognized income on a portion of contractual payment-in-kind (PIK) amounts due.

Investment Income on CLO Fund Securities

We receive distributions from our investments in the most junior class of securities of CLO Funds (typically preferred shares or subordinated securities) managed by the Asset Manager Affiliates and selective investments in securities issued by funds managed by other asset management companies. Our CLO Fund junior class securities are subordinated to senior note holders who typically receive a return on their investment at a fixed spread relative to the LIBOR index. The CLO Funds are leveraged funds and any excess cash flow or “excess spread” (interest earned by the underlying securities in the fund, less payments made to

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senior note holders and less fund expenses and management fees) is paid to the holders of the CLO Fund’s subordinated securities or preferred shares. The level of excess spread from CLO Fund securities can be impacted from the timing and level of the resetting of the benchmark interest rate for the underlying assets (which reset at various times throughout the quarter) in the CLO Fund and the related CLO Fund note liabilities (which reset at each quarterly distribution date); in periods of short-term and volatile changes in the benchmark interest rate, the levels of excess spread and distributions to us can vary significantly. In addition, the failure of CLO Funds in which we invest to comply with certain financial covenants may lead to the temporary suspension or deferral of cash distributions to us.

GAAP-basis investment income on CLO equity investments is recorded using the effective interest method in accordance with the provisions of ASC 325-40, based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated projected future cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield prospectively over the remaining life of the investment from the date the estimated yield was changed. Accordingly, investment income recognized on CLO equity securities in the GAAP statement of operations differs from both the tax-basis investment income and from the cash distributions actually received by the Company during the period.

For non-junior class CLO Fund Securities, such as our investment in the class E notes of Catamaran CLO 2014-1 Ltd, interest is earned at a fixed spread relative to the LIBOR index.

Distributions from Asset Manager Affiliates

We record distributions from our Asset Manager Affiliates on the declaration date, which represents the ex-dividend date. Distributions in excess of tax-basis earnings and profits are recorded as tax-basis return of capital. For interim periods, the Company estimates the tax attributes of any distributions as being either tax-basis earnings and profits (i.e. dividend income) or return of capital (i.e. adjustment to the Company’s cost basis in the Asset Manager Affiliates). The final determination of the tax attributes of distributions from our Asset Manager Affiliates is made on an annual (full calendar year) basis at the end of the year based upon taxable income and distributions for the full-year. Therefore, any estimate of tax attributes of distributions made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year.

Payment in Kind Interest

We may have loans in our portfolio that contain a payment-in-kind (“PIK”) provision. PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain our RIC status, this non-cash source of income must be distributed to stockholders in the form of cash dividends, even though the Company has not yet collected any cash.

Fee Income

Fee income includes fees, if any, for due diligence, structuring, commitment and facility fees, and fees, if any, for transaction services and management services rendered by us to portfolio companies and other third parties. Commitment and facility fees are generally recognized as income over the life of the underlying loan, whereas due diligence, structuring, transaction service and management service fees are generally recognized as income when the services are rendered.

Management Compensation

We may, from time to time, issue stock options or restricted stock, under the Equity Incentive Plan, to officers and employees for services rendered to us. We follow Accounting Standards Codification 718, Compensation — Stock Compensation, a method by which the fair value of options or restricted stock is determined and expensed.

U.S. Federal Income Taxes

The Company has elected and intends to continue to qualify for the tax treatment applicable to RICs under Subchapter M of the Code and, among other things, intends to make the required distributions to its stockholders as specified therein. In order to qualify as a RIC, the Company is required to timely distribute to

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its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a nondeductible 4% U.S. federal excise tax on such income, to the extent required.

Distributions to Shareholders

The amount of our declared distributions, as evaluated by management and approved by our Board of Directors, is based primarily on our evaluation of distributable taxable income and after-tax free cash flow from our Asset Manager Affiliates.

The following table sets forth the quarterly distributions declared by us since the most recent completed calendar year.

	Distribution		Declaration Date		Record Date		Pay Date
2017(1):
Second quarter	$	0.12		6/20/2017		7/7/2017		7/27/2017
First quarter		0.12		3/21/2017		4/7/2017		4/28/2017
Total declared in 2017	$	0.24
2016(2):
Fourth quarter	$	0.12		12/14/2016		1/6/2017		1/27/2017
Third quarter		0.15		9/20/2016		10/14/2016		10/27/2016
Second quarter		0.15		6/21/2016		7/7/2016		7/28/2016
First quarter		0.15		3/18/2016		4/7/2016		4/28/2016
Total declared in 2016	$	0.57
2015(3):
Fourth quarter	$	0.15		12/16/2015		1/6/2016		1/28/2016
Third quarter		0.21		9/22/2015		10/14/2015		10/27/2015
Second quarter		0.21		6/23/2015		7/6/2015		7/27/2015
First quarter		0.21		3/24/2015		4/6/2015		4/27/2015
Total declared in 2015	$	0.78

(1) Percentage of distributions representing a return of capital will be determined on a full-year basis for 2017 in early 2018

(2) Approximately 33.7% of 2016 distributions represented a return of capital.

(3) Approximately 0.0% of 2015 distributions represented a return of capital.

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The following table depicts the composition of shareholder distributions on a per share basis:

	Three Months Ended June 30,						Six Months Ended June 30,
	2017(1)			2016(1)			2017(1)			2016(1)
Net investment income	$	0.07		$	0.14		$	0.16		$	0.27
Tax Accounting Difference on CLO Equity Investments		(0.01	)		0.01			(0.03	)		0.03
Other tax accounting differences		(0.00	)		(0.03	)		(0.00	)		(0.02	)
Taxable distributable income		0.06			0.12			0.12			0.28
Cash distributed to the Company by Asset Manager Affiliates in excess of their taxable earnings		0.02			—			0.03			0.01
Cash received from CLO Equity Investments in excess of taxable earnings		0.01			—			0.03			0.03
Available for distribution(2)		0.09			0.12			0.19			0.32
Distributed		0.12			0.15			0.24			0.30
Difference	$	(0.03	)	$	(0.03	)	$	(0.05	)	$	0.02

(1) Table may not foot due to rounding.

(2) The “Available for distribution” financial measure is a non-GAAP financial measure that is calculated by including the cash distributed to the Company by the Asset Manager Affiliates in excess of their taxable earnings to the Company’s taxable distributable income, which is the most directly comparable GAAP financial measure. In order to reconcile the “Available for distribution” financial measure to taxable distributable income per share in accordance with GAAP, the $0.02 and $0.03 per share of cash distributed to the Company by the Asset Manager Affiliates in excess of their taxable earnings is subtracted from the “Available for distribution” financial measure for the three and six months ended June, 30, 2017, respectively. The Company’s management believes that the presentation of the non-GAAP “Available for distribution” financial measure provides useful information to investors.

Recent Developments

On July 19, 2017, the Company formed a joint venture with Freedom 3 Opportunities LLC, an affiliate of Freedom 3 Capital LLC, to create KCAP Freedom 3 LLC (the “KCAP-F3 Joint Venture”). The Company and Freedom 3 Opportunities LLC contributed approximately $35 million and $25 million, respectively, in assets to the KCAP-F3 Joint Venture, which in turn used the assets to capitalize a new fund (the “Fund”) managed by one of the Company’s wholly-owned investment advisers. In addition, the Fund used cash on hand and borrowings under a credit facility to purchase approximately $183 million of loans from the Company and the Company used the cash from such sale to redeem approximately $148 million in debt. The KCAP-F3 Joint Venture may originate loans from time to time and sell them to the Fund.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our business activities contain elements of market risks. We consider our principal market risk to be fluctuations in interest rates. Managing these risks is essential to our business. Accordingly, we have systems and procedures designed to identify and analyze our risks, to establish appropriate policies and thresholds and to continually monitor these risks and thresholds by means of administrative and information technology systems and other policies and processes.

Interest Rate Risk

Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest earning assets and our interest expense incurred in connection with our interest bearing debt and liabilities. Changes in interest rates can also affect, among other things, our ability to acquire and originate loans and securities and the value of our investment portfolio.

Our investment income is affected by fluctuations in various interest rates, including LIBOR and prime rates. As of June 30, 2017, approximately 98.1% of our debt securities portfolio were either fixed rate or floating rate with a spread to an interest rate index such as LIBOR or the prime rate. Most of these floating rate loans contain LIBOR floors ranging between 0.75% and 3.00%. We generally expect that future portfolio investments will predominately be floating rate investments. As of June 30, 2017, we had $174.4 million of borrowings outstanding at a current weighted average rate of 4.0%.

Because we borrow money to make investments, our net investment income is dependent upon the difference between our borrowing rate and the rate we earn on the invested proceeds borrowed. In periods of rising or lowering interest rates, the cost of the portion of our debt associated with our 7.375% Notes Due 2019 would remain the same at 7.375%, given that this debt is at a fixed rate. The Notes issued by KCAP Senior Funding are floating rate based upon a LIBOR index plus a spread, which serves as a floor should LIBOR decrease to zero. Accordingly, our interest costs associated with this debt will fluctuate with changes in LIBOR.

Generally we would expect that an increase in the base rate index for our floating rate investment assets would increase our gross investment income and that a decrease in the base rate index for such assets would decrease our gross investment income (in either case, such increase/decrease may be limited by interest rate floors/minimums for certain investment assets).

We have analyzed the potential impact of changes in interest rates on interest income net of interest expense. Assuming that our balance sheet at June 30, 2017 was to remain constant and no actions were taken to alter the existing interest rate sensitivity, the table below illustrates the impact on net investment income on our Debt Securities Portfolio for various hypothetical increases in interest rates:

	Impact on net investment income from a change in interest rates at:
	1%		2%		3%
Increase in interest rate	$	901,703	$	1,690,979	$	2,480,256
Decrease in interest rate	$	919,210	$	1,146,602	$	1,146,602

As shown above, net investment income assuming a 1% increase in interest rates would increase by approximately $902,000 on an annualized basis, reflecting the impact to investments in our portfolio that are either fixed rate or which have embedded floors that would be unaffected by a 1% change in the underlying interest rate while our interest expense would be increasing. However, if the increase in rates was more significant, such as 2% or 3%, the net effect on net investment income would be an increase of approximately $1.7 million and $2.5 million, respectively. Since LIBOR underlying certain investments, as well as certain of our borrowings, is currently low, it is unlikely that the underlying rate will decrease by 1% or 2% or even 3%. If the underlying rate decreased to 0%, it would result in approximately a $919,000 increase in net investment income.

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Although management believes that this measure is indicative of sensitivity to interest rate changes on our Debt Securities Portfolio, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect a net change in assets resulting from operations or net income. Accordingly, no assurances can be given that actual results would not materially differ from the potential outcome simulated by this estimate.

We did not hold any derivative financial instruments for hedging purposes as of June 30, 2017.

Portfolio Valuation

We carry our investments at fair value, as determined in good faith by our Board of Directors pursuant to a valuation methodology approved by our Board of Directors. Investments for which market quotations are generally readily available are generally valued at such market quotations. Investments for which there is not a readily available market value are valued at fair value as determined in good faith by our Board of Directors under a valuation policy and consistently applied valuation process. However, due to the inherent uncertainty of determining the fair value of investments that cannot be marked to market, the fair value of our investments may differ materially from the values that would have been used had a ready market existed for such investments. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the value realized on these investments to be different than the valuations that are assigned. The types of factors that we may take into account in fair value pricing of our investments include, as relevant, the nature and realizable value of any collateral, third party valuations, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly-traded securities, recent sales of or offers to buy comparable companies, and other relevant factors.

The Company has engaged an independent valuation firm to provide third party valuation consulting services to the Company’s Board of Directors. Each quarter, the independent valuation firm will perform third party valuations on the Company’s material investments in illiquid securities such that they are reviewed at least once during a trailing 12-month period. These third party valuation estimates were considered as one of the relevant data inputs in the Company’s determination of fair value. The Company intends to continue to engage an independent valuation firm in the future to provide certain valuation services, including the review of certain portfolio assets, as part of the quarterly and annual year-end valuation process.

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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following summary describes certain U.S. federal income tax considerations (and, in the case of a non-U.S. holder (as defined below), certain U.S. federal estate tax consequences) applicable to an investment in the Notes. This summary does not purport to be a complete description of the income tax considerations applicable to such an investment. The summary is based upon the Internal Revenue Code of 1986, as amended, or the “Code,” U.S. Treasury regulations, and administrative and judicial interpretations, each as of the date of this prospectus supplement and all of which are subject to change, potentially with retroactive effect, or to different interpretations. Investors should consult their own tax advisors with respect to tax considerations that pertain to their investment in the Notes.

This summary discusses only Notes held as capital assets within the meaning of the Code (generally, property held for investment purposes) and does not purport to address persons in special tax situations, such as banks and other financial institutions, insurance companies, passive foreign investment companies, real estate investment trusts and regulated investment companies (and shareholders of such corporations), dealers in securities or currencies, traders in securities, former citizens of the United States, persons holding the Notes as a position in a “straddle,” “hedge,” “constructive sale transaction” or “conversion transaction” for U.S. federal income tax purposes, entities that are tax-exempt for U.S. federal income tax purposes, retirement plans, individual retirement accounts, tax-deferred accounts, persons subject to the alternative minimum tax, pass-through entities (including partnerships and entities and arrangements classified as partnerships for U.S. federal income tax purposes) and beneficial owners of pass-through entities, or persons whose functional currency (as defined in the Code) is not the U.S. dollar. It also does not address beneficial owners of the Notes other than original purchasers of the Notes who acquire the Notes in this offering for a price equal to their issue price (i.e., the first price at which a substantial amount of the Notes is sold for money to investors (other than to bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placements agents or wholesalers)). Investors considering purchasing the Notes should consult their own tax advisors concerning the application of the U.S. federal income tax laws to their individual circumstances, as well as any consequences to such investors relating to purchasing, owning and disposing of the Notes under the laws of any state, local, foreign or other taxing jurisdiction.

If a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds any Notes, the U.S. federal income tax treatment of a partner of the partnership generally will depend upon the status of the partner, the activities of the partnership and certain determinations made at the partner level. Partnerships holding Notes, and persons holding interests in such partnerships, should each consult their own tax advisors as to the consequences of investing in the Notes in their individual circumstances.

Taxation of U.S. Holders

For purposes of this discussion, the term “U.S. holder” means a beneficial owner of a Note that is, for U.S. federal income tax purposes:

• an individual who, for U.S. federal income tax purposes, is a citizen or resident of the United States;

• a corporation or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;

• a trust subject to the control of one or more “United States persons” (within the meaning of the Code) and the primary supervision of a court in the United States; or

• an estate the income of which is subject to U.S. federal income taxation regardless of its source.

Payments of Interest

Payments or accruals of interest on a Note generally will be taxable to a U.S. holder as ordinary interest income at the time they are received (actually or constructively) or accrued, in accordance with the U.S. holder’s regular method of tax accounting.

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Sale, Exchange, Redemption, Retirement or Other Taxable Disposition of a Note

Upon the sale, exchange, redemption, retirement or other taxable disposition of a Note, a U.S. holder generally will recognize capital gain or loss equal to the difference between the amount realized on the sale, exchange, redemption, retirement or other taxable disposition (excluding amounts representing accrued and unpaid interest, which are treated as ordinary interest income to the extent not previously included in income) and the U.S. holder’s adjusted tax basis in the Note. A U.S. holder’s adjusted tax basis in a Note generally will equal the U.S. holder’s initial investment in the Note. Capital gain or loss generally will be long-term capital gain or loss if the Note was held for more than one year. Long-term capital gains recognized by individuals and certain other non-corporate U.S. holders (including individuals) generally are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations under the Code.

Unearned Income Medicare Contribution

A tax of 3.8% is imposed on certain “net investment income” (or “undistributed net investment income,” in the case of estates and trusts) received by certain taxpayers with adjusted gross income above certain threshold amounts. “Net investment income” as defined for U.S. federal Medicare contribution purposes generally includes interest payments and gain recognized from the sale, exchange,