tv535311-497 - none - 47.0945818s
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 Filed pursuant to Rule 497
 Registration No. 333-230336​
PROSPECTUS SUPPLEMENT
(to Prospectus dated April 19, 2019)
Capitala Finance Corp.
Up to $50,000,000
Common Stock
We are an externally managed non-diversified closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (“1940 Act”). Our investment objective is to generate both current income and capital appreciation through debt and equity investments. Both directly and through our subsidiaries that are licensed under the Small Business Investment Company (“SBIC”) Act, we offer customized financing to business owners, management teams and financial sponsors for change of ownership transactions, recapitalizations, strategic acquisitions, business expansion and other growth initiatives. We are managed by Capitala Investment Advisors, LLC, and Capitala Advisors Corp. provides the administrative services necessary for us to operate.
We have entered into an Open Market Sale AgreementSM, dated December 31, 2019 (the “Sales Agreement”), with Jefferies LLC (“Jefferies”) relating to shares of our common stock, $0.01 par value per share, offered by this prospectus supplement and the accompanying prospectus. In accordance with the terms of the Sales Agreement, we may offer and sell shares of our common stock having an aggregate offering price of up to $50.0 million from time to time through Jefferies acting as sales agent, at our discretion.
Our common stock is traded on the Nasdaq Global Select Market under the symbol “CPTA.” On December 27, 2019, the last reported sales price on the Nasdaq Global Select Market for our common stock was $8.53 per share. We are required to determine the net asset value per share of our common stock on a quarterly basis. Our net asset value per share of our common stock as of September 30, 2019 was $9.40.
Upon our delivery of a placement notice and subject to the terms and conditions of the Sales Agreement, Jefferies may sell shares of our common stock by methods deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended (the “Securities Act”). Jefferies will act as sales agent using its commercially reasonable efforts consistent with its normal trading and sales practices, on mutually agreed terms between Jefferies and us. There is no arrangement for funds to be received in any escrow, trust or similar arrangement.
Jefferies will be entitled to compensation at a fixed commission rate of up to 3.0% of the gross proceeds of each sale of shares of our common stock. See “Plan of Distribution” beginning on page S-30 for additional information regarding the compensation to be paid to Jefferies. In connection with the sale of our common stock on our behalf, Jefferies will be deemed to be an “underwriter” within the meaning of the Securities Act and the compensation of Jefferies will be deemed to be underwriting commissions or discounts. We have also agreed to provide indemnification and contribution to Jefferies with respect to certain liabilities, including liabilities under the Securities Act.
An investment in our common stock is subject to risks and involves a heightened risk of total loss of investment. The offering price per share of our common stock, less commission payable to Jefferies, will not be less than the net asset value per share of our common stock at the time of the sale, except (i) with the requisite approval of our stockholders or (ii) under such other circumstances as the SEC may permit. In this regard, on May 2, 2019, our stockholders voted to allow us to issue common stock at a price below the then current net asset value per share during a period beginning on May 2, 2019 and expiring on the earlier of the (i) one year anniversary of the date of the 2019 annual stockholders meeting and (ii) the date of our 2020 annual stockholders meeting, which is expected to be held in April 2020, so long as the shares to be issued do not exceed 25% of the then outstanding common stock immediately prior to each such offering (the “Stockholder Approval”). In addition, we cannot issue shares of our common stock below net asset value unless our Board of Directors determines that it would be in our and our stockholders’ best interests to do so. Sales of common stock at prices below net asset value per share dilute the interests of existing stockholders, have the effect of reducing our net asset value per share and may reduce our market price per share. Continuous sales of common stock below net asset value may have a negative impact on total returns and could have a negative impact on the market price of our shares of securities. We may sell shares of our common stock in this “at the market offering” at a price below our then-current net asset value per share, to the extent permitted by the Stockholder Approval. See “Sales of Common Stock Below Net Asset Value” in this prospectus supplement.
In addition, the companies in which we invest are subject to special risks. For example, we invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as “high yield” or “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. See “Risk Factors” beginning on page 24 of the accompanying prospectus and under similar headings in the other documents that are incorporated by reference into the accompanying prospectus, to read about factors you should consider, including the risk of leverage, before investing in our common stock.
This prospectus supplement and the accompanying prospectus contain important information about us that a prospective investor should know before investing in our common stock. We may also authorize one or more free writing prospectuses to be provided to you in connection with this offering. Please read this prospectus supplement and the accompanying prospectus, including the documents incorporated by reference herein and therein, and any related free writing prospectus before investing in our common stock and keep them for future reference. We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). This information is available free of charge by contacting us by mail at 4201 Congress St., Suite 360, Charlotte, North Carolina 28209, by telephone at (704) 376-5502 or on our website at http://www.capitalagroup.com. The SEC also maintains a website at http://www.sec.gov that contains such information. Information contained on our website or on the SEC’s website about us is not incorporated into this prospectus supplement and the accompanying prospectus and you should not consider information contained on our website or on the SEC’s website to be part of this prospectus supplement or the accompanying prospectus.
Neither the SEC nor any state securities commission has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Jefferies
December 31, 2019

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ABOUT THIS PROSPECTUS SUPPLEMENT
You should rely only on the information included or incorporated by reference in this prospectus supplement, the accompanying prospectus, or in any free writing prospectuses prepared by or on behalf of us that relates to this offering of common stock. Neither we nor Jefferies have authorized any other person to provide you with different information from that contained in, or incorporated by reference 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, the accompanying prospectus and any free writing prospectus prepared by or on behalf of us that relates to this offering of common stock do not constitute an offer to sell, or a solicitation of an offer to buy, any shares of our common stock 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 included in this prospectus supplement, the accompanying prospectus or in any free writing prospectus is complete and accurate only as of their respective dates, and any information incorporated by reference herein or therein is complete and accurate as of the date of the document incorporated by reference containing such information, regardless of the time of their delivery or sale of our common stock. This prospectus supplement supersedes the accompanying prospectus to the extent it contains information different from or additional to the information in that prospectus.
This document is in two parts. The first part is this prospectus supplement, which describes the terms of this offering of common stock and also adds to and updates information contained in the accompanying prospectus and the documents incorporated by reference into this prospectus supplement and the accompanying prospectus. The second part is the accompanying prospectus, which gives more general information and disclosure. To the extent the information contained in this prospectus supplement differs from the information contained in the accompanying prospectus, the information in this prospectus supplement shall control. Please carefully read this prospectus supplement and the accompanying prospectus together with any exhibits and the additional information described under “Available Information,” “Summary,” and “Incorporation of Certain Information By Reference” in this prospectus supplement and “Available Information,” “Incorporation of Certain Information By Reference,” “Prospectus Summary” and “Risk Factors” in the accompanying prospectus before you make an investment decision.
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SUMMARY
This summary highlights some of the information in this prospectus supplement and the accompanying prospectus, or incorporated by reference herein or therein. It is not complete and may not contain all of the information that you may want to consider. You should read carefully the more detailed information set forth under “Risk Factors” in the accompanying prospectus and the documents incorporated by reference herein and therein, and the other information included in this prospectus supplement, the accompanying prospectus, any free writing prospectus relating to this offering and the documents incorporated by reference in this prospectus supplement and the accompanying prospectus.
Immediately prior to the pricing of Capitala Finance Corp.’s initial public offering (“IPO”) on September 24, 2013, we acquired, through a series of transactions (the “Formation Transactions”), an investment portfolio (the “Legacy Portfolio”) from the following entities:

CapitalSouth Partners Fund I Limited Partnership (“Fund I”);

CapitalSouth Partners Florida Sidecar Fund I, L.P. (“Florida Sidecar Fund”);

CapitalSouth Partners Fund II Limited Partnership (“Fund II”);

CapitalSouth Partners SBIC Fund III, L.P. (“Fund III”); and

CapitalSouth Partners Fund III, L.P. (“Fund III Parent Fund”).
After the Formation Transactions, the Legacy Portfolio consisted of: (1) approximately $326.3 million in investments; (2) an aggregate of approximately $67.1 million in cash, interest receivable and other assets; and (3) liabilities of approximately $202.2 million of SBA-guaranteed debt payable. We issued an aggregate of approximately 9.0 million shares of our common stock to acquire the Legacy Portfolio. Fund II, Fund III, and Florida Sidecar Fund and their respective general partners became our wholly owned subsidiaries. Fund II and Fund III have elected to be regulated as BDCs under the 1940 Act.
Except where the context suggests otherwise:

“we,” “us,” “our,” “Capitala Finance” and the “Company” refer to Capitala Finance Corp. and its subsidiaries,

“Capitala Investment Advisors,” the “Investment Advisor” or “investment adviser” refer to Capitala Investment Advisors, LLC,

the “Administrator” or the “administrator” refers to Capitala Advisors Corp.,

the “Legacy Funds” refers collectively to Fund II, Fund III and their respective general partners; and

the “Legacy Investors” refers to the investors that received shares of our common stock through the Formation Transactions.
In this prospectus supplement, we use the term “lower and traditional middle-market” to refer to companies generating between $10 million and $200 million in annual revenue and having at least $4.5 million to $30.0 million in annual earnings before interest, taxes, depreciation and amortization (“EBITDA”).
Capitala Finance Corp.
We are an externally managed non-diversified closed-end management investment company incorporated in Maryland that has elected to be regulated as a BDC under the 1940 Act. We commenced operations on May 24, 2013 and completed our IPO on September 30, 2013. We are managed by Capitala Investment Advisors, an investment adviser that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and Capitala Advisors Corp. provides the administrative services necessary for us to operate. For U.S. federal income tax purposes, we have elected to be treated, and intend to comply with the requirements to continue to qualify annually, as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
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Our investment objective is to generate both current income and capital appreciation through debt and equity investments. Both directly and through our subsidiaries that are licensed by the U.S. Small Business Administration (“SBA”) under the SBIC Act, we offer customized financing to business owners, management teams and financial sponsors for change of ownership transactions, recapitalizations, strategic acquisitions, business expansion and other growth initiatives. We invest in first lien loans, second lien loans and subordinated loans, and, to a lesser extent, equity securities issued by lower middle-market companies and traditional middle-market companies.
Our Investment Strategy
Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We expect the companies in which we invest will generally have between $4.5 million and $30.0 million in trailing twelve month EBITDA. We believe our focus on direct lending to private companies enables us to receive higher interest rates and more substantial equity participation. As part of that strategy, we may invest in first-lien loans, which have a first priority security interest in all or some of the borrower’s assets. In addition, our first lien loans may include positions in “stretch” senior secured loans, also referred to as “unitranche” loans, which combine characteristics of traditional first-lien senior secured loans and second lien loans, providing us with greater influence and security in the primary collateral of a borrower and potentially mitigating loss of principal should a borrower default. We also may invest in second lien loans, which have a second priority security interest in all or substantially all of the borrower’s assets. In addition to first and second lien loans, we invest in subordinated loans, which may include mezzanine and other types of junior debt investments. Like second lien loans, our subordinated loans typically have a second lien on all or substantially all of the borrower’s assets; however, the principal difference between subordinated loans and second lien loans is that in a subordinated loan, we may be subject to the interruption of cash interest payments, at the discretion of the first lien lender, upon certain events of default. In addition to debt securities, we may acquire equity or detachable equity-related interests (including warrants) from a borrower. Typically, the debt in which we invest is not initially rated by any rating agency; however, we believe that if such investments were rated, they would be rated below investment grade. Below investment grade securities, which are often referred to as “high yield” or “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. We intend to target investments that mature in four to six years from our investment.
We typically will not limit the size of our loan commitments to a specific percentage of a borrower’s assets that serve as collateral for our loan, although we attempt to protect against risk of loss on our debt investments by structuring, underwriting and pricing loans based on anticipated cash flows of our borrowers. As of September 30, 2019, our investment adviser underwrote investments in more than 150 lower middle-market and traditional middle-market companies totaling more than $1.7 billion of invested capital since 2000, and we believe that a continuation of this strategy allows us to make structured investments with more attractive pricing and greater opportunities for meaningful equity participation than traditional asset-based, senior secured loans. Further, we believe that we benefit from our investment adviser’s long-standing relationships with many private equity fund sponsors, whose participation in portfolio companies, we believe, makes repayment from refinancing, asset sales and/or sales of the borrowers themselves more likely than a strategy whereby we consider investments only in founder-owned or non-sponsored borrowers.
Capitala Investment Advisors
We are managed by Capitala Investment Advisors, whose investment team members have significant and diverse experience financing, advising, operating and investing in lower middle-market and traditional middle-market companies. Moreover, our investment adviser’s investment team has refined its investment strategy by sourcing, reviewing, acquiring and monitoring more than 150 portfolio companies totaling more than $1.7 billion of invested capital from 2000 through September 30, 2019. Capitala Investment Advisors’ investment team also manages CapitalSouth Partners SBIC Fund IV, L.P. (“Fund IV”), a private investment limited partnership providing financing solutions to smaller and lower middle-market companies. Fund IV had its first closing in March 2013 and obtained SBA approval for its SBIC license in April 2013. In addition to Fund IV, affiliates of the Investment Advisor may manage several affiliated funds whereby
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institutional limited partners in Fund IV have the opportunity to co-invest with Fund IV in portfolio investments. An affiliate of the Investment Advisor also manages Capitala Private Credit Fund V, L.P. (“Fund V”), a private investment limited partnership, and a private investment vehicle (referred to herein as “Capitala Specialty Lending Corp.” or “CSLC”), both of which provide financing solutions to lower middle-market and traditional middle-market companies. The Investment Advisor and its affiliates may also manage other funds in the future that may have investment mandates that are similar, in whole and in part, with ours. To the extent permitted by the 1940 Act and interpretation of the staff of the SEC, the Investment Advisor and its affiliates may determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, the Investment Advisor or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, and consistent with the Investment Advisor’s allocation procedures. We do expect to make, and have made, co-investments with Fund V and/or CSLC given their similar investment strategies.
On June 1, 2016, the SEC issued an exemptive order (the “Order”), which permits the Company to co-invest in portfolio companies with certain funds or entities managed by the Investment Advisor or its affiliates in certain negotiated transactions where co-investing would otherwise be prohibited under the 1940 Act, subject to the conditions of the Order. Pursuant to the Order, the Company is permitted to co-invest with its affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company’s independent directors make certain conclusions in connection with a co-investment transaction, including, but not limited to, that (1) the terms of the potential co-investment transaction, including the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching in respect of the Company or its stockholders on the part of any person concerned, and (2) the potential co-investment transaction is consistent with the interests of the Company’s stockholders and is consistent with its then-current objectives and strategies.
Our Investment Advisor is led by Joseph B. Alala, III, our chief executive officer, chairman of our Board of Directors, and the managing partner and chief investment officer of our Investment Advisor, M. Hunt Broyhill, a member of the Board of Directors and a partner of our Investment Advisor, Stephen A. Arnall, our chief financial officer and chief operating officer, and John F. McGlinn, a managing director of our Investment Advisor. Messrs. Alala, Broyhill and McGlinn serve as our Investment Advisor’s investment committee. They are assisted by seventeen investment professionals.
Our investment adviser’s investment committee, as well as certain key investment team members that are involved in screening and underwriting portfolio transactions, have worked together for more than 15 years. These investment professionals have an average of over 20 years of experience in various finance-related fields, including operations, corporate finance, investment banking, business law and merchant banking, and have collectively developed a broad network of contacts that can offer us investment opportunities. Much of our investment adviser’s investment team has worked together screening opportunities, underwriting new investments and managing a portfolio of investments in lower middle-market and traditional middle-market companies through two recessions, a credit crunch, the dot-com boom and bust and a historic, leverage-fueled asset valuation bubble.
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Corporate Structure and History
Set forth below is a diagram of our current organizational structure:
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(1)
Capitala Finance also owns 100% of the general partners of each of Fund II and Fund III. These general partners do not hold any portfolio investments.
(2)
Includes the investments acquired from Fund I and Fund III Parent through the Formation Transactions.
On May 26, 2017, we issued $50.0 million in aggregate principal amount of 5.75% fixed-rate convertible notes due on May 31, 2022 (the “2022 Convertible Notes”). On June 26, 2017, we issued an additional $2.1 million in aggregate principal amount of the 2022 Convertible Notes pursuant to a partial exercise of the underwriters’ overallotment option. Interest is payable quarterly. The 2022 Convertible Notes are listed on the Nasdaq Capital Market under the trading symbol “CPTAG” with a par value $25.00 per share.
On May 16, 2017, we issued $70.0 million in aggregate principal amount of 6.0% fixed-rate notes due May 31, 2022 (the “2022 Notes”). On May 25, 2017, we issued an additional $5.0 million in aggregate principal amount of the 2022 Notes pursuant to a partial exercise of the underwriters’ overallotment option. The 2022 Notes will mature on May 31, 2022, and may be redeemed in whole or in part at any time or from time to time at our option on or after May 31, 2019 at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest is payable quarterly. The 2022 Notes are listed on the Nasdaq Global Select Market under the trading symbol “CPTAL” with a par value $25.00 per share.
On October 17, 2014, the Company entered into a senior secured revolving credit agreement (as amended, the “Credit Facility”) with ING Capital, LLC, as administrative agent, arranger, and bookrunner, and the lenders party thereto. The Credit Facility currently provides for borrowings up to $60.0 million and may be increased up to $150.0 million pursuant to its “accordion” feature. The Credit Facility matures on April 30, 2022. As of December 27, 2019, we had no borrowings outstanding and $60.0 million available under the Credit Facility.
Borrowings under the Credit Facility bear interest, at our election, at a rate per annum equal to (i) the one, two, three or six month LIBOR (subject to a floor of zero), as applicable, plus 3.50% (in the case of eurocurrency loans) or (ii) 2.50% plus the highest of  (A) a prime rate, (B) the Federal Funds rate plus 0.50%, (C) three month LIBOR plus 1.00% and (D) zero (in the case of alternate base rate loans), in each case of the preceding clauses (i) and (ii), subject to a 0.50% step-down in pricing when certain conditions are met. Our ability to elect LIBOR indices with various tenors (e.g., one, two, three or six-month LIBOR) on which the interest rates for borrowings under the Credit Facility are based provides us with increased flexibility to manage interest rate risks as compared to a borrowing arrangement that does not provide for such optionality. Once a particular LIBOR rate has been selected, the interest rate on the applicable amount
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borrowed will reset after the applicable tenor period and be based on the then applicable selected LIBOR rate (e.g., borrowings for which we have elected the one-month LIBOR rate will reset on the one-month anniversary of the period based on the then selected LIBOR rate). For any given borrowing under the Credit Facility, we intend to elect what we believe to be an appropriate LIBOR rate taking into account our needs at the time as well as our view of future interest rate movements. We will also pay an unused commitment fee at a rate of  (a) 0.75% per annum on the unutilized portion of the aggregate commitments under the Credit Facility on each day when the utilized portion of the aggregate commitments is less than 35% for such day, and (b) 0.50% per annum on the unutilized portion of the aggregate commitments under the Credit Facility on each day when the utilized portion of the aggregate commitments is equal to or greater than 35% for such day.
Our Portfolio
As of September 30, 2019, the investments in our portfolio were comprised of approximately $279.8 million in debt investments and $91.6 million in equity investments and warrants across 40 portfolio companies. The debt investments in our portfolio had a weighted average annualized yield of approximately 11.5% as of September 30, 2019, which includes a cash component of approximately 10.7% and a payment-in-kind (“PIK”) interest component of approximately 0.8%. PIK interest represents contractually deferred interest added to the investment balance that is generally due at the end of the investment term and recorded as income on an accrual basis to the extent such amounts are expected to be collected.
As of September 30, 2019, the debt investments in our portfolio had a weighted average time to maturity of 2.2 years. Our debt investments have structural protections, including default penalties, information rights, affirmative, negative and financial covenants, such as lien protection and prohibitions against change of control and, as needed, intercreditor agreements to protect second lien positions.
The following charts summarize our portfolio mix of investments by security type, industry and region based on fair value as of September 30, 2019.
Mix of Investments by Security Type
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Mix of Investments by Industry
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Mix of Investments by Region
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Market Opportunity
We believe that the current credit environment provides significant opportunities to achieve attractive risk-adjusted returns on the types of cash flow-based loans to lower and traditional middle-market companies that we intend to make. In particular, we believe that due to factors affecting lending institutions (including but not limited to consolidation, capital constraints and regulatory changes) and the failure of non-bank financing vehicles during and immediately following the 2008 – 2009 recession, demand for financing from lower and traditional middle-market companies exceeds, and will continue to exceed, the investment capacity of lenders that have traditionally served this market. We review investment opportunities throughout the United States. Based on our location and the 20-year track record of our investment adviser’s investment team, we target our business development efforts in the Southeast, Southwest and Mid-Atlantic capital markets.
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We believe that the following characteristics of the current credit markets combined with certain long-term trends associated with lending to lower and traditional middle-market companies provide a strong market environment.

Strong Demand For Capital Coupled with Fewer Providers.   We believe there has been a combination of growing demand for capital and an underserved market for capital addressing lower and traditional middle-market borrowers. We believe there is robust demand for both continued growth capital and refinancing capital as debt facilities become due at a time when there is a significant lack of willing and qualified capital providers. We believe these market conditions have been further exacerbated in the current environment due to:

Recent domestic and international regulatory changes, including Basel III and Federal Reserve regulations, have resulted in the contraction of banks’ lending capacities and a related de-emphasis on product offerings to lower and traditional middle-market companies;

the elimination of many specialized lenders from the market due to lack of capital as a result of various factors including the shrinking of the securitization market or their own poor performance; and

the need for certain remaining capital providers to reduce lending activities due to reduced access to capital and the overall deleveraging of the financial market.

More Conservative Deal Structures and Attractive Return Profiles.   As a result of traditional lenders having been hurt by loans underwritten prior to the 2008 – 2009 economic recession, borrowers have generally been required to maintain more equity as a percentage of their total capitalization. With more conservative capital structures, middle market companies have exhibited higher levels of cash flows available to service their debt. In addition, middle market companies often are characterized by simpler capital structures than larger borrowers, which facilitates a streamlined underwriting process.
Further, the withdrawal of many traditional senior lenders from the market, combined with reduced leverage levels and a restoration of prudent loan conditions and covenant levels, allows for specialty finance companies making unitranche and cash flow-based senior or subordinated loans to charge premium risk-adjusted pricing, while subordinated only to a modest amount of senior asset-based debt (if not maintaining first lien senior secured positions over the loan collateral provided by the borrowers).

Underserved Capital Markets.   We believe that the Southeast, Southwest and Mid-Atlantic capital markets are less-served than other larger, more mature capital markets (i.e., the Northeast, Midwest and West Coast). Likewise, we believe that the impact of credit contraction as a result of lender consolidation, departure or refocusing will continue to disproportionately impact the lower and traditional middle-market companies that the Legacy Funds have supported since 2000.
Our Competitive Advantages
We believe that we are well positioned to take advantage of investment opportunities in lower and traditional middle-market companies due to the following competitive advantages:

Focus on Seasoned, Lower and Traditional Middle-Market Companies in Underserved Capital Markets.   Most of our capital is invested in companies that need growth capital, acquisition financing or funding to recapitalize or refinance existing debt facilities. We generally seek to avoid investing in high-risk, early-stage enterprises that are only beginning to develop their market share or build their management and operational infrastructure. We believe our target portfolio companies are generally considered too small for, or remote from, large, competitive capital markets, or in underserved industries or sectors. Further, we anticipate that some investments will require our industry-specific knowledge and expertise. As a result, we believe we can negotiate loan terms that typically will possess better risk-adjusted return profiles than loan terms to larger, more mainstream companies. While we will consider investment opportunities from anywhere in the United States and we recognize the importance of geographic diversification, we continue to
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focus on smaller, underserved capital markets. We are headquartered in Charlotte, North Carolina, and have offices in Raleigh, North Carolina, Fort Lauderdale, Florida, Atlanta, Georgia, Los Angeles, California, and Dallas, Texas. We have a historical track record with numerous investment firms and deal sources across the Southeast, Southwest and Mid-Atlantic regions. We believe we are well positioned to continue to source high quality investment opportunities throughout these regions.

Flexible, Customized Financing Solutions to Provide Attractive Risk-Adjusted Returns.   Based on our prior experience, we can offer our portfolio companies (and their financial sponsors) a variety of attractive bespoke financing structures to meet their capital needs. We expect to continue to focus on senior, cash flow-based “unitranche” debt investments, coupled with equity interests, either in the form of detachable “penny” warrants or equity co-investments made pari passu with financial sponsors. As of September 30, 2019, the weighted average annualized yield of our debt investments was approximately 11.5%, which includes a cash component of approximately 10.7% and a PIK interest component of approximately 0.8%. Additional information regarding our portfolio is set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in the schedule of investments and the related notes thereto included in our Annual and Quarterly Reports on Forms 10-K and 10-Q, respectively, and incorporated by reference into this prospectus supplement.

Disciplined Underwriting Policies and Rigorous Portfolio Management.   We pursue rigorous due diligence of all prospective investments regardless of whether a potential investment was sourced directly by our investment adviser or we are invited to invest as part of a lending syndicate. Our investment adviser’s investment team has developed an extensive underwriting due diligence process, which includes a review of the operational, financial, legal and industry performance and outlook for the prospective investment, including quantitative and qualitative stress tests, review of industry data and analyst coverage and consultation with outside experts regarding the creditworthiness of the borrower and the potential equity upside. These processes continue during the portfolio monitoring process, when our investment adviser will conduct field examinations, review all compliance certificates and covenants and regularly assess the financial and business conditions and prospects of portfolio companies.

Lower-Cost SBA-Guaranteed Debentures.   As a licensed SBIC, our wholly owned subsidiary, Fund III, has issued fixed low-interest rate, long-term debentures that are guaranteed by the SBA, securitized, and ultimately sold in the capital markets. We believe these lower-cost existing debentures and any additional SBA-guaranteed debentures we may be permitted to issue in the future will allow us to increase our net interest income beyond the level that would otherwise be attainable without such leverage or by solely utilizing traditional higher-cost leverage obtained from conventional financial institutions. On June 10, 2014, we received an exemptive order from the SEC granting relief from the asset coverage requirements for certain indebtedness issued by Fund III as an SBIC.

Established Direct Origination Platform with Extensive Deal Sourcing Infrastructure.   Our investment adviser’s investment team has reviewed, on average, over 800 investment opportunities per year since 2008. We anticipate that our principal source of investment opportunities will continue to be sell-side intermediaries and private equity sponsors investing in the same types of lower and traditional middle-market companies in which we seek to invest. We believe our investment adviser’s track record, extensive experience in multiple industries and investments with multiple private equity sponsors have strengthened our relationships with private equity sponsors and will lead to new ones. Our investment adviser’s investment team seeks to leverage its extensive network of additional referral sources, including law firms, accounting firms, financial, operational and strategic consultants and financial institutions, with whom we have previously completed investments. All these relationships should continue to enable us to review a significant amount of high quality, direct (or non-brokered) deal flow, lead to a stable, continuing source of high quality investment opportunities and provide significant benefits to our investments, such as more thorough due diligence, an additional primary layer of investment monitoring and
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management and a backup source of additional equity funding. In the future, we may co-invest with investment funds, accounts and vehicles managed by our Investment Advisor or its affiliates when doing so is consistent with our investment strategy as well as applicable law and SEC staff interpretations. We generally will only be permitted to co-invest with such investment funds, accounts and vehicles where the only term that is negotiated is price. On June 1, 2016, the SEC issued an exemptive order permitting us and certain of our affiliates, to co-invest together in portfolio companies subject to certain conditions included therein. We expect that this order will permit greater flexibility to negotiate the terms of co-investments with investment funds, accounts and investment vehicles managed by our Investment Advisor or its affiliates in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors.

Experienced Management Team with Proven Track Record.   We believe that our investment adviser’s investment team is one of the leading capital providers to lower and traditional middle-market companies in the Southeast, Southwest and Mid-Atlantic regions. Our investment adviser’s investment committee, as well as certain key investment team members that are involved in screening and underwriting portfolio transactions, have worked together for more than 15 years, and have an average of over 20 years of experience in finance-related fields. These four investment professionals have worked together screening opportunities, underwriting new investments in, and managing a portfolio of, investments in lower and traditional middle-market companies through two recessions, a credit crunch, the dot-com boom and bust and a historic, leverage-fueled asset valuation bubble. Moreover, the investment team has refined its investment strategy through the sourcing, reviewing, executing and monitoring of more than 150 portfolio companies totaling more than $1.7 billion of invested capital through September 30, 2019. Each member brings a complementary component to a team well-rounded in finance, accounting, operations, strategy, business law and executive management.
Summary Risk Factors
An investment in our common stock involves risk, including the risk of leverage and the risk that our operating policies and strategies may change without prior notice to our stockholders or prior stockholder approval. See “Risk Factors” in the accompanying prospectus and in any free writing prospectuses we have authorized for use in connection with this offering, and information under similar headings in the documents that are incorporated by reference into this prospectus supplement and the accompanying prospectus, including the section titled “Risk Factors” included in our most recent Annual Report on Form 10-K, as well as in any of our subsequent SEC filings, for a discussion of factors you should carefully consider before deciding to invest in our common stock. The value of our assets, as well as the market price of our securities, will fluctuate. Our investments may be risky, and you may lose all or part of your investment in Capitala Finance. We primarily invest in securities that are rated below investment grade, or would be rated below investment grade if they were rated, and these securities are commonly referred to as “junk bonds” and have predominantly speculative investment characteristics. Investing in Capitala Finance involves other risks, including the following:

We have a limited operating history as a BDC.

Our investment portfolio is recorded at fair value, with our Board of Directors having final responsibility for overseeing, reviewing and approving, in good faith, its estimate of fair value and, as a result, there may be uncertainty as to the value of our portfolio investments.

We depend upon Capitala Investment Advisors’ key personnel for our future success.

We operate in a highly competitive market for investment opportunities, which could reduce returns and result in losses.

Regulations governing our operation as a BDC affect our ability to raise additional capital and the way in which we do so. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage.
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We borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us, and the calculation of our base management fee based upon our gross assets may have the effect of encouraging our investment adviser to utilize leverage when it may not be advisable to do so.

To the extent we borrow money to finance our investments, changes in interest rates will affect our cost of capital and net investment income.

A disruption in the capital markets and the credit markets could impair our ability to raise capital and negatively affect our business.

We may experience fluctuations in our quarterly and annual results.

We will be subject to corporate-level U.S. federal income tax if we are unable to qualify or maintain our qualification for tax treatment as a RIC under the Code.

We cannot predict how tax reform legislation will affect us, our investments, or our stockholders, and any such legislation could adversely affect our business.

Our investment adviser is not obligated to reimburse us for any part of the incentive fee it receives from us that is based on accrued income that we never receive.

The failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning could impair our ability to conduct business effectively.

Efforts to comply with Section 404 of the Sarbanes-Oxley Act involve significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley Act may adversely affect us and the market price of our common stock.

An investment strategy focused primarily on smaller privately held companies involves a high degree of risk and presents certain challenges, including the lack of available information about these companies, a dependence on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability to economic downturns.

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

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

We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer.

Our portfolio may be concentrated in a limited number of industries, which may subject us to a risk of significant loss if there is a downturn in a particular industry in which a number of our investments are concentrated.

The market price of our common stock may fluctuate significantly.

Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock.

The net asset value per share of our common stock may be diluted if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock.
Operating and Regulatory Structure
Capitala Finance is a Maryland corporation that is an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. Capitala Finance’s wholly owned SBIC subsidiary, Fund III, has also elected to be treated as a BDC under the 1940 Act. As a BDC, we are required to meet regulatory tests, including the requirement to invest at least 70% of
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our gross assets in “qualifying assets.” Qualifying assets generally include securities of private or thinly traded public U.S. companies and cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. See “Regulation as a Business Development Company” in the accompanying prospectus. In addition to our existing SBA-guaranteed debentures, we may, if permitted by regulation, seek to issue additional SBA-guaranteed debentures as well as other forms of leverage and borrow funds to make investments. In addition, we have elected to be treated for U.S. federal income tax purposes, and intend to continue to qualify annually, as a RIC under Subchapter M of the Code. See “Certain U.S. Federal Income Tax Considerations” in the accompanying prospectus and “Additional Material U.S. Federal Income Tax Considerations” in this prospectus supplement.
Our investment activities are managed by Capitala Investment Advisors and supervised by our Board of Directors. Capitala Investment Advisors is an investment adviser that is registered under the Advisers Act. Under our investment advisory agreement, which we refer to as the Investment Advisory Agreement, we have agreed to pay Capitala Investment Advisors an annual base management fee based on our gross assets as well as an incentive fee based on our performance. See “Investment Advisory Agreement” in the accompanying prospectus. We have also entered into an administration agreement, which we refer to as the Administration Agreement, under which we have agreed to reimburse our administrator for our allocable portion of overhead and other expenses incurred by our administrator in performing its obligations under the Administration Agreement, including furnishing us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities, as well as providing us with other administrative services. See “Administration Agreement” in the accompanying prospectus.
Joseph B. Alala, III, our chief executive officer, president and chairman of our Board of Directors is the managing partner and chief investment officer of Capitala Investment Advisors and is the chief executive officer, president and a director of our administrator.
Our Corporate Information
Our executive offices are located at 4201 Congress Street, Suite 360, Charlotte, North Carolina 28209, our telephone number is (704) 376-5502 and our website may be found at http://www.capitalagroup.com. Information contained on our website or on the SEC’s website about us is not incorporated into this prospectus supplement and you should not consider information contained on our website or on the SEC’s website to be part of this prospectus supplement.
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THE OFFERING
Common stock offered by us
Shares of our common stock having an aggregate offering price of up to $50.0 million.
Shares of common stock outstanding as of December 27, 2019
16,189,636
Plan of Distribution
“At the market offering” that may be made from time to time through Jefferies, using commercially reasonable efforts. See “Plan of Distribution” on page S-30 of this prospectus supplement.
Use of Proceeds
We plan to use the net proceeds from the sale of our common stock pursuant to this prospectus supplement and the accompanying prospectus for new investments in portfolio companies in accordance with our investment objective and strategies, as described in this prospectus supplement and the accompanying prospectus, and for general working capital purposes. We may also use a portion of the net proceeds from this offering to equitize a new SBIC subsidiary, to repay any indebtedness (which will be subject to reborrowing), to pay operating expenses, including advisory and administrative fees and expenses, and may pay other expenses such as due diligence expenses of potential new investments. Proceeds not immediately used for new investments will be invested in cash, cash equivalents, U.S. government securities and other high-quality investments that mature in one year or less from the date of the investment. These securities may have lower yields than the types of investments we would typically make in accordance with our investment objective and, accordingly, may result in lower distributions, if any during such period. See “Use of Proceeds.”
Sales of Common Stock Below Net Asset Value
The offering price per share of our common stock, less any commission payable to Jefferies, may be less than the net asset value per share of our common stock at the time of the sale to the extent permitted by the terms of the Stockholder Approval and under such other circumstances as the SEC may permit. In this regard, on May 2, 2019, our stockholders voted to allow us to issue shares of common stock at a price below the then current net asset value per share during a period beginning on May 2, 2019 and expiring on the earlier of the (i) one year anniversary of the date of the 2019 annual stockholders meeting and (ii) the date of our 2020 annual stockholders meeting, which is expected to be held in April 2020, so long as the shares to be issued do not exceed 25% of the then outstanding common stock immediately prior to each such offering. In addition, we cannot issue shares of our common stock below net asset value unless our Board of Directors determines that it would be in our and our stockholders’ best interests to do so. Sales of common stock at prices below net asset value per share dilute the interests of existing stockholders, have the effect of reducing our net asset value per share and may reduce our market price per share. In addition, continuous sales of common stock below net asset value may have a negative impact on total returns and could have a negative impact on the market price of our shares of common
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stock. We may sell shares of our common stock in this “at the market offering” at a price below our then-current net asset value per share, to the extent permitted by the Stockholder Approval. See “Sales of Common Stock Below Net Asset Value” in this prospectus supplement.
Distributions
To the extent that we have income available, we intend to make monthly distributions to our stockholders. Our monthly stockholder distributions, if any, will be determined by our Board of Directors on a quarterly basis. Any distribution to our stockholders will be declared out of assets legally available for distribution. Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital, which is a return of a portion of a shareholder’s original investment in our common stock, to the extent of an investor’s basis in our stock and, assuming that an investor holds our stock as a capital asset, thereafter as a capital gain. Generally, a non-taxable return of capital will reduce an investor’s basis in our stock for federal tax purposes, which will result in higher tax liability when the stock is sold. See “Price Range of Common Stock and Distributions” in this prospectus supplement.
Taxation
We have elected to be treated for U.S. federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. To maintain our RIC tax treatment, we must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. See “Price Range of Common Stock and Distributions” in this prospectus supplement and “Certain U.S. Federal Income Tax Considerations” in the accompanying prospectus and “Additional Material U.S. Federal Income Tax Considerations” in this prospectus supplement.
Nasdaq Global Select Market symbol of common stock
“CPTA”
Risk Factors
An investment in our common stock is subject to risks and involves a heightened risk of total loss of investment. In addition, the companies in which we invest are subject to special risks. See “Risk Factors” in our most recent Annual Report on Form 10-Kand our most recent Quarterly Report on Form 10-Q, each of which is incorporated by reference in this prospectus supplement, in the accompanying prospectus, and in any free writing prospectuses we have authorized for use in connection with this offering, and under similar headings in the documents that are filed with the SEC on or after the date hereof and are incorporated by reference into this prospectus supplement and the accompanying prospectus, to read about factors you should consider, including the risk of leverage, before investing in our common stock.
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FEES AND EXPENSES
The following table is intended to assist you in understanding the costs and expenses that you will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus supplement contains a reference to fees or expenses paid by “you,” “Capitala Finance,” or “us” or that “we” or “Capitala Finance” will pay fees or expenses, Capitala Finance will pay such fees and expenses out of our net assets and, consequently, you will indirectly bear such fees or expenses as an investor in Capitala Finance. However, you will not be required to deliver any money or otherwise bear personal liability or responsibility for such fees or expenses.
Stockholder transaction expenses:
Sales load (as a percentage of offering price)
3.0%(1)
Offering expenses borne by us (as a percentage of offering price)
0.6%(2)
Dividend reinvestment plan fees (per sales transaction fee)
$ 15.00(3)
Total stockholder transaction expenses (as a percentage of offering price)
3.6%
Annual expenses (as a percentage of net assets attributable to common stock):
Base management fee
4.73%(4)
Incentive fees payable from Net Investment Income
1.17%(5)
Incentive fees payable from Capital Gains
0.00%(5)
Interest payments on borrowed funds
8.21%(6)
Other expenses
3.02%(7)
Acquired funds fees and expenses
0.13%(8)
Total annual expenses
17.26%(9)
(1)
Represents the maximum commission with respect to the shares of our common stock being sold in this offering, which we will pay to Jefferies in connection with sales of shares of our common stock effected by Jefferies in this offering.
(2)
The offering expenses of this offering are estimated to be approximately $275,000.
(3)
If a participant elects by written notice to the plan administrator to have the plan administrator sell part or all of the shares held by the plan administrator in the participant’s account and remit the proceeds to the participant, the plan administrator is authorized to deduct a transaction fee of  $15.00 plus a $0.10 per share brokerage commission from the proceeds. The expenses of the dividend reinvestment plan are included in “other expenses.” The plan administrator’s fees will be paid by us. There will be no brokerage charges or other charges to stockholders who participate in the plan. For additional information, see “Dividend Reinvestment Plan” in the accompanying prospectus.
(4)
Reflects our gross base management fee as a percentage of net assets. Our base management fee under the Investment Advisory Agreement is calculated at an annual rate of 1.75% of our gross assets, which is our total assets as reflected on our balance sheet and includes any borrowings for investment purposes. The gross base management fee reflected in the table above is based on the nine months ended September 30, 2019. See “Investment Advisory Agreement” in the accompanying prospectus.
(5)
Assumes that annual incentive fees earned by Capitala Investment Advisors remain consistent with the incentive fees earned by Capitala Investment Advisors during the nine months ended September 30, 2019 and includes accrued capital gains incentive fee, if any. As of September 30, 2019, Capitala Investment Advisors has accrued no capital gains incentive fee. As we cannot predict whether we will meet the thresholds for incentive fees under the Investment Advisory Agreement, the incentive fees paid in subsequent periods, if any, may be substantially different than the fees incurred during the nine months ended September 30, 2019.
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On January 4, 2016, Capitala Investment Advisors voluntarily agreed to waive all or such portion of the quarterly incentive fees earned by Capitala Investment Advisors that would otherwise cause our quarterly net investment income to be less than the distribution payments declared by our Board of Directors. Quarterly incentive fees are earned by Capitala Investment Advisors pursuant to the Investment Advisory Agreement. Incentive fees subject to the waiver cannot exceed the amount of incentive fees earned during the period, as calculated on a quarterly basis. Capitala Investment Advisors will not be entitled to recoup any amount of incentive fees that it waives. This waiver was effective in the fourth quarter of 2015 and will continue unless otherwise publicly disclosed by us. However, because this is a voluntary waiver that is not guaranteed to last indefinitely, the incentive fee reflected in the above table is presented on a gross basis and does not take into account the voluntary fee waiver. For more detailed information about the incentive fee calculations, see the “Investment Advisory Agreement” section of the accompanying prospectus.
(6)
In addition to our existing SBA-guaranteed debentures, 2022 Notes, and 2022 Convertible Notes, we may borrow funds from time to time to make investments to the extent we determine that additional capital would allow us to take advantage of additional investment opportunities or if the economic situation is otherwise conducive to doing so. The costs associated with any borrowings are indirectly borne by our stockholders. As of September 30, 2019, we had approximately $75.0 million of 2022 Notes, and $52.1 million of 2022 Convertible Notes outstanding. For purposes of this calculation, we have assumed that the September 30, 2019 amounts of 2022 Notes and 2022 Convertible Notes remain outstanding, and have computed interest expense using an assumed interest rate of 6.0% for the 2022 Notes, and 5.75% for the 2022 Convertible Notes which were the rates payable as of September 30, 2019. We have assumed $150.0 million of SBA guaranteed debentures outstanding. We have computed interest expense using an assumed interest rate of 3.56%. We have also assumed borrowings of $25.0 million under the Credit Facility at an interest rate equal to 4.75% per annum.
(7)
“Other expenses” include our overhead expenses, including payments by us under the Administration Agreement based on the allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations to us under the Administration Agreement, and expenses relating to the dividend reinvestment plan, for the nine months ended September 30, 2019.
(8)
The holders of shares of our common stock indirectly bear the expenses of our investment in Capitala Senior Loan Fund II (“CSLF II”). No management fee is charged on our investment in CSLF II in connection with the administrative services provided to CSLF II. As CSLF II is structured as a private joint venture, no management fees are paid by CSLF II. Future expenses for CSLF II may be substantially higher or lower because certain expenses may fluctuate over time.
(9)
The holders of shares of our common stock indirectly bear the cost associated with our annual expenses.
Example
The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed that our borrowings and annual operating expenses would remain at the levels set forth in the table above. See Note 6 above for additional information regarding certain assumptions regarding our level of leverage.
1 Year
3 Years
5 Years
10 Years
You would pay the following expenses on a $1,000 investment, assuming
a 5.0% annual return
$ 156 $ 418 $ 625 $ 973
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The example should not be considered a representation of future expenses, and actual expenses may be greater or less than those shown.
While the example assumes, as required by the applicable rules of the SEC, a 5.0% annual return, our performance will vary and may result in a return greater or less than 5.0%. In addition, while the examples assume reinvestment of all dividends and distributions at net asset value, participants in our dividend reinvestment plan will receive a number of shares of our common stock, generally determined by dividing the total dollar amount of the dividend payable to a participant by the market price per share of our common stock at the close of trading on the dividend payment date, which may be at, above or below net asset value. See “Dividend Reinvestment Plan” in the accompanying prospectus for additional information regarding the dividend reinvestment plan in the accompanying prospectus.
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CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
Information included or incorporated by reference in this prospectus supplement, the accompanying prospectus and in any free writing prospectus relating to this offering of common stock may contain forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about Capitala Finance, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements. The matters described in the section titled “Risk Factors” in the accompanying prospectus, and our most recent Annual Report on Form 10-K and our most recent Quarterly Report on Form 10-Q, which are each incorporated by reference in this prospectus supplement and the accompanying prospectus, as well as subsequent filings with the SEC, or in any free writing prospectus relating to this offering, and certain other factors noted throughout, or incorporated by reference in, this prospectus supplement, the accompanying prospectus and in any free writing prospectus relating to this offering, constitute cautionary statements identifying important factors with respect to any such forward-looking statements, including certain risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. We undertake no obligation to revise or update any forward-looking statements but advise you to consult any additional disclosures that we may make directly to you or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. The forward-looking statements included or incorporated by reference in this prospectus supplement and the accompanying prospectus involve risks and uncertainties, including statements as to:

our future operating results;

our business prospects and the prospects of our portfolio companies;

the impact of investments that we expect to make;

our contractual arrangements and 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 ability of our portfolio companies to achieve their objectives;

our expected financings and investments;

the adequacy of our cash resources and working capital; and

the timing of cash flows, if any, from the operations of our portfolio companies.
These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

an economic downturn could impair our portfolio companies’ ability to continue to operate or repay their borrowings, which could lead to the loss of some or all of our investments in such portfolio companies;

a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities;

interest rate volatility could adversely affect our results, particularly if we use leverage as part of our investment strategy; and
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the risks, uncertainties and other factors we identify in “Risk Factors” in the accompanying prospectus and in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, each of which is incorporated by reference herein.
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. 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 and objectives will be achieved. These risks and uncertainties include those described or identified in “Risk Factors” in our most recent Annual Report on Form 10-K and our most recent Quarterly Report on Form 10-Q and in other documents that we may file with the SEC, as well as in the accompanying prospectus and elsewhere in this prospectus supplement and the accompanying prospectus. You should not place undue reliance on these forward-looking statements, which are based on information available to us as of the applicable date of this prospectus supplement and the accompanying prospectus or, with respect to any information incorporated by reference herein or therein, are based on information available to us as of the date of the document incorporated by reference containing such information, regardless of the time of their delivery or sale of our common stock, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely on these statements.
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USE OF PROCEEDS
Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be made in negotiated transactions or transactions that are deemed to be part of an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act, including at market prices prevailing at the time of sale, at prices related to prevailing market prices or at other negotiated prices. There is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus. Actual sales, if any, of our common stock under this prospectus supplement and the accompanying prospectus may be less than as set forth in this paragraph depending on, among other things, the market price of our common stock at the time of any such sale. As a result, the actual net proceeds we receive may be more or less than the amount of net proceeds estimated in this prospectus supplement. Assuming the sale of  $50.0 million in aggregate amount of our common stock available under this “at the market offering” pursuant to this prospectus supplement and the accompanying prospectus, we anticipate that the net proceeds of this offering remaining available to us will be approximately $48.2 million after deducting the sales commission payable to Jefferies and estimated offering expenses payable by us.
We plan to use the net proceeds from the sale of our common stock pursuant to this prospectus supplement and the accompanying prospectus for new investments in portfolio companies in accordance with our investment objective and strategies, as described in this prospectus supplement and the accompanying prospectus, and for general working capital purposes. We may also use a portion of the net proceeds from this offering to equitize a new SBIC subsidiary, to repay any indebtedness (which will be subject to reborrowing), to pay operating expenses, including advisory and administrative fees and expenses, and may pay other expenses such as due diligence expenses of potential new investments. We are continuously identifying, reviewing and, to the extent consistent with its investment objective, funding new investments. As a result, we typically raise capital as we deem appropriate to fund such new investments.
We estimate that it will take three to six months for us to substantially invest the net proceeds of this offering made pursuant to this prospectus supplement, depending on the availability of attractive opportunities, market conditions and the amount raised. However, we can offer no assurance that we will be able to achieve this goal.
Proceeds not immediately used for new investments will be invested in cash, cash equivalents, U.S. government securities and other high-quality investments that mature in one year or less from the date of investment. These securities may have lower yields than the types of investments we would typically make in accordance with our investment objective and, accordingly, may result in lower distributions, if any, during such period. See “Regulation as a Business Development Company — 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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PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
Our common stock is traded on the Nasdaq Global Select Market under the symbol “CPTA.” The following table sets forth, for each fiscal quarter within the two most recent fiscal years and the current fiscal year, the range of high and low intraday sales prices of our common stock as reported on the Nasdaq Global Select Market, the premium (discount) of sales price to our net asset value (“NAV”) and the distributions declared by us for each fiscal quarter.
Fiscal Year Ended
NAV
Per Share(1)
Sales Price
Premium or
(Discount) of
High Sales
Price to
NAV(2)
Premium or
(Discount) of
Low Sales
Price to
NAV(2)
Declared
Distributions
Per Share(3)
High
Low
December 31, 2019
Fourth Quarter (through December 27, 2019)
$ * $ 9.12 $ 8.07 *% *% $ 0.25
Third Quarter
$ 9.40 $ 9.99 $ 7.34 6.3% (21.9)% $ 0.25
Second Quarter
$ 9.55 $ 9.69 $ 7.97 1.5% (16.5)% $ 0.25
First Quarter
$ 11.61 $ 8.74 $ 6.83 (24.7)% (41.2)% $ 0.25
December 31, 2018
Fourth Quarter
$ 11.88 $ 8.80 $ 6.46 (25.9)% (45.6)% $ 0.25
Third Quarter
$ 12.71 $ 9.05 $ 8.29 (28.8)% (34.8)% $ 0.25
Second Quarter
$ 13.71 $ 8.60 $ 7.66 (37.3)% (44.1)% $ 0.25
First Quarter
$ 13.66 $ 8.15 $ 6.88 (40.3)% (49.6)% $ 0.25
December 31, 2017
Fourth Quarter
$ 13.91 $ 10.00 $ 7.12 (28.1)% (48.8)% $ 0.25
Third Quarter
$ 14.21 $ 13.57 $ 8.67 (4.5)% (39.0)% $ 0.39
Second Quarter
$ 14.97 $ 14.43 $ 12.85 (3.6)% (14.2)% $ 0.39
First Quarter
$ 15.71 $ 14.65 $ 13.00 (6.7)% (17.3)% $ 0.39
(1)
Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low sales prices. The net asset values shown are based on outstanding shares at the end of each period.
(2)
Calculated as of the respective high or low intraday sales price divided by the quarter end NAV and subtracting 1.
(3)
Unless otherwise noted, represents the distribution paid or to be paid in the specified quarter. Unless otherwise indicated, no payments included a return of capital.
*
Not determinable at the time of filing
The last reported price for our common stock on December 27, 2019, was $8.53 per share. As of December 27, 2019, there were 36 holders of record of our common stock.
Shares of BDCs may trade at a market price that is less than the value of the net assets attributable to those shares. The possibility that our shares of common stock will trade at a discount from NAV or at premiums that are unsustainable over the long term are separate and distinct from the risk that our NAV will decrease. Since our initial public offering on September 25, 2013, our shares of common stock have traded at times at both a discount and a premium to the net assets attributable to those shares. As of December 27, 2019, shares of our common stock traded at a discount of approximately (9.3%) of the NAV attributable to those shares as of September 30, 2019. It is not possible to predict whether the shares offered hereby will trade at, above, or below NAV.
In order to qualify for tax treatment as a RIC and to avoid corporate-level U.S. federal income tax on the income we distribute to our stockholders, we are required to timely distribute at least 90% of our net ordinary income and our net short-term capital gains in excess of net long-term capital losses, if any, to our
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stockholders on an annual basis. Additionally, we must timely distribute an amount at least equal to the sum of 98% of our net ordinary income (during the calendar year) plus 98.2% of our net capital gain income (during each 12-month period ending on October 31) plus any net ordinary income and capital gain net income that we recognized in preceding years but was not distributed during such years and on which we paid no U.S. federal income tax to avoid a U.S. federal excise tax. To the extent that we have income available, we intend to make monthly distributions to our stockholders. Our monthly stockholder distributions, if any, will be determined by our Board of Directors on a quarterly basis. Any distribution to our stockholders will be declared out of assets legally available for distribution.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of our distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentage of our income annually, we may suffer adverse tax consequences, including the possible loss of our qualification for tax treatment as a RIC. We cannot assure stockholders that they will receive any distributions.
To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should read any written disclosure accompanying any stockholder distribution carefully and should not assume that the source of any distribution is our ordinary income or capital gains.
We have adopted an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock unless a stockholder specifically “opts out” of our dividend reinvestment plan. If a stockholder opts out, that stockholder will receive cash distributions. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, stockholders participating in our dividend reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes.
The following table reflects our distributions, including dividends and returns of capital, if any, per share that have been declared by our Board of Directors during fiscal years ended 2019, 2018, and 2017.
Date Declared
Record Date
Payment Date
Amount Per Share
January 2, 2019
January 24, 2019
January 30, 2019
$ 0.0833
January 2, 2019
February 27, 2019
February 27, 2019
$ 0.0833
January 2, 2019
March 28, 2019
March 28, 2019
$ 0.0833
April 2, 2019
April 19, 2019
April 27, 2019
$ 0.0833
April 2, 2019
May 22, 2019
May 30, 2019
$ 0.0833
April 2, 2019
June 20, 2019
June 28, 2019
$ 0.0833
July 1, 2019
July 23, 2019
July 30, 2019
$ 0.0833
July 1, 2019
August 22, 2019
August 29, 2019
$ 0.0833
July 1, 2019
September 20, 2019
September 27, 2019
$ 0.0833
October 1, 2019
October 22, 2019
October 29, 2019
$ 0.0833
October 1, 2019
November 22, 2019
November 29, 2019
$ 0.0833
October 1, 2019
December 23, 2019
December 30, 2019
$ 0.0833
Total Distributions Declared and Distributed for 2019
$ 1.00
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Date Declared
Record Date
Payment Date
Amount Per Share
January 2, 2018
January 22, 2018
January 1, 2018
$ 0.0833
January 2, 2018
February 20, 2018
February 27, 2018
$ 0.0833
January 2, 2018
March 23, 2018
March 29, 2018
$ 0.0833
April 2, 2018
April 19, 2018
April 27, 2018
$ 0.0833
April 2, 2018
May 22, 2018
May 30, 2018
$ 0.0833
April 2, 2018
June 20, 2018
June 28, 2018
$ 0.0833
July 2, 2018
July 23, 2018
July 30, 2018
$ 0.0833
July 2, 2018
August 23, 2018
August 30, 2018
$ 0.0833
July 2, 2018
September 20, 2018
September 27, 2018
$ 0.0833
October 1, 2018
October 23, 2018
October 30, 2018
$ 0.0833
October 1, 2018
November 21, 2018
November 29, 2018
$ 0.0833
October 1, 2018
December 20, 2018
December 28, 2018
$ 0.0833
Total Distributions Declared and Distributed for 2018
$ 1.00
Date Declared
Record Date
Payment Date
Amount Per Share
January 3, 2017
January 20, 2017
January 30, 2017
$ 0.13
January 3, 2017
February 20, 2017
February 27, 2017
$ 0.13
January 3, 2017
March 23, 2017
March 30, 2017
$ 0.13
April 3, 2017
April 19, 2017
April 27, 2017
$ 0.13
April 3, 2017
May 23, 2017
May 29, 2017
$ 0.13
April 3, 2017
June 21, 2017
June 29, 2017
$ 0.13
July 3, 2017
July 21, 2017
July 28, 2017
$ 0.13
July 3, 2017
August 23, 2017
August 30, 2017
$ 0.13
July 3, 2017
September 20, 2017
September 28, 2017
$ 0.13
October 2, 2017
October 23, 2017
October 30, 2017
$ 0.0833
October 2, 2017
November 21, 2017
November 29, 2017
$ 0.0833
October 2, 2017
December 20, 2017
December 28, 2017
$ 0.0833
Total Distributions Declared and Distributed for 2017
$ 1.42
Tax characteristics of all distributions paid by us are reported to stockholders on Form 1099 after the end of the calendar year. Our future distributions, if any, will be determined by our Board of Directors.
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SENIOR SECURITIES
Information about the Company’s senior securities as of December 31, 2018, 2017, 2016, 2015, 2014 and 2013 and as of September 30, 2019, and information about Fund II’s and Fund III’s senior securities as of December 31, 2012, 2011, 2010 and 2009 are shown in the following table. The reports of  (i) Ernst & Young LLP, an independent registered public accounting firm, on the senior securities table as of December 31, 2018, 2017, 2016, 2015, 2014 and 2013, and (ii) Dixon Hughes Goodman LLP, Fund II’s and Fund III’s auditor, on the senior securities table as of December 31, 2012 and 2011, are attached as, or incorporated by reference to, exhibits to the registration statement of which this prospectus is a part. The information as of December 31, 2010 and 2009 has been derived from the financial statements of Fund II and Fund III that were subject to SBA-required statutory audits.
Class and Year
Total Amount
Outstanding
Exclusive of
Treasury
Securities(6)
Asset
Coverage
per Unit(2)(6)
Involuntary
Liquidation
Preference
per Unit(3)
Average
Market Value
per Unit(4)
(in thousands)
Capitala Finance Corp.
Credit Facility(5)
2019 (as of September 30, 2019)
$ $ 2,200 N/A
2018
10,000 2,400 N/A
2017
9,000 2,600 N/A
2016
44,000 2,600 N/A
2015
70,000 2,500 N/A
2014
1,800 N/A
2022 Notes
2019 (as of September 30, 2019)
$ 75,000 $ 2,200 $ 1,005
2018
75,000 2,400 996
2017
75,000 2,600 1,014
2022 Convertible Notes
2019 (as of September 30, 2019)
$ 52,087 $ 2,200 $ 1,000
2018
52,087 2,400 984
2017
52,087 2,600 1,001
SBA-guaranteed debentures
2019 (as of September 30, 2019)
$ 150,000 N/A N/A
2018
165,700 N/A N/A
2017
170,700 N/A N/A
2016
170,700 N/A N/A
2015
184,200 N/A N/A
2014
192,200 $ 1,800 N/A
2013
202,200 2,300 N/A
2014 Notes
2016
$ 113,438 $ 2,600 $ 1,006
2015
113,438 2,500 1,020
2014
113,438 1,800 1,036
Fund II SBA-guaranteed debentures
2012
$ 52,200 $ 2,000 N/A
2011
52,200 1,600 N/A
2010
36,500 1,600 N/A
2009
36,500 1,500 N/A
Fund III SBA-guaranteed debentures
2012
$ 125,000 $ 1,700 N/A
2011
90,000 1,700 N/A
2010
33,000 1,900 N/A
2009
N/A
(1)
Total amount of each class of senior securities outstanding at the end of the period presented.
(2)
Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior
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securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness. Amounts are rounded to the nearest $1,000.
(3)
The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it. The “—” indicates information that the SEC expressly does not require to be disclosed for certain types of senior securities.
(4)
Not applicable except for the 2014 Notes, the 2022 Notes and the 2022 Convertible Notes which are publicly traded. The Average Market Value Per Unit is calculated by taking the daily average closing price during the period and dividing it by twenty-five dollars per share and multiplying the result by one thousand to determine a unit price per thousand consistent with Asset Coverage Per Unit.
(5)
As of September 30, 2019, there was no outstanding balance on the Credit Facility. As of December 27, 2019, there was no outstanding balance on the Credit Facility.
(6)
We have excluded our SBA-guaranteed debentures from the asset coverage calculation as of September 30, 2019 and December 31, 2018, 2017, 2016, and 2015 pursuant to the exemptive relief granted by the SEC in June 2014 that permits us to exclude such debentures from the definition of senior securities in the asset coverage ratio we are required to satisfy under the 1940 Act. 
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ADDITIONAL MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion serves as a supplement to the discussion in the accompanying prospectus under the heading “Certain U.S. Federal Income Tax Considerations.” This summary does not purport to be a complete description of the income tax considerations applicable to such an investment. For example, we have not described tax consequences that may be relevant to certain types of holders subject to special treatment under U.S. federal income tax laws, including stockholders subject to the alternative minimum tax, tax-exempt organizations, insurance companies, dealers in securities, a trader in securities that elects to use a market-to-market method of accounting for its securities holdings, pension plans and trusts, and financial institutions. The discussion is based upon the Code, Treasury regulations, and administrative and judicial interpretations, each as of the date of this prospectus supplement, and all of which are subject to change which could affect the continuing validity of this discussion. We have not sought and will not seek any ruling from the Internal Revenue Service regarding this offering. This summary does not discuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does not discuss the special treatment under U.S. federal income tax laws that could result if we invested in tax-exempt securities or certain other investment assets.
Foreign Account Tax Compliance Act
Legislation commonly referred to as the “Foreign Account Tax Compliance Act” generally imposes a 30% withholding tax on payments of certain types of income to foreign financial institutions (“FFIs”) unless such FFIs either (i) enter into an agreement with the U.S. Treasury to report certain required information with respect to accounts held by U.S. persons (or held by foreign entities that have U.S. persons as substantial owners) or (ii) reside in a jurisdiction that has entered into an intergovernmental agreement (“IGA”) with the United States to collect and share such information and are in compliance with the terms of such IGA and any enabling legislation or regulations. The types of income subject to the tax include U.S. source interest and dividends. While existing U.S. Treasury regulations would also require withholding on payments of the gross proceeds from the sale of any property that could produce U.S. source interest or dividends, the U.S. Treasury Department has indicated in subsequent proposed regulations its intent to eliminate this requirement. The information required to be reported includes the identity and taxpayer identification number of each account holder that is a U.S. person and transaction activity within the holder’s account. In addition, subject to certain exceptions, this legislation also imposes a 30% withholding on payments to foreign entities that are not FFIs unless the foreign entity certifies that it does not have a greater than 10% U.S. owner or provides the withholding agent with identifying information on each greater than 10% U.S. owner. Depending on the status of a Non-U.S. stockholder and the status of the intermediaries through which they hold their shares, Non-U.S. stockholders could be subject to this 30% withholding tax with respect to distributions on their shares and potentially proceeds from the sale of their shares. Under certain circumstances, a Non-U.S. stockholder might be eligible for refunds or credits of such taxes.
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SALES OF COMMON STOCK BELOW NET ASSET VALUE
At our 2019 Annual Stockholders Meeting, subject to certain determinations required to be made by our Board of Directors, our stockholders approved our ability to sell or otherwise issue shares of our common stock, not exceeding 25% of our then outstanding common stock immediately prior to each such offering, at a price below the then current net asset value per share during a period beginning on May 2, 2019 and expiring on the earlier of the one year anniversary of the date of the 2019 Annual Stockholders Meeting and the date of our 2020 Annual Stockholders Meeting, which is expected to be held in April 2020. Our Board of Directors, subject to its fiduciary duties and regulatory requirements, has the discretion to determine the amount of the discount, and as a result, the discount could be up to 100% of net asset value per share. The Company does not presently intend to sell shares of its common stock at a price that is more than 20% lower than the Company’s then current net asset value, absent extenuating circumstances, including, but not limited to, circumstances that would require the Company to raise equity capital in order to avoid defaulting on its debt obligations. However, since our IPO in September 2013, we have not sold any shares of our common stock at a price below our then current net asset value per share. Any offering of our common stock that requires Stockholder Approval must occur, if at all, within one year after receiving such Stockholder Approval. Sales of common stock at prices below net asset value per share dilute the interests of existing stockholders, have the effect of reducing our net asset value per share and may reduce our market price per share. In addition, continuous sales of common stock below net asset value may have a negative impact on total returns and could have a negative impact on the market price of our shares of common stock. For additional information, see “Sales of Common Stock Below Net Asset Value” in the accompanying prospectus.
The Company may sell shares of its common stock at a price below net asset value per share from time to time under this “at the market offering.” The Board of Directors has determined that the following conditions have been met:

a majority of our independent directors who have no financial interest in the sale must have approved the sale; and

a majority of such directors, who are not interested persons of the Company, in consultation with the underwriter or underwriters of the offering if it is to be underwritten, must have determined in good faith, and as of a time immediately prior to the first solicitation by us or on our behalf of firm commitments to purchase such shares or immediately prior to the issuance of such shares, that the price at which such shares are to be sold is not less than a price which closely approximates the market value of those shares, less any underwriting commission or discount.
Our net asset value per share as of September 30, 2019 (the last date prior to the date of this prospectus supplement on which we determined net asset value) was $9.40.
In making a determination that a possible offering of common stock below our net asset value per share, including an offering pursuant to this “at the market offering,” is in our and our stockholders’ best interests, our Board of Directors considered a variety of factors including:

The effect that an offering below NAV per share would have on our stockholders, including the potential dilution they would experience as a result of the offering;

The amount per share by which the offering price per share and the net proceeds per share are less than the most recently determined net asset value per share;

The relationship of recent market prices of our common stock to net asset value per share and the potential impact of the offering on the market price per share of our common stock;

Whether the proposed offering price would closely approximate the market value of our shares;

The potential market impact of being able to raise capital during the current financial market difficulties;

The nature of any new investors anticipated to acquire shares in this offering;

The anticipated rate of return on and quality, type and availability of investments to be funded with the proceeds from this offering, if any; and
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The leverage available to us, both before and after any offering, and the terms thereof.
Our Board of Directors also considered the fact that sales of shares of common stock at a discount will benefit our Investment Advisor because it will earn additional investment management fees on the proceeds of such offering, as it would from the offering of any of our other securities or from the offering of common stock at a premium to net asset value per share.
Sales by us of our common stock at a discount from net asset value per share pose potential risks for our existing stockholders whether or not they participate in the offering, as well as for new investors who participate in the offering. Any sale of common stock at a price below net asset value per share will result in an immediate dilution to many of our existing common stockholders even if they participate in such sale.
Impact on Existing Stockholders who do not participate in this offering
Our existing stockholders who do not participate in this offering or who do not buy additional shares in the secondary market at the same or lower price we obtain in this offering (after expenses and commissions) face the greatest potential risks. All stockholders will experience an immediate decrease (often called dilution) in the NAV of the shares they hold. Stockholders who do not participate in the offering will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting power than stockholders who do participate in this offering. All stockholders may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential decreases in NAV per share. The following table illustrates the level of NAV dilution that would be experienced by a nonparticipating stockholder in this offering.
Prior to Sale
Below
NAV
Example 1
10.0% Offering
10.0% Discount
Example 2
20.0% Offering
100.0% Discount
Following
Sale
%
Change
Following
Sale
%
Change
Offering Price
Price per Share to Public(1)
$ 8.76 $ 0.001
Net proceeds per Share to Issuer
$ 8.46 $ 0.001
Decrease to NAV
Total Shares Outstanding
16,161,075 17,777,183 10.00% 19,393,290 20.00%
NAV per Share
$ 9.40 $ 9.31 $ 7.83
Share Dilution to Stockholder
Shares Held by Stockholder A
161,611 161,611 161,611
Percentage of Shares Held by
Stockholder A
1.00% 0.91% (9.09)% 0.83% (16.67)%
Total Asset Values
Total NAV Held by Stockholder A
$ 1,518,810 $ 1,505,003 (0.91)% $ 1,265,702 (16.66)%
Total Investment by Stockholder A (Assumed to Be $9.40 per Share)
$ 1,518,810 $ 1,518,810 $ 1,518,810
Total Dilution to Stockholder A (Change in Total NAV Held By Stockholder)
$ (13,807) $ (253,108)
Per Share Amounts
NAV per Share Held by Stockholder A
$ 9.31 $ 7.83
Investment per Share Held by Stockholder A (Assumed to be $9.40 per Share on Shares Held Prior to
Sale)
$ 9.40 $ 9.40 $ 9.40
Dilution per Share Held by Stockholder A
$ (0.09) $ (1.57)
Percentage Dilution per Share Held by Stockholder A
(0.91)% (16.66)%
(1)
Assumes 3.6% in selling compensation and expenses paid by Capitala Finance Corp.
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Impact on Existing Stockholders who do participate in this offering
Our existing stockholders who participate in this offering or who buy additional shares in the secondary market at the same or lower price as we obtain in the offering (after expenses and commissions) will experience the same types of NAV dilution as the nonparticipating stockholders, albeit at a lower level, to the extent they purchase less than the same percentage of the discounted offering as their interest in our shares immediately prior to the offering. The level of NAV dilution on an aggregate basis will decrease as the number of shares such stockholders purchase increases. Existing stockholders who buy more than their proportionate percentage will experience NAV dilution but will, in contrast to existing stockholders who purchase less than their proportionate share of this offering, experience an increase (often called accretion) in NAV per share over their investment per share and will also experience a disproportionately greater increase in their participation in our earnings and assets and their voting power than our increase in assets, potential earning power and voting interests due to this offering. The level of accretion will increase as the excess number of shares purchased by such stockholder increases. These stockholders may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential decreases in NAV per share. The following table illustrates the level of NAV dilution that would be experienced by a participating stockholder in this offering.
Prior to Sale
Below NAV
Example 1 –
50.0% Participation
20.0% Offering
20.0% Discount
Example 2 –
150.0% Participation
20.0% Offering
20.0% Discount
Following
Sale
%
Change
Following
Sale
%
Change
Offering Price
Price per Share to Public(1)
$ 7.79 $ 7.79
Net proceeds per Share to Issuer
$ 7.52 $ 7.52
Increase to Shares and Decrease to NAV
Total Shares Outstanding
16,161,075 19,393,290 20.00% 19,393,290 20.00%
NAV per Share
$ 9.40 $ 9.08 (3.33)% $ 9.08 (3.33)%
Dilution/Accretion to Participating Stockholder A
Share Dilution/Accretion
Shares Held by Stockholder A
161,611 177,772 210,094
Percentage of Shares Held by
Stockholder A
1.00% 0.92% (8.33)% 1.08% 8.33%
NAV Dilution/Accretion
Total NAV Held by Stockholder A
$ 1,518,810 $ 1,615,001 6.33% $ 1,908,638 25.67%
Total Investment by Stockholder A (Assumed to Be $9.40 per Share)
$ 1,644,689 $ 1,896,447
Total Dilution to Stockholder A (Change in
Total NAV Held By Stockholder)
$ (29,688) $ 12,191
NAV Dilution/Accretion per Share
NAV per Share Held by Stockholder A
$ 9.08 $ 9.08
Investment per Share Held by Stockholder A (Assumed to be $9.40 per Share on Shares Held Prior to Sale)
$ 9.40 $ 9.25 (1.56)% $ 9.03 (3.95)%
NAV Dilution/Accretion per Share
Experienced by Stockholder A (NAV per
Share less Investment per Share)
$ (0.17) $ 0.06
NAV Dilution/Accretion per Share
Experienced by Stockholder A (NAV
Dilution/Accretion per Share Divided by
Investment per Share)
(1.81)% 0.64%
(1)
Assumes 3.6% in selling compensation and expenses paid by Capitala Finance Corp.
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Impact on New Investors
Investors who are not currently stockholders, but who participate in this offering and whose investment per share is greater than the resulting NAV per share (due to selling compensation and expenses paid by us) will experience an immediate decrease, albeit small, in the NAV of their shares and their NAV per share compared to the price they pay for their shares. Investors who are not currently stockholders and who participate in this offering and whose investment per share is also less than the resulting NAV per share will experience an immediate increase in the NAV of their shares and their NAV per share compared to the price they pay for their shares. All these investors will experience a disproportionately greater participation in our earnings and assets and their voting power than our increase in assets, potential earning power and voting interests. These investors will, however, be subject to the risk that we may make additional discounted offerings in which such new stockholder does not participate, in which case such new stockholder will experience dilution as described above in such subsequent offerings. These investors may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential decreases in NAV per share. The following table illustrates the level of NAV dilution that would be experienced by a new investor in this offering.
Prior to Sale
Below NAV
Example 1 –
1.0% New Investor
10.0% Offering
10.0% Discount
Example 2 –
1.0% New Investor
20.0% Offering
100.0% Discount
Following
Sale
%
Change
Following
Sale
%
Change
Offering Price
Price per Share to Public(1)
$ 8.76 $ 0.001
Net proceeds per Share to Issuer
$ 8.46 $ 0.001
Increase to Shares and Decrease to NAV
Total Shares Outstanding
16,161,075 17,777,183 10.00% 19,393,290 20.00%
NAV per Share
$ 9.40 $ 9.31 (0.91)% $ 7.83 (16.66)%
Dilution/Accretion to Participating New Investor A
Share Dilution
Shares Held by New Investor A
16,161 32,322
Percentage of Shares Held by New Investor A
0.00% 0.09% 0.17%
NAV Dilution
Total NAV Held by New Investor A
$ $ 150,500 $ 253,140
Total Investment by New Investor A
(At Price to Public)
$ $ 141,614 $ 33
Total Dilution to New Investor A (Change in Total NAV Held By New Investor)
$ 8,886 $ 253,107
NAV Dilution/Accretion per Share
NAV per Share Held by New Investor A
$ 9.31 $ 7.83
Investment per Share Held by New Investor
A (Assumed to be $9.40 per Share on
Shares Held Prior to Sale)
$ 8.76 $ 0.001
NAV Dilution/Accretion per Share Experienced by New Investor A (NAV per Share less Investment per Share)
$ 0.55 $ 7.83
NAV Dilution/Accretion per Share
Experienced by New Investor A (NAV
Dilution/Accretion per Share Divided by
Investment per Share)
6.28% 99.99%
(1)
Assumes 3.6% in selling compensation and expenses paid by Capitala Finance Corp.
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PLAN OF DISTRIBUTION
We have entered into a Sales Agreement with Jefferies, under which we may offer and sell up to $50.0 million of our shares of common stock from time to time through Jefferies acting as agent. Sales of our shares of common stock, if any, under this prospectus supplement and the accompanying prospectus will be made by any method that is deemed to be an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act.
Each time we wish to issue and sell shares of common stock under the Sales Agreement, we will notify Jefferies of the number of shares to be issued, the dates on which such sales are anticipated to be made, any limitation on the number of shares to be sold in any one day and any minimum price below which sales may not be made. Once we have so instructed Jefferies, unless Jefferies declines to accept the terms of such notice, Jefferies has agreed to use its commercially reasonable efforts consistent with its normal trading and sales practices to sell such shares up to the amount specified on such terms. The obligations of Jefferies under the Sales Agreement to sell our shares of common stock are subject to a number of conditions that we must meet.
The settlement of sales of shares between us and Jefferies is generally anticipated to occur on the second trading day following the date on which the sale was made. Sales of our shares of common stock as contemplated in this prospectus supplement will be settled through the facilities of The Depository Trust Company or by such other means as we and Jefferies may agree upon. There is no arrangement for funds to be received in an escrow, trust or similar arrangement.
We will pay Jefferies a commission of up to 3.0% of the aggregate gross proceeds we receive from each sale of our shares of common stock. Because there is no minimum offering amount required as a condition to close this offering, the actual total public offering amount, commissions and proceeds to us, if any, are not determinable at this time. In addition, we have agreed to reimburse Jefferies for the fees and disbursements of its counsel, payable upon execution of the Sales Agreement, in an amount not to exceed $50,000 and certain ongoing expenses. We estimate that the total expenses for the offering, excluding any commissions or expense reimbursement payable to Jefferies under the terms of the Sales Agreement, will be approximately $275,000. The remaining sale proceeds, after deducting any other transaction fees, will equal our net proceeds from the sale of such shares.
Jefferies will provide written confirmation to us before the open on The Nasdaq Global Select Market on the day following each day on which shares of common stock are sold under the Sales Agreement. Each confirmation will include the number of shares sold on that day, the aggregate gross proceeds of such sales and the proceeds to us.
In connection with the sale of the shares of common stock on our behalf, Jefferies will be deemed to be an “underwriter” within the meaning of the Securities Act, and the compensation of Jefferies will be deemed to be underwriting commissions or discounts. We have agreed to indemnify Jefferies against certain civil liabilities, including liabilities under the Securities Act. We have also agreed to contribute to payments Jefferies may be required to make in respect of such liabilities.
The offering of our shares of common stock pursuant to the Sales Agreement will terminate upon the earlier of  (i) the sale of all shares of common stock subject to the Sales Agreement and (ii) the termination of the Sales Agreement as permitted therein. We and Jefferies may each terminate the Sales Agreement at any time upon ten days’ prior notice.
This summary of the material provisions of the Sales Agreement does not purport to be a complete statement of its terms and conditions. A copy of the Sales Agreement will be filed as an exhibit to a current report on Form 8-K filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and incorporated by reference in this prospectus supplement.
Jefferies and its affiliates may in the future provide various investment banking, commercial banking, financial advisory and other financial services for us and our affiliates, for which services they may in the future receive customary fees. In the course of its business, Jefferies may actively trade our securities for its own account or for the accounts of customers, and, accordingly, Jefferies may at any time hold long or short positions in such securities.
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A prospectus supplement and the accompanying prospectus in electronic format may be made available on a website maintained by Jefferies, and Jefferies may distribute the prospectus supplement and the accompanying prospectus electronically.
The principal business address of Jefferies is 520 Madison Avenue, New York, New York 10022.
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LEGAL MATTERS
Certain legal matters in connection with the securities offered hereby will be passed upon for us by Eversheds Sutherland (US) LLP, Washington, District of Columbia. Jefferies LLC is being represented in connection with this offering by Cooley LLP, New York, New York.
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on Form N-2, together with all amendments and related exhibits, under the Securities Act. The registration statement contains additional information about us and the common stock being offered by this prospectus supplement and the accompanying prospectus.
We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Exchange Act. The SEC maintains a website that contains reports, proxy and information statements and other information filed electronically by us with the SEC which are available free of charge on the SEC’s website at http://www.sec.gov. This information will also be available free of charge by contacting us at Capitala Finance Corp., 4201 Congress Street, Suite 360, Charlotte, North Carolina 28209, by telephone at (704) 376-5502, or on our website at http://www.capitalagroup.com. Information contained on our website or on the SEC’s website about us is not incorporated into this prospectus supplement or the accompanying prospectus and you should not consider information contained on our website or on the SEC’s website to be part of this prospectus supplement or the accompanying prospectus.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
We incorporate by reference in this prospectus supplement the documents listed below and any reports and other documents we file with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of this offering (such reports and other documents deemed to be incorporated by reference into this prospectus supplement and to be part hereof from the date of filing of such reports and other documents); provided, however, that information “furnished” under Item 2.02 or Item 7.01 of Form 8-K, or other information “furnished” to the SEC pursuant to the Exchange Act will not be incorporated by reference into this prospectus supplement:

our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 4, 2019;

our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, filed with the SEC on May 6, 2019;

our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, filed with the SEC on August 5, 2019;

our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, filed with the SEC on November 4, 2019;

our Current Reports on Form 8-K filed with the SEC on February 28, 2019, October 15, 2019, December 26, 2019, and Item 5.07 of our Current Report on Form 8-K filed with the SEC on May 6, 2019;

our Definitive Proxy Statement on Schedule 14A, filed with the SEC on March 11, 2019; and

the description of our Common Stock referenced in our Registration Statement on Form 8-A, as filed with the SEC on September 24, 2013, including any amendment or report filed for the purpose of updating such description prior to the termination of this offering.
To obtain copies of these filings, see “Available Information” in this prospectus supplement.
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PROSPECTUS
Capitala Finance Corp.
$500,000,000
Common Stock
Preferred Stock
Subscription Rights
Warrants
Debt Securities
We are an externally managed non-diversified closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (“1940 Act”). Our investment objective is to generate both current income and capital appreciation through debt and equity investments. Both directly and through our subsidiaries that are licensed under the Small Business Investment Company Act (“SBIC”), we offer customized financing to business owners, management teams and financial sponsors for change of ownership transactions, recapitalizations, strategic acquisitions, business expansion and other growth initiatives. We are managed by Capitala Investment Advisors, LLC, and Capitala Advisors Corp. provides the administrative services necessary for us to operate.
We may offer, from time to time, in one or more offerings or series, up to $500,000,000 of common stock, preferred stock, debt securities, subscription rights to purchase shares of our common stock, or warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, which we refer to, collectively, as the “securities”. The preferred stock, subscription rights, warrants and debt securities offered hereby may be convertible or exchangeable into shares of common stock. The securities may be offered at prices and on terms to be described in one or more supplements to this prospectus.
In the event we offer common stock, the offering price per share of our common stock less any underwriting discounts or commissions will generally not be less than the net asset value per share of our common stock at the time we make the offering. However, we may issue shares of our common stock pursuant to this prospectus at a price per share that is less than our net asset value per share (i) in connection with a rights offering to our existing stockholders, (ii) with the prior approval of the majority (as defined in the 1940 Act) of our common stockholders or (iii) under such other circumstances as the Securities and Exchange Commission may permit.
The securities may be offered directly to one or more purchasers, or through agents designated from time to time by us, or to or through underwriters or dealers. Each prospectus supplement relating to an offering will identify any agents or underwriters involved in the sale of the securities, and will disclose any applicable purchase price, fee, discount or commissions arrangement between us and our agents or underwriters or among our underwriters or the basis upon which such amount may be calculated. See “Plan of Distribution”. We may not sell any of the securities through agents, underwriters or dealers without delivery of this prospectus and a prospectus supplement describing the method and terms of the offering of such securities.
Our common stock is traded on the NASDAQ Global Select Market under the symbol “CPTA”. On April 16, 2019, the last reported sales price on the NASDAQ Global Select Market for our common stock was $8.70 per share. Our 6.0% notes due 2022 are traded on the NASDAQ Global Select Market under the symbol “CPTAL”. On April 16, 2019, the last reported sales price on the NASDAQ Global Select Market for our 6.0% notes due 2022 was $25.15. Our 5.75% convertible notes due 2022 are traded on the NASDAQ Capital Market under the symbol “CPTAG”. On April 16, 2019, the last reported sales price on the NASDAQ Global Select Market for our 5.75% convertible notes due 2022 was $25.03.
An investment in our common stock is subject to risks and involves a heightened risk of total loss of investment. In addition, the companies in which we invest are subject to special risks. For example, we invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as “high yield” or “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. See “Risk Factors” beginning on page 24 of this prospectus, and in, or incorporated by reference into, the applicable prospectus supplement and in any free writing prospectuses we may authorize for use in connection with a specific offering, and under similar headings in the other documents that are incorporated by reference into this prospectus, to read about factors you should consider, including the risk of leverage, before investing in our securities.
Neither the SEC nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
This prospectus may not be used to consummate sales of our securities unless accompanied by a prospectus supplement.
This prospectus describes some of the general terms that may apply to an offering of our securities. We will provide the specific terms of these offerings and securities in one or more supplements to this prospectus. We may also authorize one or more free writing prospectuses to be provided to you in connection with these offerings. The prospectus supplement and any related free writing prospectus may also add, update, or change information contained in this prospectus. You should carefully read this prospectus, the applicable prospectus supplement, and any related free writing prospectus, and the documents incorporated by reference, before buying any of the securities being offered. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission (“SEC”). This information is available free of charge by contacting us by mail at 4201 Congress St., Suite 360, Charlotte, NC 28209, by telephone at (704) 376-5502 or on our website at http://www.capitalagroup.com. The SEC also maintains a website at http://www.sec.gov that contains such information. Information contained on our website or on the SEC’s website about us is not incorporated into this prospectus or any supplement hereto and you should not consider information contained on our website or on the SEC’s website to be part of this prospectus or any supplement hereto.
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You should rely only on the information contained in this prospectus, any prospectus supplement or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized any dealer, salesman or other person to give any information or to make any representation other than those contained in this prospectus, any prospectus supplement or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. You must not rely upon any information or representation not contained in this prospectus, any such prospectus supplements or any free writing prospectuses as if we had authorized it. This prospectus, any such prospectus supplements or any free writing prospectuses do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which they relate, nor do they constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The information contained in, or incorporated by reference in, this prospectus, any such prospectus supplements or any free writing prospectuses is accurate as of the dates on their covers. Our business, financial condition, results of operations and prospects may have changed since then.
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ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with the Securities and Exchange Commission (“SEC”), using the “shelf” registration process. Under the shelf registration process, which constitutes a delayed offering in reliance on Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), the Company may offer, from time to time, in one or more offerings, up to $500,000,000 of our common stock, preferred stock, debt securities, subscription rights to purchase shares of our common stock, or warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, on terms to be determined at the time of the offering. The securities may be offered at prices and on terms described in one or more supplements to this prospectus. This prospectus provides you with a general description of the offerings of securities that we may conduct pursuant to this prospectus. Each time we use this prospectus to offer securities, we will provide a prospectus supplement that will contain specific information about the terms of that offering.
We may also authorize one or more free writing prospectuses to be provided to you that may contain material information relating to these offerings. In a prospectus supplement or free writing prospectus, we may also add, update, or change any of the information contained in this prospectus or in the documents we incorporate by reference into this prospectus. This prospectus, together with the applicable prospectus supplement, any related free writing prospectus, and the documents incorporated by reference into this prospectus and the applicable prospectus supplement, will include all material information relating to the applicable offering. Before buying any of the securities being offered, you should carefully read both this prospectus and the applicable prospectus supplement and any related free writing prospectus, together with any exhibits and the additional information described in the sections titled “Available Information,” “Incorporation of Certain Information By Reference,” “Prospectus Summary” and “Risk Factors.”
This prospectus includes summaries of certain provisions contained in some of the documents described in this prospectus, but reference is made to the actual documents for complete information. All of the summaries are qualified in their entirety by the actual documents. Copies of some of the documents referred to herein have been filed, will be filed, or will be incorporated by reference as exhibits to the registration statement of which this prospectus is a part, and you may obtain copies of those documents as described in the section titled “Available Information.”
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PROSPECTUS SUMMARY
The following summary contains basic information about offerings pursuant to this prospectus. It may not contain all the information that is important to you. For a more complete understanding of offerings pursuant to this prospectus, we encourage you to read this entire prospectus and the documents to which we have referred in this prospectus, together with any accompanying prospectus supplements or free writing prospectuses, including the risks set forth under the caption “Risk Factors” in this prospectus, the applicable prospectus supplement and any related free writing prospectus, and under similar headings in any other documents that are incorporated by reference into this prospectus, and the information set forth under the caption “Available Information” in this prospectus.
Immediately prior to the pricing of Capitala Finance Corp.’s initial public offering (“IPO”) on September 24, 2013, we acquired, through a series of transactions (the “Formation Transactions”), an investment portfolio (the “Legacy Portfolio”) from the following entities:

CapitalSouth Partners Fund I Limited Partnership (“Fund I”);

CapitalSouth Partners Florida Sidecar Fund I, L.P. (“Florida Sidecar Fund”);

CapitalSouth Partners Fund II Limited Partnership (“Fund II”);

CapitalSouth Partners SBIC Fund III, L.P. (“Fund III”); and

CapitalSouth Partners Fund III, L.P. (“Fund III Parent Fund”).
After the Formation Transactions, the Legacy Portfolio consisted of: (1) approximately $326.3 million in investments; (2) an aggregate of approximately $67.1 million in cash, interest receivable and other assets; and (3) liabilities of approximately $202.2 million of SBA-guaranteed debt payable. We issued an aggregate of approximately 9.0 million shares of our common stock to acquire the Legacy Portfolio. Fund II, Fund III, and Florida Sidecar Fund and their respective general partners became our wholly owned subsidiaries. Fund II and Fund III have elected to be regulated as BDCs under the 1940 Act.
Except where the context suggests otherwise:

“we,” “us,” “our,” “Capitala Finance” and the “Company” refer to Capitala Finance Corp. and its subsidiaries,

“Capitala Investment Advisors,” the “Investment Advisor,” or “investment adviser” refer to Capitala Investment Advisors, LLC,

the “Administrator” or the “administrator” refers to Capitala Advisors Corp.,

the “Legacy Funds” refers collectively to Fund II, Fund III and their respective general partners; and

the “Legacy Investors” refers to the investors that received shares of our common stock through the Formation Transactions.
In this prospectus, we use the term “lower and traditional middle-market” to refer to companies generating between $10 million and $200 million in annual revenue and having at least $4.5 million to $30.0 million in annual earnings before interest, taxes, depreciation and amortization (“EBITDA”).
Capitala Finance Corp.
We are an externally managed non-diversified closed-end management investment company incorporated in Maryland that has elected to be regulated as a BDC under the 1940 Act. We commenced operations on May 24, 2013 and completed our IPO on September 30, 2013. We are managed by Capitala Investment Advisors, an investment adviser that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and Capitala Advisors Corp. provides the administrative services necessary for us to operate. For U.S. federal income tax purposes, we have elected to be treated, and intend to comply with the requirements to continue to qualify annually, as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
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Our investment objective is to generate both current income and capital appreciation through debt and equity investments. Both directly and through our subsidiaries that are licensed by the U.S. Small Business Administration (“SBA”) under the Small Business Investment Company (“SBIC”) Act, we offer customized financing to business owners, management teams and financial sponsors for change of ownership transactions, recapitalizations, strategic acquisitions, business expansion and other growth initiatives. We invest in first lien loans, second lien loans and subordinated loans, and, to a lesser extent, equity securities issued by lower middle-market companies and traditional middle-market companies.
Our Investment Strategy
Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We expect the companies in which we invest will generally have between $4.5 million and $30.0 million in trailing twelve month EBITDA. We believe our focus on direct lending to private companies enables us to receive higher interest rates and more substantial equity participation. As part of that strategy, we may invest in first-lien loans, which have a first priority security interest in all or some of the borrower’s assets. In addition, our first lien loans may include positions in “stretch” senior secured loans, also referred to as “unitranche” loans, which combine characteristics of traditional first-lien senior secured loans and second lien loans, providing us with greater influence and security in the primary collateral of a borrower and potentially mitigating loss of principal should a borrower default. We also may invest in second lien loans, which have a second priority security interest in all or substantially all of the borrower’s assets. In addition to first and second lien loans, we invest in subordinated loans, which may include mezzanine and other types of junior debt investments. Like second lien loans, our subordinated loans typically have a second lien on all or substantially all of the borrower’s assets; however, the principal difference between subordinated loans and second lien loans is that in a subordinated loan, we may be subject to the interruption of cash interest payments, at the discretion of the first lien lender, upon certain events of default. In addition to debt securities, we may acquire equity or detachable equity-related interests (including warrants) from a borrower. Typically, the debt in which we invest is not initially rated by any rating agency; however, we believe that if such investments were rated, they would be rated below investment grade. Below investment grade securities, which are often referred to as “high yield” or “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. We intend to target investments that mature in four to six years from our investment.
We typically will not limit the size of our loan commitments to a specific percentage of a borrower’s assets that serve as collateral for our loan, although we attempt to protect against risk of loss on our debt investments by structuring, underwriting and pricing loans based on anticipated cash flows of our borrowers. As of December 31, 2018, our investment adviser underwrote investments in 134 lower middle-market and traditional middle-market companies totaling more than $1.4 billion of invested capital since 2000, and we believe that a continuation of this strategy allows us to make structured investments with more attractive pricing and greater opportunities for meaningful equity participation than traditional asset-based, senior secured loans. Further, we believe that we benefit from our investment adviser’s long-standing relationships with many private equity fund sponsors, whose participation in portfolio companies, we believe, makes repayment from refinancing, asset sales and/or sales of the borrowers themselves more likely than a strategy whereby we consider investments only in founder-owned or non-sponsored borrowers.
Capitala Investment Advisors
We are managed by Capitala Investment Advisors, whose investment team members have significant and diverse experience financing, advising, operating and investing in lower middle-market and traditional middle-market companies. Moreover, our investment adviser’s investment team has refined its investment strategy by sourcing, reviewing, acquiring and monitoring 134 portfolio companies totaling more than $1.4 billion of invested capital from 2000 through December 31, 2018. Capitala Investment Advisors’ investment team also manages CapitalSouth Partners SBIC Fund IV, L.P. (“Fund IV”), a private investment limited partnership providing financing solutions to smaller and lower middle-market companies. Fund IV had its first closing in March 2013 and obtained SBA approval for its SBIC license in April 2013. In addition to Fund IV, affiliates of the Investment Advisor may manage several affiliated funds whereby
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institutional limited partners in Fund IV have the opportunity to co-invest with Fund IV in portfolio investments. An affiliate of the Investment Advisor also manages Capitala Private Credit Fund V, L.P. (“Fund V”), a private investment limited partnership, and a private investment vehicle (referred to herein as “Capitala Specialty Lending Corp.” or “CSLC”), both of which provide financing solutions to lower middle-market and traditional middle-market companies. The Investment Advisor and its affiliates may also manage other funds in the future that may have investment mandates that are similar, in whole and in part, with ours. To the extent permitted by the 1940 Act and interpretation of the staff of the SEC, the Investment Advisor and its affiliates may determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, the Investment Advisor or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, and consistent with the Investment Advisor’s allocation procedures. We do expect to make, and have made, co-investments with Fund V and/or CSLC given their similar investment strategies.
On June 1, 2016, the SEC issued an exemptive order (the “Order”), which permits the Company to co-invest in portfolio companies with certain funds or entities managed by the Investment Advisor or its affiliates in certain negotiated transactions where co-investing would otherwise be prohibited under the 1940 Act, subject to the conditions of the Order. Pursuant to the Order, the Company is permitted to co-invest with its affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company’s independent directors make certain conclusions in connection with a co-investment transaction, including, but not limited to, that (1) the terms of the potential co-investment transaction, including the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching in respect of the Company or its stockholders on the part of any person concerned, and (2) the potential co-investment transaction is consistent with the interests of the Company’s stockholders and is consistent with its then-current objectives and strategies.
Our Investment Advisor is led by Joseph B. Alala, III, our chief executive officer, chairman of our Board of Directors, and the managing partner and chief investment officer of our Investment Advisor, M. Hunt Broyhill, a member of the Board of Directors and a partner of our Investment Advisor, Stephen A. Arnall, our chief financial officer and chief operating officer, and John F. McGlinn, a managing director of our Investment Advisor. Messrs. Alala, Broyhill and McGlinn serve as our Investment Advisor’s investment committee. They are assisted by nineteen investment professionals.
Our investment adviser’s investment committee, as well as certain key investment team members that are involved in screening and underwriting portfolio transactions, have worked together for more than 15 years. These investment professionals have an average of over 20 years of experience in various finance-related fields, including operations, corporate finance, investment banking, business law and merchant banking, and have collectively developed a broad network of contacts that can offer us investment opportunities. Much of our investment adviser’s investment team has worked together screening opportunities, underwriting new investments and managing a portfolio of investments in lower middle-market and traditional middle-market companies through two recessions, a credit crunch, the dot-com boom and bust and a historic, leverage-fueled asset valuation bubble.
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Corporate Structure and History
Set forth below is a diagram of our current organizational structure:
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(1)
Capitala Finance also owns 100% of the general partners of each of Fund II and Fund III. These general partners do not hold any portfolio investments.
(2)
Includes the investments acquired from Fund I and Fund III Parent through the Formation Transactions.
On May 26, 2017, we issued $50.0 million in aggregate principal amount of 5.75% fixed-rate convertible notes due on May 31, 2022 (the “2022 Convertible Notes”). On June 26, 2017, we issued an additional $2.1 million in aggregate principal amount of the 2022 Convertible Notes pursuant to a partial exercise of the underwriters’ overallotment option. Interest is payable quarterly beginning August 31, 2017. The 2022 Convertible Notes are listed on the NASDAQ Capital Market under the trading symbol “CPTAG” with a par value $25.00 per share.
On May 16, 2017, we issued $70.0 million in aggregate principal amount of 6.0% fixed-rate notes due May 31, 2022 (the “2022 Notes”). On May 25, 2017, we issued an additional $5.0 million in aggregate principal amount of the 2022 Notes pursuant to a partial exercise of the underwriters’ overallotment option. The 2022 Notes will mature on May 31, 2022, and may be redeemed in whole or in part at any time or from time to time at our option on or after May 31, 2019 at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest is payable quarterly beginning August 31, 2017. The 2022 Notes are listed on the NASDAQ Global Select Market under the trading symbol “CPTAL” with a par value $25.00 per share.
On October 17, 2014, the Company entered into a senior secured revolving credit agreement (the “Credit Facility”) with ING Capital, LLC, as administrative agent, arranger, and bookrunner, and the lenders party thereto. The Credit Facility was amended on May 22, 2015, June 16, 2017, July 19, 2018, (the “Amendments”). The Amendments were affected, among other things, in order to increase the total borrowings allowed under the Credit Facility, allow for stock repurchases, extend the maturity date, and to reduce the minimum required interest coverage ratio. The Credit Facility currently provides for borrowings up to $114.5 million and may be increased up to $200.0 million pursuant to its “accordion” feature. The Credit Facility matures on June 16, 2021. As of December 31, 2018, we had $10.0 million outstanding and $104.5 million available under the Credit Facility.
Borrowings under the Credit Facility bear interest, at our election, at a rate per annum equal to (i) the one, two, three or six month LIBOR as applicable, plus 3.00% or (ii) 2.00% plus the highest of  (A) a prime rate, (B) the Federal Funds rate plus 0.5% and (C) three-month LIBOR plus 1.0%. Our ability to elect LIBOR indices with various tenors (e.g., one, two, three or six-month LIBOR) on which the interest rates for borrowings under the Credit Facility are based provides us with increased flexibility to manage interest rate risks as compared to a borrowing arrangement that does not provide for such optionality. Once a
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particular LIBOR rate has been selected, the interest rate on the applicable amount borrowed will reset after the applicable tenor period and be based on the then applicable selected LIBOR rate (e.g., borrowings for which we have elected the one-month LIBOR rate will reset on the one-month anniversary of the period based on the then selected LIBOR rate). For any given borrowing under the Credit Facility, we intend to elect what we believe to be an appropriate LIBOR rate taking into account our needs at the time as well as our view of future interest rate movements. We will also pay an unused commitment fee at a rate of 2.50% per annum on the amount (if positive) by which 40% of the aggregate commitments under the Credit Facility exceeds the outstanding amount of loans under the Credit Facility and 0.50% per annum on any remaining unused portion of the Credit Facility.
Our Portfolio
As of December 31, 2018, the investments in our portfolio were comprised of approximately $343.2 million in debt investments and $105.7 million in equity investments and warrants across 44 portfolio companies. The debt investments in our portfolio had a weighted average annualized yield of approximately 11.9% as of December 31, 2018, which includes a cash component of approximately 11.4% and a payment-in-kind (“PIK”) interest component of approximately 0.5%. PIK interest represents contractually deferred interest added to the investment balance that is generally due at the end of the investment term and recorded as income on an accrual basis to the extent such amounts are expected to be collected.
As of December 31, 2018, the debt investments in our portfolio had a weighted average time to maturity of 2.4 years. Our debt investments have structural protections, including default penalties, information rights, affirmative, negative and financial covenants, such as lien protection and prohibitions against change of control and, as needed, intercreditor agreements to protect second lien positions.
The following charts summarize our portfolio mix of investments by security type, industry and region based on fair value as of December 31, 2018.
Mix of Investments by Security Type
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Mix of Investments by Industry
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Mix of Investments by Region
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Recent Developments
Distributions
On January 2, 2019 our Board of Directors declared the following distributions:
Date Declared
Record Date
Payment Date
Distributions
per Share
January 2, 2019
January 24, 2019
January 30, 2019
$ 0.0833
January 2, 2019
February 20, 2019
February 27, 2019
$ 0.0833
January 2, 2019
March 21, 2019
March 28, 2019
$ 0.0833
On April 1, 2019 our Board declared the following distributions:
Date Declared
Record Date
Payment Date
Distributions
per Share
April 1, 2019
April 22, 2019
April 29, 2019
$ 0.0833
April 1, 2019
May 23, 2019
May 30, 2019
$ 0.0833
April 1, 2019
June 20, 2019
June 27, 2019
$ 0.0833
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Portfolio Activity
On January 4, 2019, the Company invested $9.2 million in first lien debt and $0.9 million in membership units of Reliant Account Management, LLC.
On February 1, 2019, the Company invested $3.8 million in second lien debt of AAE Acquisition, LLC.
On February 27, 2019, the Company sold its warrants in B&W Quality Growers, LLC for $5.9 million.
Borrowings
On February 22, 2019, the Company completed an amendment to its Credit Facility that reduced its minimum net asset value to $150.0 million and reduced the minimum required asset coverage ratio to 2:1 debt-to-equity.
On March 1, 2019, the Company prepaid $15.7 million in outstanding SBA debentures for Fund II and relinquished the related SBIC license.
Market Opportunity
We believe that the current credit environment provides significant opportunities to achieve attractive risk-adjusted returns on the types of cash flow-based loans to lower and traditional middle-market companies that we intend to make. In particular, we believe that due to factors affecting lending institutions (including but not limited to consolidation, capital constraints and regulatory changes) and the failure of non-bank financing vehicles during and immediately following the 2008 – 2009 recession, demand for financing from lower and traditional middle-market companies exceeds, and will continue to exceed, the investment capacity of lenders that have traditionally served this market. We review investment opportunities throughout the United States. Based on our location and the 20-year track record of our investment adviser’s investment team, we target our business development efforts in the Southeast, Southwest and Mid-Atlantic capital markets.
We believe that the following characteristics of the current credit markets combined with certain long-term trends associated with lending to lower and traditional middle-market companies provide a strong market environment.

Strong Demand For Capital Coupled with Fewer Providers.   We believe there has been a combination of growing demand for capital and an underserved market for capital addressing lower and traditional middle-market borrowers. We believe there is robust demand for both continued growth capital and refinancing capital as debt facilities become due at a time when there is a significant lack of willing and qualified capital providers. We believe these market conditions have been further exacerbated in the current environment due to:

Recent domestic and international regulatory changes, including Basel III and Federal Reserve regulations, have resulted in the contraction of banks’ lending capacities and a related de-emphasis on product offerings to lower and traditional middle-market companies;

the elimination of many specialized lenders from the market due to lack of capital as a result of various factors including the shrinking of the securitization market or their own poor performance; and

the need for certain remaining capital providers to reduce lending activities due to reduced access to capital and the overall deleveraging of the financial market.

More Conservative Deal Structures and Attractive Return Profiles.   As a result of traditional lenders having been hurt by loans underwritten prior to the 2008 – 2009 economic recession, borrowers have generally been required to maintain more equity as a percentage of their total capitalization. With more conservative capital structures, middle market companies have exhibited higher levels of cash flows available to service their debt. In addition, middle market companies often are characterized by simpler capital structures than larger borrowers, which facilitates a streamlined underwriting process.
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Further, the withdrawal of many traditional senior lenders from the market, combined with reduced leverage levels and a restoration of prudent loan conditions and covenant levels, allows for specialty finance companies making unitranche and cash flow-based senior or subordinated loans to charge premium risk-adjusted pricing, while subordinated only to a modest amount of senior asset-based debt (if not maintaining first lien senior secured positions over the loan collateral provided by the borrowers).

Underserved Capital Markets.   We believe that the Southeast, Southwest and Mid-Atlantic capital markets are less-served than other larger, more mature capital markets (i.e., the Northeast, Midwest and West Coast). Likewise, we believe that the impact of credit contraction as a result of lender consolidation, departure or refocusing will continue to disproportionately impact the lower and traditional middle-market companies that the Legacy Funds have supported since 2000.
Our Competitive Advantages
We believe that we are well positioned to take advantage of investment opportunities in lower and traditional middle-market companies due to the following competitive advantages:

Focus on Seasoned, Lower and Traditional Middle-Market Companies in Underserved Capital Markets.   Most of our capital is invested in companies that need growth capital, acquisition financing or funding to recapitalize or refinance existing debt facilities. We generally seek to avoid investing in high-risk, early-stage enterprises that are only beginning to develop their market share or build their management and operational infrastructure. We believe our target portfolio companies are generally considered too small for, or remote from, large, competitive capital markets, or in underserved industries or sectors. Further, we anticipate that some investments will require our industry-specific knowledge and expertise. As a result, we believe we can negotiate loan terms that typically will possess better risk-adjusted return profiles than loan terms to larger, more mainstream companies. While we will consider investment opportunities from anywhere in the United States and we recognize the importance of geographic diversification, we continue to focus on smaller, underserved capital markets. We are headquartered in Charlotte, North Carolina, and have offices in Raleigh, North Carolina; Fort Lauderdale, Florida, Atlanta, Georgia, Los Angeles, California, New York, New York, and Dallas, Texas. We have a historical track record with numerous investment firms and deal sources across the Southeast, Southwest and Mid-Atlantic regions. We believe we are well positioned to continue to source high quality investment opportunities throughout these regions.

Flexible, Customized Financing Solutions to Provide Attractive Risk-Adjusted Returns.   Based on our prior experience, we can offer our portfolio companies (and their financial sponsors) a variety of attractive bespoke financing structures to meet their capital needs. We expect to continue to focus on first lien, second lien and subordinated debt investments, coupled with equity interests, either in the form of detachable “penny” warrants or equity co-investments made pari passu with financial sponsors. As of December 31, 2018, the weighted average annualized yield of our debt investments was approximately 11.9%, which includes a cash component of approximately 11.4% and a PIK interest component of approximately 0.5%. Additional information regarding our portfolio is set forth under “Portfolio Companies” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in the schedule of investments and the related notes thereto included in this prospectus.

Disciplined Underwriting Policies and Rigorous Portfolio Management.   We pursue rigorous due diligence of all prospective investments regardless of whether a potential investment was sourced directly by our investment adviser or we are invited to invest as part of a lending syndicate. Our investment adviser’s investment team has developed an extensive underwriting due diligence process, which includes a review of the operational, financial, legal and industry performance and outlook for the prospective investment, including quantitative and qualitative stress tests, review of industry data and analyst coverage and consultation with outside experts regarding the creditworthiness of the borrower and the potential equity upside. These processes continue during the portfolio monitoring process, when our investment adviser will conduct field examinations, review all compliance certificates and covenants and regularly assess the financial and business conditions and prospects of portfolio companies.
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Lower-Cost SBA-Guaranteed Debentures.   As licensed SBICs, our wholly owned subsidiaries, Fund II and Fund III, have issued fixed low-interest rate, long-term debentures that are guaranteed by the SBA, securitized, and ultimately sold in the capital markets. We believe these lower-cost existing debentures and any additional SBA-guaranteed debentures we may be permitted to issue in the future will allow us to increase our net interest income beyond the level that would otherwise be attainable without such leverage or by solely utilizing traditional higher-cost leverage obtained from conventional financial institutions. On June 10, 2014, we received an exemptive order from the SEC granting relief from the asset coverage requirements for certain indebtedness issued by Fund II and Fund III as SBICs.

Established Direct Origination Platform with Extensive Deal Sourcing Infrastructure.   Our investment adviser’s investment team has reviewed, on average, over 800 investment opportunities per year since 2008. We anticipate that our principal source of investment opportunities will continue to be sell-side intermediaries and private equity sponsors investing in the same types of lower and traditional middle-market companies in which we seek to invest. We believe our investment adviser’s track record, extensive experience in multiple industries and investments with multiple private equity sponsors have strengthened our relationships with private equity sponsors and will lead to new ones. Our investment adviser’s investment team seeks to leverage its extensive network of additional referral sources, including law firms, accounting firms, financial, operational and strategic consultants and financial institutions, with whom we have previously completed investments. All these relationships should continue to enable us to review a significant amount of high quality, direct (or non-brokered) deal flow, lead to a stable, continuing source of high quality investment opportunities, and provide significant benefits to our investments, such as more thorough due diligence, an additional primary layer of investment monitoring and management and a backup source of additional equity funding. In the future, we may co-invest with investment funds, accounts and vehicles managed by our Investment Advisor or its affiliates when doing so is consistent with our investment strategy as well as applicable law and SEC staff interpretations. We generally will only be permitted to co-invest with such investment funds, accounts and vehicles where the only term that is negotiated is price. On June 1, 2016, the SEC issued an exemptive order permitting us and certain of our affiliates, to co-invest together in portfolio companies subject to certain conditions included therein. We expect that this order will permit greater flexibility to negotiate the terms of co-investments with investment funds, accounts and investment vehicles managed by our Investment Advisor or its affiliates in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors.

Experienced Management Team with Proven Track Record.   We believe that our investment adviser’s investment team is one of the leading capital providers to lower and traditional middle-market companies in the Southeast, Southwest and Mid-Atlantic regions. Since their respective formations in 1998, 2002 and 2007 until the closing of our IPO on September 30, 2013, Fund I, Fund II and Fund III had invested in excess of  $46.9 million, $151.7 million and $278.9 million in 79, 117, and 78 transactions, respectively. As of the closing of our IPO, approximately $9.1 million, $9.6 million and $15.7 million of distributions and/or invested capital, as the case may be, had been paid to investors, and at the time of the IPO, approximately $4.2 million, $26.2 million and $75 million of funded capital remained outstanding in Fund I, Fund II and Fund III, respectively. Fund I, Fund II and Fund III were generally invested in the same types of portfolio investments that we target. Our investment adviser’s investment committee, as well as certain key investment team members that are involved in screening and underwriting portfolio transactions, have worked together for more than 15 years, and have an average of over 20 years of experience in finance-related fields. These five investment professionals have worked together screening opportunities, underwriting new investments in, and managing a portfolio of, investments in lower and traditional middle-market companies through two recessions, a credit crunch, the dot-com boom and bust and a historic, leverage-fueled asset valuation bubble. Moreover, the investment team has refined its investment strategy through the
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sourcing, reviewing, executing and monitoring of 134 portfolio companies totaling more than $1.4 billion of invested capital through December 31, 2018. Each member brings a complementary component to a team well-rounded in finance, accounting, operations, strategy, business law and executive management.
Summary Risk Factors
An investment in our securities involves risk, including the risk of leverage and the risk that our operating policies and strategies may change without prior notice to our stockholders or prior stockholder approval. See “Risk Factors” and the other information included in this prospectus, any applicable prospectus supplement or any related free writing prospectus for a discussion of factors you should carefully consider before deciding to invest in our securities. The value of our assets, as well as the market price of our securities, will fluctuate. Our investments may be risky, and you may lose all or part of your investment in Capitala Finance. We primarily invest in securities that are rated below investment grade, or would be rated below investment grade if they were rated, and these securities are commonly referred to as “junk bonds” and have predominantly speculative investment characteristics. Investing in Capitala Finance involves other risks, including the following:

We have a limited operating history as a BDC.

Our investment portfolio is recorded at fair value, with our Board of Directors having final responsibility for overseeing, reviewing and approving, in good faith, its estimate of fair value and, as a result, there may be uncertainty as to the value of our portfolio investments.

We depend upon Capitala Investment Advisors’ key personnel for our future success.

We operate in a highly competitive market for investment opportunities, which could reduce returns and result in losses.

Regulations governing our operation as a BDC affect our ability to raise additional capital and the way in which we do so. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage.

We borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us, and the calculation of our base management fee based upon our gross assets may have the effect of encouraging our investment adviser to utilize leverage when it may not be advisable to do so.

To the extent we borrow money to finance our investments, changes in interest rates will affect our cost of capital and net investment income.

A disruption in the capital markets and the credit markets could impair our ability to raise capital and negatively affect our business.

We may experience fluctuations in our quarterly and annual results.

We will be subject to corporate-level U.S. federal income tax if we are unable to qualify or maintain our qualification for tax treatment as a RIC under the Code.

We cannot predict how tax reform legislation will affect us, our investments, or our stockholders, and any such legislation could adversely affect our business.

Our investment adviser is not obligated to reimburse us for any part of the incentive fee it receives from us that is based on accrued income that we never receive.

The failure in cyber security systems, as well as the occurrence of events unanticipated in the Company’s disaster recovery systems and management continuity planning could impair the Company’s ability to conduct business effectively.

Efforts to comply with Section 404 of the Sarbanes-Oxley Act involve significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley Act may adversely affect us and the market price of our common stock.
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An investment strategy focused primarily on smaller privately held companies involves a high degree of risk and presents certain challenges, including the lack of available information about these companies, a dependence on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability to economic downturns.

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

We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer.

Our portfolio may be concentrated in a limited number of industries, which may subject us to a risk of significant loss if there is a downturn in a particular industry in which a number of our investments are concentrated.

The market price of our common stock may fluctuate significantly.

Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock.

The net asset value per share of our common stock may be diluted if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock.
Operating and Regulatory Structure
Capitala Finance is a Maryland corporation that is an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. Capitala Finance’s wholly owned SBIC subsidiaries, Fund II and Fund III, have also elected to be treated as BDCs under the 1940 Act. As a BDC, we are required to meet regulatory tests, including the requirement to invest at least 70% of our gross assets in “qualifying assets.” Qualifying assets generally include securities of private or thinly traded public U.S. companies and cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. See “Regulation as a Business Development Company.” In addition to our existing SBA-guaranteed debentures, we may, if permitted by regulation, seek to issue additional SBA-guaranteed debentures as well as other forms of leverage and borrow funds to make investments. In addition, we have elected to be treated for U.S. federal income tax purposes, and intend to qualify annually thereafter, as a RIC under Subchapter M of the Code. See “Certain U.S. Federal Income Tax Considerations.”
Our investment activities are managed by Capitala Investment Advisors and supervised by our Board of Directors. Capitala Investment Advisors is an investment adviser that is registered under the Investment Advisers Act of 1940, as amended, or the Advisers Act. Under our investment advisory agreement, which we refer to as the Investment Advisory Agreement, we have agreed to pay Capitala Investment Advisors an annual base management fee based on our gross assets as well as an incentive fee based on our performance. See “Investment Advisory Agreement.” We have also entered into an administration agreement, which we refer to as the Administration Agreement, under which we have agreed to reimburse our administrator for our allocable portion of overhead and other expenses incurred by our administrator in performing its obligations under the Administration Agreement, including furnishing us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities, as well as providing us with other administrative services. See “Administration Agreement.”
Joseph B. Alala, III, our chief executive officer and chairman of our Board of Directors, is the managing partner and chief investment officer of Capitala Investment Advisors and is the chief executive officer, president and a director of our administrator.
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Our Corporate Information
Our executive offices are located at 4201 Congress Street, Suite 360, Charlotte, North Carolina 28209, our telephone number is (704) 376-5502 and our website may be found at http://www.capitalagroup.com. Information contained on our website or on the SEC’s website about us is not incorporated into this prospectus and you should not consider information contained on our website or on the SEC’s website to be part of this prospectus.
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THE OFFERING
We may offer, from time to time, up to $500,000,000 of our common stock, preferred stock, debt securities, subscription rights to purchase shares of our common stock, or warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, on terms to be determined at the time of each offering. We will offer our securities at prices and on terms to be set forth in one or more supplements to this prospectus. The offering price per share of our securities, less any underwriting commissions or discounts, generally will not be less than the net asset value per share of our securities at the time of an offering. However, we may issue securities pursuant to this prospectus at a price per share that is less than our net asset value per share (i) in connection with a rights offering to our existing stockholders, (ii) with the prior approval of the majority (as defined in the 1940 Act) of our common stockholders or (iii) under such other circumstances as the SEC may permit. Any such issuance of shares of our common stock below net asset value may be dilutive to the net asset value of our common stock. See “Risk Factors — Risks Relating to Offerings Pursuant to this Prospectus”.
Our securities may be offered directly to one or more purchasers, including existing stockholders in a rights offering, through agents designated from time to time by us, or to or through underwriters or dealers. The prospectus supplement relating to an offering will identify any agents or underwriters involved in the sale of our securities, and will disclose any applicable purchase price, fee, commission or discount arrangement between us and our agents or underwriters or among our underwriters or the basis upon which such amount may be calculated. See “Plan of Distribution”. We may not sell any of our securities through agents, underwriters or dealers without delivery of this prospectus and a prospectus supplement describing the method and terms of the offering of securities.
Set forth below is additional information regarding offerings of securities pursuant to this prospectus:
Use of Proceeds
Unless otherwise specified in a prospectus supplement, we plan to use the net proceeds from the sale of our securities pursuant to this prospectus for new investments in portfolio companies in accordance with our investment objective and strategies described in this prospectus and for general working capital purposes. We will also pay operating expenses, including advisory and administrative fees and expenses, and may pay other expenses such as due diligence expenses of potential new investments, from the net proceeds from the sale of our securities pursuant to this prospectus. Proceeds not immediately used for new investments will be invested in cash, cash equivalents, U.S. government securities and other high-quality investments that mature in one year or less from the date of the investment. These securities may have lower yields than the types of investments we would typically make in accordance with our investment objective and, accordingly, may result in lower distributions, if any during such period. Each prospectus supplement to this prospectus or free writing prospectus relating to an offering will more fully identify the use of the proceeds from such offering. See “Use of Proceeds”.
NASDAQ Global Select Market Symbol of Common Stock
“CPTA”
NASDAQ Global Select Market Symbol of 2022 Notes
“CPTAL”
NASDAQ Capital Market Symbol of 2022 Convertible Notes
“CPTAG”
Investment Advisory Fees
We will pay Capitala Investment Advisors a fee for its services under the Investment Advisory Agreement consisting of two components — a base management fee and an incentive fee. The
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base management fee is calculated at an annual rate of 1.75% of our gross assets, which is our total assets as reflected on our balance sheet and includes any borrowings for investment purposes. Although we do not anticipate making significant investments in derivative financial instruments, the fair value of any such investments, which will not necessarily equal their notional value, will be included in our calculation of gross assets.
The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20.0% of our “pre-incentive fee net investment income” for the immediately preceding quarter, subject to a 2.0% preferred return, or “hurdle,” and a “catch up” feature. The second part is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement) in an amount equal to 20.0% of our realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.
We will defer cash payment of the portion of the aggregate incentive fees earned by our investment adviser that exceed 20% of the sum of the following:

our pre-incentive fee net investment income;

our net unrealized appreciation or depreciation; and

our net realized capital gains or losses,
during the most recent 12 full calendar month period ending on or prior to the date such payment is to be made. Any deferred incentive fees will be carried over for payment in subsequent calculation periods to the extent such payment is payable under the Investment Advisory Agreement. The determination of whether such payment is payable in subsequent calculation periods will be based on the same methodology as described above.
On January 4, 2016, Capitala Investment Advisors voluntarily agreed to waive all or such portion of the quarterly incentive fees earned by Capitala Investment Advisors that would otherwise cause the Company’s quarterly net investment income to be less than the distribution payments declared by the Company’s Board of Directors. Quarterly incentive fees are earned by Capitala Investment Advisors pursuant to the Investment Advisory Agreement. Incentive fees subject to the waiver cannot exceed the amount of incentive fees earned during the period, as calculated on a quarterly basis. Capitala Investment Advisors will not be entitled to recoup any amount of incentive fees that it waives. This waiver was effective in the fourth quarter of 2015 and will continue unless otherwise publicly disclosed by the Company. See “Investment Advisory Agreement” for an example of when a deferral of the incentive fee will occur.
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Administration Agreement
We will reimburse our administrator for our allocable portion of overhead and other expenses it incurs in performing its obligations under the Administration Agreement, including furnishing us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities, as well as providing us with other administrative services. In addition, we will reimburse our administrator for the fees and expenses associated with performing compliance functions, and our allocable portion of the compensation of our chief financial officer, chief compliance officer and their respective administrative support staff. For the fiscal year ended December 31, 2018, we reimbursed our administrator an aggregate of  $1.4 million, which represents approximately 0.3% of our gross assets. See “Administration Agreement.”
Distributions
To the extent that we have income available, we intend to make monthly distributions to our stockholders. Our monthly stockholder distributions, if any, will be determined by our Board of Directors on a quarterly basis. Any distribution to our stockholders will be declared out of assets legally available for distribution. Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital, which is a return of a portion of a shareholder’s original investment in our common stock, to the extent of an investor’s basis in our stock and, assuming that an investor holds our stock as a capital asset, thereafter as a capital gain. Generally, a non-taxable return of capital will reduce an investor’s basis in our stock for federal tax purposes, which will result in higher tax liability when the stock is sold.
Taxation
We have elected to be treated for U.S. federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. To maintain our RIC tax treatment, we must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. See “Price Range of Common Stock and Distributions” and “Certain U.S. Federal Income Tax Considerations.”
Dividend Reinvestment Plan
We have adopted an “opt out” dividend reinvestment plan. If your shares of common stock are registered in your own name, your distributions will automatically be reinvested under our dividend reinvestment plan in additional whole and fractional shares of common stock, unless you “opt out” of our dividend reinvestment plan so as to receive cash dividends by delivering a written notice to our dividend paying agent. If your shares are held in the name of a broker or other nominee, you should contact the broker or nominee for details regarding opting out of our dividend reinvestment plan. Stockholders who receive
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distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. See “Dividend Reinvestment Plan.”
Trading at a Discount
Shares of closed-end investment companies frequently trade at a discount to their net asset value. The possibility that our common stock may trade at a discount to its net asset value per share is separate and distinct from the risk that its net asset value per share may decline. We cannot predict whether our common stock will trade above, at or below net asset value.
License Agreement
We have entered into a license agreement with Capitala Investment Advisors, pursuant to which Capitala Investment Advisors has agreed to grant us a non-exclusive, royalty-free license to use the name “Capitala.” See “License Agreement.”
Leverage
We expect to continue to use leverage to make investments. As a result, we may continue to be exposed to the risks of leverage, which include that leverage may be considered a speculative investment technique. The use of leverage magnifies the potential for gain and loss on amounts we invest and therefore, indirectly, increases the risks associated with investing in shares of our common stock. See “Risk Factors.”
Certain Anti-Takeover
Provisions
Our charter and bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third-party from making an acquisition proposal for us. These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price for our common stock. See “Description of Our Capital Stock.”
Available Information
We have filed with the SEC a registration statement on Form N-2 together with all amendments and related exhibits under the Securities Act. The registration statement contains additional information about us and the securities being offered by this prospectus.
We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This information will be available free of charge by contacting us at Capitala Finance Corp., 4201 Congress Street, Suite 360, Charlotte, North Carolina 28209, by telephone at (704) 376-5502, on our website at http://www.capitalagroup.com, or on the SEC’s website at www.sec.gov. Information contained on our website or on the SEC’s website about us is not incorporated into this prospectus and you should not consider information contained on our website or on the SEC’s website to be part of this prospectus.
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Incorporation of certain information by reference
This prospectus is part of a registration statement that we have filed with the SEC. In accordance with the Small Business Credit Availability Act, we are allowed to “incorporate by reference” the information that we file with the SEC, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to comprise a part of this prospectus from the date we file that document. Any reports filed by us with the SEC subsequent to the date of this prospectus and before the date that any offering of any securities by means of this prospectus and any accompanying prospectus supplement is terminated will automatically update and, where applicable, supersede any information contained in this prospectus or incorporated by reference in this prospectus. See “Incorporation of Certain Information by Reference.”
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FEES AND EXPENSES
The following table is intended to assist you in understanding the costs and expenses that you will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by “you”, “Capitala Finance”, or “us” or that “we” or “Capitala Finance” will pay fees or expenses, Capitala Finance will pay such fees and expenses out of our net assets and, consequently, you will indirectly bear such fees or expenses as an investor in Capitala Finance. However, you will not be required to deliver any money or otherwise bear personal liability or responsibility for such fees or expenses.
Stockholder transaction expenses:
Sales load (as a percentage of offering price)
N/A(1)
Offering expenses borne by us (as a percentage of offering price)
N/A(2)
Dividend reinvestment plan fees (per sales transaction fee)
$ 15.00(3)
Total stockholder transaction expenses (as a percentage of offering price)
%
Annual expenses (as a percentage of net assets attributable to common stock):
Base management fee
4.29%(4)
Incentive fees payable from Net Investment Income
0.12%(5)
Incentive fee payable from Capital Gains
%(5)
Interest payments on borrowed funds
6.76%(6)
Other expenses
2.23(7)
Acquired funds fees and expenses
0.03%(8)
Total annual expenses
13.43%(9)
(1)
In the event that the shares to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will disclose the applicable sales load.
(2)
The prospectus supplement corresponding to each offering will disclose the applicable estimated amount of offering expenses of the offering and the offering expenses borne by us as a percentage of the offering price.
(3)
If a participant elects by written notice to the plan administrator to have the plan administrator sell part or all of the shares held by the plan administrator in the participant’s account and remit the proceeds to the participant, the plan administrator is authorized to deduct a transaction fee of  $15.00 plus a $.10 per share brokerage commission from the proceeds. The expenses of the dividend reinvestment plan are included in “other expenses.” The plan administrator’s fees will be paid by us. There will be no brokerage charges or other charges to stockholders who participate in the plan. For additional information, see “Dividend Reinvestment Plan.”
(4)
Reflects our gross base management fee as a percentage of net assets. Our base management fee under the Investment Advisory Agreement is calculated at an annual rate of 1.75% of our gross assets, which is our total assets as reflected on our balance sheet and includes any borrowings for investment purposes. The gross base management fee reflected in the table above is based on the fiscal year ended December 31, 2018. See “Investment Advisory Agreement.”
(5)
Assumes that annual incentive fees earned by Capitala Investment Advisors remain consistent with the incentive fees earned by Capitala Investment Advisors during the fiscal year ended December 31, 2018 and includes accrued capital gains incentive fee. As of December 31, 2018, Capitala Investment Advisors has accrued no capital gains incentive fee. As we cannot predict whether we will meet the thresholds for incentive fees under the Investment Advisory Agreement, the incentive fees paid in subsequent periods, if any, may be substantially different than the fees incurred during the fiscal year ended December 31, 2018.
On January 4, 2016, Capitala Investment Advisors voluntarily agreed to waive all or such portion of the quarterly incentive fees earned by Capitala Investment Advisors that would otherwise cause the
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Company’s quarterly net investment income to be less than the distribution payments declared by the Company’s Board of Directors. Quarterly incentive fees are earned by Capitala Investment Advisors pursuant to the Investment Advisory Agreement. Incentive fees subject to the waiver cannot exceed the amount of incentive fees earned during the period, as calculated on a quarterly basis. Capitala Investment Advisors will not be entitled to recoup any amount of incentive fees that it waives. This waiver was effective in the fourth quarter of 2015 and will continue unless otherwise publicly disclosed by the Company. However, because this is a voluntary waiver that is not guaranteed to last indefinitely, the incentive fee reflected in the above table is presented on a gross basis and does not take into account the voluntary fee waiver. For more detailed information about the incentive fee calculations, see the “Investment Advisory Agreement” section of this prospectus.
(6)
In addition to our existing SBA-guaranteed debentures, 2022 Notes, and 2022 Convertible Notes, we may borrow funds from time to time to make investments to the extent we determine that additional capital would allow us to take advantage of additional investment opportunities or if the economic situation is otherwise conducive to doing so. The costs associated with any borrowings are indirectly borne by our stockholders. As of December 31, 2018, we had approximately $75.0 million of 2022 Notes, and $52.1 million of Convertible Notes outstanding. For purposes of this calculation, we have assumed that the December 31, 2018 amounts of 2022 Notes and 2022 Convertible Notes remain outstanding, and have computed interest expense using an assumed interest rate of 6.0% for the 2022 Notes, and 5.75% for the 2022 Convertible Notes which were the rates payable as of December 31, 2018. We have assumed $150.0 million of SBA guaranteed debentures outstanding, reflective of the $15.7 million repayment on March 1, 2019. We have computed interest expense using an assumed interest rate of 3.56%. We have also assumed borrowings of  $25.0 million under the Credit Facility at an interest rate equal to 5.6% per annum. See “Senior Securities” in this prospectus.
(7)
“Other expenses” include our overhead expenses, including payments by us under the Administration Agreement based on the allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations to us under the Administration Agreement, and expenses relating to the Dividend Reinvestment Plan, for the fiscal year ended December 31, 2018.
(8)
The holders of shares of our common stock indirectly bear the expenses of our investment in CSLF II. No management fee is charged on our investment in CSLF II in connection with the administrative services provided to CSLF II. As CSLF II is structured as a private joint venture, no management fees are paid by CSLF II. Future expenses for CSLF II may be substantially higher or lower because certain expenses may fluctuate over time.
(9)
The holders of shares of our common stock indirectly bear the cost associated with our annual expenses.
Example
The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed that our borrowings and annual operating expenses would remain at the levels set forth in the table above. In the event that shares to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will restate this example to reflect the applicable sales load and offering expenses. See Note 6 above for additional information regarding certain assumptions regarding our level of leverage.
1 Year
3 Years
5 Years
10 Years
You would pay the following expenses on a $1,000 investment, assuming
a 5.0% annual return
$ 133 $ 367 $ 564 $ 929
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The example should not be considered a representation of future expenses, and actual expenses may be greater or less than those shown.
While the example assumes, as required by the applicable rules of the SEC, a 5.0% annual return, our performance will vary and may result in a return greater or less than 5.0%. The incentive fee under the Investment Advisory Agreement, which, assuming a 5.0% annual return, would either not be payable or would have an insignificant impact on the expense amounts shown above, is not included in the above example. The above illustration assumes that we will not realize any capital gains (computed net of all realized capital losses and unrealized capital depreciation) in any of the indicated time periods. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our expenses and returns to our investors would be higher. For example, if we assumed that we received our 5.0% annual return completely in the form of net realized capital gains on our investments, computed net of all cumulative unrealized depreciation on our investments, the projected dollar amount of total cumulative expenses set forth in the above illustration would be as follows:
1 Year
3 Years
5 Years
10 Years
You would pay the following expenses on a $1,000 investment, assuming
a 5.0% annual return
$ 143 $ 390 $ 594 $ 958
The example assumes no sales load. However, in the event that the securities to which this prospectus relates are sold with a sales load, a corresponding prospectus supplement will provide a revised expense example that will include the effect of the sales load. In addition, while the examples assume reinvestment of all dividends and distributions at net asset value, participants in our dividend reinvestment plan will receive a number of shares of our common stock, generally determined by dividing the total dollar amount of the dividend payable to a participant by the market price per share of our common stock at the close of trading on the dividend payment date, which may be at, above or below net asset value. See “Dividend Reinvestment Plan” for additional information regarding the dividend reinvestment plan.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial data of the Company is as of and for the fiscal years ended December 31, 2018, 2017, 2016, 2015 and 2014. Financial information for the fiscal years ended December 31, 2018, 2017, 2016, 2015 and 2014 has been derived from our consolidated financial statements that have been audited by Ernst & Young LLP, our independent registered public accounting firm. This consolidated financial data should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this prospectus and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section which follows (dollars in thousands except share and per share data):
For the
year ended
December 31,
2018
For the
year ended
December 31,
2017
For the
year ended
December 31,
2016
For the
year ended
December 31,
2015
For the
year ended
December 31,
2014
Consolidated statements of operations data:
Total investment income
$ 47,293 $ 51,089 $ 68,312 $ 63,976 $ 49,528
Total expenses, net of fee waivers
31,271 35,565 39,272 38,649 29,562
Net investment income
16,022 15,524 29,040 25,327 19,966
Net realized gain/(loss) from investments
(34,804) (24,189) (22,766) 5,436 832
Net unrealized appreciation/(depreciation) on investments and written call option
840 2,970 2,878 (16,913) (24,238)
Tax (provision) benefit
1,916 (1,289)
Net increase/(decrease) in net assets resulting from operations
$ (16,026) $ (6,984) $ 9,152 $ 13,850 $ (3,440)
Per share data:
Net investment income
$ 1.00 $ 0.98 $ 1.84 $ 1.67 $ 1.54
Net increase/(decrease) in net assets resulting from operations
$ (1.00) $ (0.44) $ 0.58 $ 0.91 $ (0.27)
Distributions declared
$ 1.00 $ 1.42 $ 1.80 $ 2.38 $ 1.88
Net asset value per share
$ 11.88 $ 13.91 $ 15.79 $ 17.04 $ 18.56
Consolidated statements of assets and liabilities data:
Total assets
$ 493,165 $ 534,595 $ 584,415 $ 632,818 $ 539,864
Total net assets
$ 190,644 $ 221,887 $ 250,582 $ 268,802 $ 240,837
Other data:
Total return(1)
12.14% (35.68)% 24.07% (20.43)% (0.85)%
Number of portfolio company investments
at period end
44 47 53 57 52
Total portfolio investments for the period
$ 107,802 $ 82,750 $ 120,844 $ 260,640 $ 216,276
Investment repayments for the period
$ 123,517 $ 115,810 $ 163,564 $ 142,713 $ 80,197
(1)
Total investment return is calculated assuming a purchase of common shares at the current market value on the first day and a sale at the current market value on the last day of the period reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions.
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SELECTED QUARTERLY FINANCIAL DATA
The following tables set forth certain quarterly financial information for each of the quarters for the fiscal years ended December 31, 2018 and 2017. This information was derived from our unaudited consolidated financial statements. Results for any quarter are not necessarily indicative of results for the past fiscal year or for any future quarter.
For the quarter ended
(Dollars in thousands, except per share data)
December 31,
2018
September 30,
2018
June 30,
2018
March 31,
2018
Total investment income
$ 11,308 $ 11,530 $ 11,882 $ 12,572
Net investment income
$ 3,501 $ 3,851 $ 4,231 $ 4,438
Net increase (decrease) in net assets resulting from operations
$ (9,201) $ (11,916) $ 4,948 $ 141
Net investment income per share(1)
$ 0.22 $ 0.24 $ 0.26 $ 0.28
Net increase (decrease) in net assets resulting from operations per share(1)
$ (0.57) $ (0.74) $ 0.31 $ 0.01
Net asset value per share at end of period
$ 11.88 $ 12.71 $ 13.71 $ 13.66
For the quarter ended
(Dollars in thousands, except per share data)
December 31,
2017
September 30,
2017
June 30,
2017
March 31,
2017
Total investment income
$ 11,600 $ 12,312 $ 12,362 $ 14,815
Net investment income
$ 4,220 $ 4,410 $ 703 $ 6,191
Net increase (decrease) in net assets from operations
$ (587) $ (5,753) $ (5,525) $ 4,881
Net investment income per share(1)
$ 0.26 $ 0.28 $ 0.04 $ 0.39
Net increase (decrease) in net assets from operations per share(1)
$ (0.04) $ (0.36) $ (0.35) $ 0.31
Net asset value per share at end of period
$ 13.91 $ 14.21 $ 14.97 $ 15.71
(1)
Calculated based on weighted average shares outstanding during the quarter.
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RISK FACTORS
Investing in our securities involves a number of significant risks. In addition to the other information contained in this prospectus, any accompanying prospectus supplement, any related free writing prospectus, and any documents incorporated by reference into this prospectus, you should consider carefully the following information before making an investment in our securities. The risks described in these documents and set out below are not the only risks we face. Additional risks and uncertainties not presently known to us or not presently deemed material by us may also impair our operations and performance. If any of the following events occur, our business, financial condition, results of operations and cash flows could be materially and adversely affected. In such case, our net asset value and the trading price of our securities could decline, and you may lose all or part of your investment. The risk factors described below are the principal risk factors associated with an investment in us as well as those factors generally associated with an investment company with investment objectives, investment policies, capital structure, or trading markets similar to ours.
Risks Relating to Our Business and Structure
We have a limited operating history as a BDC.
Capitala Finance was formed in February 2013 and has only operated as a BDC since September 2013. As a result, we are subject to many of the business risks and uncertainties associated with recently formed businesses, including the risk that we will not achieve our investment objective and that the value of your investment could decline substantially. As a BDC, we are subject to the regulatory requirements of the SEC, in addition to the specific regulatory requirements applicable to BDCs under the 1940 Act and RICs under the Code. Our management and that of our investment adviser, Capitala Investment Advisors, did not have any prior experience operating under this regulatory framework, and we incur substantial costs, and expend significant time or other resources, to operate under this regulatory framework. From time to time, Capitala Investment Advisors may pursue investment opportunities in which it has more limited experience. We may also be unable to replicate the historical performance of prior investment funds managed by our management team. In addition, we may be unable to generate sufficient revenue from our operations to make or sustain distributions to our stockholders.
Our investment portfolio is recorded at fair value, with our Bo