SEEKING TO TRANSFORM EQUUS INTO AN OPERATING COMPANY

Changing Our Status as an Investment Company

Seeking a Transformative Transaction.  In our public filings in recent years, we have noted our intention to pursue an acquisition or merger with an operating company and terminate the Company’s election to be classified as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”).  We are presently evaluating suitable target operating companies which we may acquire or with which we, or a special purpose subsidiary, may merge with or into to complete this restructuring.

Intention to Maintain Exchange Act Reporting Status and NYSE Listing.  Currently, Equus and other BDCs are subject to various provisions of both the 1940 Act as well as the Securities Exchange Act of 1934 (the “Exchange Act”).  If Equus is transformed into an operating company instead of a closed-end fund, the Company will no longer be subject to the 1940 Act but will still be subject to the reporting requirements of the Exchange Act.  This means, for example, that Equus will continue, following the consummation of such a transaction, to file annual, quarterly, and period reports with the SEC on Forms 10-K, 10-Q, and 8-K, respectively.  Further, we intend to ensure that Equus satisfies the continued listing criteria for operating companies pursuant to applicable rules of the New York Stock Exchange.  To this end, we intend to seek potential acquisition or merger candidates with sufficient revenue, earnings, and market capitalization that, when combined with Equus, would enable the Company to meet these listing standards.  However, we cannot guarantee that every candidate with which we may conclude such a transaction will enable us to meet these listing standards, and we may have to list our securities on a different exchange if we are unable to satisfy such listing requirements following our acquisition or merger with an operating company.

Over the past several years, the Company has examined a number of potential transactions in a variety of sectors, including energy, natural resources, containers and packaging, real estate, media, technology, and telecommunications.  These reviews have included consideration of potential strategic transactions to maximize value to shareholders as an operating company not subject to the 1940 Act.  To this end, we have previously received time-limited authorizations from our stockholders to withdraw the Company’s BDC authorization as part of a potential strategic transformation of Equus into an operating company. Although Equus has been previously authorized to withdraw and terminate the Company’s BDC election under the 1940 Act, it will not submit any such withdrawal unless and until Equus has entered into a definitive agreement to acquire an operating company.

Potential Advantages

When considering the relatively small size of our Company, the regulatory compliance restraints placed upon BDCs, and opportunities that Equus may have to expand via the restructuring of Equus into an operating company, organic growth, and retained earnings, we believe that Equus should consider the transformation of the Company into an operating company for the benefit of our stockholders.  In particular, we believe an operating company structure, in lieu of a closed-end fund structure, could be advantageous to the Company in a variety of ways, such as the following:

• Growth and Development Opportunities.  If we become an operating company, we expect to capitalize on growth opportunities through growth and development of our core operating business, as well as by acquisition.  Further, we would expect that Equus will be valued by the investing public based on traditional criteria applicable to operating companies, such as revenue, gross profit, and net earnings instead of net asset value (“NAV”) and the Company’s portfolio investments.

• Lower Proportional Compliance Costs.  Given the relatively small size of our Company at present, should Equus effect a transformation into a much larger operating company, we anticipate lowering our overall compliance-related costs as a percentage of our assets, particularly with the expected elimination of costs associated with compliance with the 1940 Act.

• Increased Flexibility in the Issuance of Common Equity.  Under the 1940 Act, absent stockholder approval, we may not issue new shares of our common stock at a per share price less than our then NAV.  The market prices for shares of BDCs such as Equus are generally lower, often substantially lower, than their NAVs, making it much more difficult for BDCs to raise equity capital than for operating companies.  In the case of the Company, because our stock price has been below our NAV for several years, we have generally been unable to access the equity capital markets to take advantage of opportunities during this period that could, in our view, have generated higher returns than the cost of equity capital.  While the restriction against issuing shares below NAV provides our stockholders an appropriate and meaningful protection against dilution of their indirect investment interest in our portfolio securities, this can also be a significant impediment to our ability to moderately expand or make small acquisitions using our shares.  If Equus did not have this restriction, we would have increased flexibility to issue our common stock, but would nevertheless remain subject to NYSE rules which require stockholder approval for an issuance of common stock that represents more than 20% of our outstanding shares.

• Greater Ability to Issue Other Securities.  BDCs are limited or restricted as to the type of securities other than common stock, such as options, warrants, and preferred stock, which they may issue.  In addition, issuances of senior debt and senior equity securities require that certain “asset coverage” tests and other criteria be satisfied on a continuing basis.  This significantly affects the use of these types of securities.  In the case of debt securities, we are limited in our use of these instruments because asset coverage continuously changes by variations in market prices of the Company’s investment securities.  In the case of equity securities, counterparties and financiers in mergers and acquisitions often require the issuance of preferred equity securities or other equity-linked instruments as an essential component of these transactions.  Operating companies benefit from having maximum flexibility to raise capital and acquire other commercial interests through various financing structures and a wider array of potential financial instruments that may be issued.

• Related Party Transactions.  The 1940 Act significantly restricts, among other things, (a) transactions involving transfers of property between a BDC and affiliated persons (including affiliated persons of such affiliated persons) and (b) joint transactions with a third party involving a BDC and affiliated persons (including affiliated persons of such affiliated persons).  An exemption from these restrictions can be obtained from the SEC, but it is typically a time-consuming and expensive procedure, regardless of the intrinsic fairness of such transaction or the approval thereof by disinterested directors of the BDC.  We believe that situations may arise in which the Company’s best interests are served by such transactions.  Further, we believe that our stockholders are adequately protected by the fiduciary obligations imposed on the Company’s directors under Delaware corporate governance law, which generally requires that the disinterested members of the Board determine fairness to the Company of an interested-party transaction (provided full disclosure of all material facts regarding the transaction and the interested party’s relationship with the Company is made), and SEC disclosure rules, which require the Company to include specified disclosure regarding transactions with related parties in its Exchange Act filings.

• Compensation of Directors and Executive Officers.  The 1940 Act limits the extent to which and the circumstances under which directors and executive officers of a BDC may be paid compensation other than in the form of salary payable in cash.  For example, the issuance of restricted stock is generally prohibited, absent a lengthy exemptive application process with the SEC.  However, we believe that, by achieving greater flexibility in the structuring of director and employee compensation packages, we will be able to attract and retain additional talented and qualified personnel and to more fairly reward and more effectively motivate our personnel.

• Eligible Investments.  BDCs may not acquire any asset other than “qualifying assets” (i.e. securities issued by privately-held or public microcap U.S. companies in certain industries) unless, at the time of the acquisition is made, qualifying assets represent at least 70% of the value of the BDC’s total assets.  If we are able to fully implement a transformational transaction and become an operating company, we will not be subject to these restrictions affecting the type or jurisdiction of assets we may acquire, nor on the composition of our assets, the result of which will be greater flexibility to acquire enterprises in a broader asset class and invest our financial resources in a wider range of opportunities in more diverse geographies and industries.

Potential Risks

If we withdraw the Company’s election to be treated as a BDC and become an operating company, Equus will no longer be subject to regulation under the 1940 Act, which is designed to protect the interests of investors in investment companies.  Some of the items listed above that would provide advantages to Equus as an operating company, would also present certain risks to our shareholders, inasmuch as stockholders would no longer have the following protections of the 1940 Act:

• Leverage Limits.  We would no longer be subject to the requirement in Section 61 of the 1940 Act that we maintain a ratio of assets to senior securities (such as senior debt or preferred stock) of at least 150% and we would not be limited by statute or regulation to the amount of leverage we could incur.

• Range of Investments.  We would no longer be prohibited from investing in certain types of companies, such as brokerage firms, insurance, companies, and investment companies.

• Changes in Financial Reporting.  While the conversion of Equus into an operating company will enable us to consolidate the financial results of entities we control, a change in our method of accounting could also reduce the reported value of our investments in controlled privately-held companies by eliminating our ability to report an increase in the fair value of these holdings.

• Protection of Directors and Officers.  We would no longer be prohibited from protecting any director or officer against any liability to the Company or our stockholders arising from willful malfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of that person’s office, although there are similar limitations under Delaware law, our Certificate of Incorporation, and our Bylaws that would still apply.

• Fidelity Bond.  We would no longer be required to provide and maintain an investment company blanket bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement.

• Director Independence.  We would no longer be required to ensure that a majority of our directors are persons who are not “interested persons,” as that term is defined in the 1940 Act, and certain persons, such as investment bankers, that would be prevented from serving on our Board if we were a BDC.  However, assuming we can comply with the NYSE’s listing standards for operating companies, we will remain subject to NYSE listing standards that require the majority of directors of a listed company and all members of its compensation, audit and nominating committees to be “independent” as defined under NYSE rules.

• Affiliate Transactions.  We would no longer be subject to provisions of the 1940 Act regulating transactions between BDCs and certain affiliates, although we would still be subject to conflict of interest rules and governance procedures that exist under Delaware law and NYSE rules.

• Share Issuances.  We would no longer be subject to provisions of the 1940 Act restricting our ability to issue shares below NAV or in exchange for services, nor would we be restricted in issuing more than one class of equity securities or instruments that could be converted into other classes of equity securities.

• Share Repurchases.  We would no longer be restricted under the 1940 Act in our ability to repurchase shares from our stockholders, and would instead be subject only to NYSE rules and Delaware corporate law requirements for such repurchases.

• Change of Business.  We would be able to change the nature of our business and fundamental investment policies without having to obtain the approval of our stockholders.

• Director and Officer Incentives.  We would no longer require exemptive relief from the SEC before implementing incentive compensation plans for our key executives and non-executive directors.

Effect on Financial Reporting

If we effect the withdrawal of our election to be treated as a BDC and complete the transformation of Equus into an operating company, our accounting methods will undergo substantial changes.  As a BDC, our financial statements are presented and accounted for under the specialized method of accounting applicable to investment companies, which requires us to recognize our investments, including controlled investments, at fair value.  As a BDC, we are generally precluded from consolidating the operational results of our controlled and wholly-owned subsidiaries.

As an operating company, we will be required to account for investments based on the degree of control or influence we can exert over the entity and, therefore, will be required to consolidate controlled entities and use either the equity method of accounting, fair value option or historical cost method of accounting for the financial statement presentation and accounting of other securities held.  Following the consummation of a transformative transaction, we expect to consolidate the operational results in entities we control including, for example, our investment in Equus Energy, and elect the fair value option for our investments in other securities.  Accordingly, the change in our accounting method could have a material impact on the presentation of our financial statements commencing on the day we withdraw our BDC election.

Effect on Tax Reporting

In addition to our BDC election, we currently qualify as a regulated investment company (“RIC”) for federal income tax purposes and, therefore, are not required to pay corporate income taxes on any income or gains that we distribute to our stockholders.  If we cease to be treated as a BDC and instead become an operating company, we will not qualify as a RIC.  We will then become subject to corporate level federal income tax on our income (without regard to any distributions we make to our stockholders) pursuant to Subchapter C of the Internal Revenue Code.  As a consequence, any distributions we make to our stockholders will be net of federal income tax owing by the Company, and our stockholders will further be subject to federal income tax in connection with the receipt of such distributions.

Process and Conditions of Withdrawing our BDC Election

Assuming that a suitable merger or acquisition candidate for Equus can be secured and a definitive agreement can be executed, we anticipate gaining approval from our stockholders to file with the SEC a Notice of Withdrawal of our BDC election.  The Notice of Withdrawal, if and when filed, will immediately terminate the Company’s status as a BDC under the 1940 Act.  Our intention is to file the Notice of Withdrawal shortly before we complete a transformative transaction, but we will not file the Notice of Withdrawal until we are reasonably certain that Equus will not be deemed to be an investment company without the protection of its BDC election.

After we file the Notice of Withdrawal with the SEC, the Company will no longer be subject to the regulatory provisions of the 1940 Act applicable to BDCs, including regulations related to insurance, custody, composition of our Board of Directors, affiliated transactions and any compensation arrangements.

Anticipated Timeline

As discussed above, we are presently evaluating various possible merger and acquisition candidates and transaction structures by which we may effect the transformation of Equus into an operating company.  In order to enter into a binding agreement that would, if consummated, result in such a transformation, we will seek authorization from our shareholders to withdraw our BDC election.  Once this authorization has been provided, we believe that we can more actively consider and possibly move toward the negotiation, production, and execution of a definitive agreement that embodies the transformation of Equus from a closed-end fund into an operating company.  We expect that any such agreement will be subject to a number of conditions to closing and, therefore, the timing of such closing is presently uncertain.  We will, however, not file the Notice of Withdrawal unless and until we are reasonably certain that the closing of such a transaction will occur within a relatively short time after filing.