Why Invest in a Non-Traded Business Development Company?

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1 Why Invest in a Non-Traded Business Development Company? This literature must be read in conjunction with the prospectus in order to fully understand all of the implications and risks of the offering of securities to which the prospectus relates. A copy of the prospectus must be made available to you in connection with any offering. No offering is made except by a prospectus filed with the Department of Law of the State of New York. This is neither a solicitation of an offer to buy the securities described herein, which can only be made by the prospectus. Neither the Securities and Exchange Commission, the Attorney General of the State of New York nor any other state securities regulator has approved or disapproved of this offering or determined if the prospectus is truthful and complete. Any representation to the contrary is a criminal offense.

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3 Why Invest in a Non-Traded Business Development Company? 01 Business development companies (BDCs) are pooled investment vehicles that offer investors the potential for income and growth from debt and equity investments in private and some public U.S. companies. BDCs were created by Congress in 1980 to provide capital to these companies and to offer assistance in improving their management and operations. Thus, these companies receive the capital and expertise of professional fund managers with years of experience and investors have the opportunity to invest in funds with unique investment opportunities not available elsewhere. While BDCs are publicly registered companies, they have the option to list or not list their shares on a national exchange. 1, 2 Traditionally, investments made by BDCs have been available only to large institutional funds and sophisticated, high-net-worth individuals. BDCs may provide the potential for periodic distributions and may also diversify an investment portfolio. 3 How a Non-Traded BDC Investment Works Investors Business Development Company Funding for Privately Held and Certain Public U.S. Companies Returns to Investors Proceeds to Investors at Time of Liquidity Event 4 BDC combines capital from investors. BDC s investment professionals screen and identify potential investments. BDC uses the pool of money to make loans and/or equity investments in selected companies (portfolio companies). BDC investments may potentially provide periodic distributions and a way to diversify an investment portfolio. 3 Potential liquidity events could include (1) sale of all assets (2) listing of shares on a national exchange (3) merger or other transaction. 1 Traded investments provide investors with ready liquidity and share price transparency. 2 Non-traded (or non-listed) BDCs are not traded on a securities exchange and therefore have limited liquidity. They are subject to more substantial fees than traditional investments and are not appropriate for all investors. Investors should consider that they may not have access to the money they invest for an indefinite period. 3 There is no guarantee a BDC will be able to pay distributions. Further, the amount of any distributions is uncertain and may not grow over time. 4 Also note that non-traded BDCs are not obligated to effectuate a liquidity event (also called an exit event) by a specified date, so it may be difficult for investors to sell their shares.

4 02 Exploring the Potential of Private Companies In the United States, more than 350,000 private companies 1 are responsible for 40% of the economy. Although private companies are considered the real engines behind the growth of America, they have had far fewer options for funding the growth and operations of their businesses than the approximately 6,000 U.S. companies that can access capital in the public markets. 2 This ongoing challenge for private companies has been heightened since the onset of the recent economic crisis because traditional lenders, such as banks, have further tightened their lending to this segment of the market. Non-traded BDCs offer a solution to reduced funding sources by providing capital to America s most innovative and exciting, growing companies to help them expand and create jobs. They also offer investors a unique and compelling investment opportunity not found with other investments. Accessing these private companies through a non-traded BDC provides investors with the potential for income and growth and an opportunity to help meet the funding needs of this important segment of the American economy. 3 How You Can Invest in Different Types of Companies 6,000 2 Public Companies Stock, Bonds and Mutual Funds 350,000 1 Private Companies Large Market $3B - $25B revenue Middle Market $150M - $3B revenue Traded BDCs Non-Traded BDCs Lower Middle Market $10M - $150M revenue 1 Source: U.S. Census Bureau latest available data, Approximate number of publicly traded companies based on the approximate number of companies listed on the New York Stock Exchange and NASDAQ as of April There is no guarantee that any non-traded BDC will meet these objectives.

5 How Non-Traded BDCs Invest in Private U.S. Companies 03 Non-traded BDCs help private and smaller public companies throughout the United States meet their funding needs by supplying capital primarily in the form of debt and/or through equity investments. Although BDCs have the flexibility to make either debt or equity investments, many tend to focus on different types of debt (loan) investments particularly senior secured debt, 1 which is typically issued with floating interest rates that may adjust over time. Senior secured debt investments are backed by specific assets such as property, inventory, equipment and intangible assets, which typically establish lenders as first in line creditors if a borrower defaults. The collateral securing investments in senior secured loans may fluctuate or decrease in value over time. Types of Investments a BDC May Include in its Portfolio HIGHER (Paid First) Priority of claim on a private company s assets and cash flows Senior Secured Debt (1st Lien) Senior Secured Debt (2nd Lien) Unsecured Debt (High Yield Bonds, Mezzanine Capital...) Preferred Equity LOWER (Paid Last) Common Equity This chart shows that investments higher up in a company s capital structure have tended to be more secure. 1 Keep in mind that interest rate and market risks could have a substantial impact on the performance of floating rate, senior secured loans.

6 04 How Non-Traded BDCs May Help Companies Bridge their Financing Gap As private and smaller public U.S. companies grow, they may seek capital for a number of reasons to expand distribution, add facilities and equipment, or refinance debt. These companies can consider sources of capital such as traditional banks and private equity firms. However, those sources tend to offer inflexible repayment policies or terms that may not be compatible with a privately owned company s long-term objectives. By contrast, BDCs offer these companies a unique value proposition the flexibility to meet those companies capital commitments with the expertise provided by industry professionals with years of experience. BDCs are required to offer significant managerial assistance to these companies, an advantage not offered by other traditional lenders. Because a BDC s management is traditionally staffed by knowledgeable and experienced professionals with many years of experience in a variety of industries and economic conditions, this requirement can be very helpful to the companies in which the BDC invests. Non-traded BDCs may help bridge the financing gap by offering more flexible options over time that may better align with the interests of middle- and lower middle-market companies, such as offering a mixture of debt and/or equity to help meet funding needs (see chart below). Why Non-Traded BDCs vs. Banks or Private Equity Firms? Banks BDCs Private Equity Standardized lending terms and procedures Predominately assetbased lending and collateral requirements Strict amortization and covenants No managerial guidance or support Flexible loan terms (debt and equity); may extend term Cash flow and asset review; relative to the investment Flexible customized amortization and covenants; may modify during down economic cycles Offer managerial assistance; companies retain control Targets majority equity ownership with the intent to sell and recoup investment Typically seeks large investment opportunities Seeks management control

7 05 Potential Benefits of Private Company Debt and Equity Investing The strategies BDCs use to build their portfolios can vary widely. Some BDCs may invest at several levels in a private company s capital structure including senior and junior debt, and even preferred or common equity investments. Other BDCs may differentiate themselves by focusing on senior debt and making equity capital investments as market conditions change or if opportunities arise. That s why it is important to understand a BDC s strategy before investing. BDCs Making Debt Investments: Potential for Income 1 Interest payments that private companies make on their loans offer the potential to provide current income to investors. There are three ways BDCs can invest in such loans: 1. Purchase loans on the primary markets from the banks that made them (bank-originated debt). 2. Purchase existing loans that were made to private companies on the secondary market from a non-originating loan holder. 3. Lend money directly to private companies (self-originated loans). BDCs Making Debt and Equity Investments: Potential for Income Plus Growth 1 Private debt investing and equity investing are two different strategies, though there is no guarantee that one strategy is more advantageous than the other. Returns from interest payments earned on loans may offer the potential to provide investors with current income, but they do not necessarily offer the potential for gains beyond those interest payments that equity investing offers. Returns from the equity component come from the change in market value of the portfolio companies (possibility through capital appreciation and dividends), but they do not offer the predictability of interest payments. Potential BDC Income Sources 1 Private Company Debt Investments BDC serves as a lender to portfolio companies Income from interest earned on loans may potentially support periodic distributions Private Company Equity Investments BDC has small ownership stake in portfolio companies Equity investments may help supplement the BDC s income component through income earned on long-term capital appreciation and dividends 1 BDCs are subject to interest rate and market risks. Investing in a non-traded BDC is considered speculative and income is not guaranteed. Additionally, there is no guarantee a BDC will meet its investment objectives or be able to make distributions, or that distributions will be funded from the BDC s cash flow from operations.

8 06 Where Do Non-Traded BDCs Fit into an Investment Portfolio? Accessing private and smaller public U.S. companies through a non-traded BDC may help investors reach their long-term financial goals because it offers the potential to provide asset class diversification in addition to current income and long-term capital appreciation. 1, 2 Asset Class Diversification 1 Investments don t all move in the same direction at the same time, a concept measured by correlation. The lower the correlation to other asset classes, the less likely they will move up and down in value with each other at the same time. Thus, a portfolio with many assets that are not correlated is less likely to suffer severe losses than one that is concentrated in a particular industry. A non-traded BDC can serve as a potential source of diversification within an investment portfolio because alternative investments generally have a low correlation with commonly held asset classes such as stocks and bonds. In addition, BDCs are permitted to invest in any industry provided the portfolio meets certain requirements. This means an investment in a BDC is an investment in potentially multiple different industries. The potential diversification provided by BDCs enables an investor to avoid concentrating his or her portfolio in a limited number of asset classes. Equity Cash Alternative Investments 2 Fixed Income Non-traded BDCs can complement an allocation to bonds and other incomeproducing investments This chart is for illustrative purposes only. It is not intended to be a representation or recommendation of a portfolio allocation model. By working with a financial advisor, investors can determine if adding a non-traded BDC to their overall portfolio would be within their risk tolerance and could help them meet their financial goals. 1 Diversification does not guarantee a profit or eliminate a loss. Additionally, there is no guarantee that any BDC will be able to pay distributions. 2 Alternative investments/strategies are subject to significantly more risks, including lack of liquidity, and substantial fees than traditional investments/strategies and are not appropriate for all investors.

9 07 Answers to Frequently Asked Questions How are BDCs governed? BDCs are registered with the Securities and Exchange Commission (SEC) and regulated under the Investment Company Act of 1940, which is the same regulatory framework that governs mutual funds. However, BDCs are not mutual funds. The investment adviser of a BDC must also be registered under the Investment Advisers Act of Are regular public filings or reporting required? Yes. BDCs are subject to standard SEC reporting requirements and must file periodic reports such as Forms 10-K, 10-Q, 8-K and proxy statements with the SEC. What types of American companies do BDCs typically invest in? Some BDC management teams focus on large private U.S. companies while others may invest in smaller public U.S. companies. Still, others may provide access to middle- and lower middlemarket U.S. companies. BDCs can focus on specific industries, such as technology or consumer products, or they can diversify across industries. Where can I buy shares of a non-traded BDC? Shares of non-traded BDCs are sold in a continuous offering period through financial advisors affiliated with retail broker-dealers. Non-traded BDC shares are available only to investors who meet suitability standards established by the state where they live. Are non-traded BDCs designed for short-term investing? No. Non-traded BDCs are designed for long-term investing. In fact, investors should be prepared to hold their investment in a non-traded BDC for a significant period of time. Because non-traded BDCs are not publicly traded, investors will have limited ability to sell their shares. Will the distribution I receive be taxable? Distributions are typically taxable to U.S. investors as ordinary income or capital gains. An investor should consult his or her tax advisor to understand the tax implications of investments in a BDC on that investor s tax liability. For more information about non-traded BDCs, talk to your financial advisor or visit us at hinessecurities.com.

10 08 Important Information Regarding an Investment in HMS Income Fund About the Sub-Advisory Relationship Main Street Capital Corporation ( Main Street ) is providing sub-advisory services to the adviser of HMS Income Fund, HMS Adviser LP, until the issuer obtains exemptive relief from the SEC to Main Street Capital Partners, LLC ( Main Street Partners ) to provide such services. HMS Income Fund may not realize gains from its equity investments, which may adversely affect its investment returns and stockholders ability to recover their entire investment in HMS Income Fund. AN INVESTMENT IN HMS INCOME FUND MAY BE CONSIDERED SPECULATIVE AND IS SUBJECT TO SUBSTANTIAL RISKS, INCLUDING THE RISK OF THE LOSS OF YOUR INVESTMENT.

11 Important Risk Considerations An investment in our common stock involves a high degree of risk, may be considered speculative, and may not be suitable for all investors. You should carefully consider the information found in the Risk Factors section of the prospectus before deciding to invest in shares of our common stock. The following are some of the risks an investment in us involves: We have a limited operating history and are subject to the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objectives. Investing in small and middle market companies involves a number of significant risks, including potential defaults by these portfolio companies, any one of which could have a material adverse effect on our operating results. Because there is no public trading market for shares of our common stock and we are not obligated to effectuate a liquidity event by a specified date, it is unlikely that you will be able to sell your shares, and if you are able to sell your shares, you would likely have to sell them at a discount from your purchase price. We have previously funded distributions from waivers of certain fees to our advisor. Our advisor may not waive these fees in the future. In addition, we may pay distributions from offering proceeds, borrowings or the sale of assets to the extent our cash flow from operations, net investment income or earnings are not sufficient to fund declared distributions. We have not established limits on the amount of funds we may use from net offering proceeds or borrowings to make distributions. An investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies, and uncertainty about the market value of those investments. We rely on our advisor and its personnel for the day-to-day operation of our business, to obtain adequate information of the creditworthiness and potential return from investing in these companies. Adverse economic conditions, as well as deterioration in a portfolio company s financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. In addition, the collateral securing these investments may fluctuate in value or lose its entire value over time based on the performance of the portfolio company which may lead to a loss in principal. If this occurs, our investment in the portfolio company could lead to financial losses in our portfolio and a corresponding decrease in revenues, net income and assets. Regulations governing our operation as a BDC and RIC will affect our ability to raise, and the way in which we raise, additional capital and conduct our operations. If we fail to continue to qualify to be regulated as a BDC, our operating results could have a negative adverse impact. A failure to qualify as a RIC would subject us to federal income tax on all of our income, which would have a material adverse effect on our financial performance. As a result of the annual distribution requirement to maintain our qualification as a RIC, we will likely need to continually raise cash or borrow to fund new investments. At times, these sources of funding may not be available to us on acceptable terms, if at all. If we do not obtain exemptive relief from the SEC to allow us to co-invest alongside Main Street and/or certain of its affiliates, we will be limited in our ability to invest in certain portfolio companies in which certain of our affiliates are investing or are invested, and we may be required to adjust our investment strategy. The amount of any distributions we may make is uncertain. Our distribution proceeds may exceed our earnings, particularly during the period before we have substantially invested the net proceeds from this offering. Therefore, portions of the distributions that we make may represent a return of capital to you for tax purposes. Our board of directors may change our operating policies and investment strategies without prior notice or stockholder approval, the effects of which may be adverse. The potential for our Advisers to earn incentive fees under the investment advisory and administrative services agreement may create an incentive for them to make investments that are riskier or more speculative than would otherwise be in our best interests, and, since the base management fee is based on gross assets, our Adviser may have an incentive to increase portfolio leverage in order to earn higher base management fees. We may borrow funds to make investments. As a result, we would be exposed to the risks of borrowing, also known as leverage, which may be considered a speculative investment technique. Leverage increases the volatility of investments by magnifying the potential for gain and loss on amounts invested, therefore increasing the risks associated with investing in our securities. We intend to invest primarily in loans such as senior secured term loans, second lien loans, and mezzanine debt that is rated, or would be if they were rated by a rating agency, as below investment grade quality or junk. Indebtedness of below investment grade quality is regarded as having predominantly speculative characteristics with respect to the issuer s capacity to pay interest and repay principal. Certain of these loans may also be subordinate to senior credit instruments. This could adversely affect our investment returns in the event of default or financial difficulties of the borrower. We are subject to financial market risks, including changes in interest rates, which may have a substantial negative impact on our investments. The purchase price at which you purchase shares will be determined at each periodic closing date. As a result, such purchase price may be higher than the prior periodic closing price per share, and therefore you may receive a smaller number of shares than if you had subscribed at the prior periodic closing price. This is a best efforts offering, and we have not identified any specific investments that we will make with the proceeds of this offering and you will not have the opportunity to evaluate our investments prior to purchasing shares of our common stock. As a result, our offering may be considered a blind pool offering. While we intend to conduct quarterly tender offers for our shares pursuant to our share repurchase program beginning with the first calendar quarter following the one-year anniversary of satisfying the minimum offering requirement, only a limited number of shares will be eligible for repurchase and we may suspend or terminate the share repurchase program at any time.

12 For more information about HMS Income Fund, read the prospectus. You may obtain a copy of the prospectus, free of charge, from Hines Securities, Inc., 2800 Post Oak Blvd., Suite 4700, Houston, Texas 77056, or by visiting hinessecurities.com. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE Hines Securities, Inc. Dealer Manager Member FINRA, SIPC 2800 Post Oak Blvd. Suite 4700 Houston, Texas hinessecurities.com HMSEDB 12/13