Step 1Heat 1 tablespoon butter in large nonstick pan over medium heat. When hot, add shallots. Cook until softened but not brown, stirring often, about 2 minutes. Transfer to bowl. Add squash, eggs, milk, flour, sugar, baking soda, salt, cayenne pepper, black pepper to taste and basil. Stir until smooth.
Step 2Use paper towel to wipe out pan. Heat 1/2 tablespoon butter in pan over medium heat, tipping pan to coat surface. Use 2 scant tablespoons batter for each pancake and use back of spoon to spread to 3-inch diameter. Cook until edges are lightly browned and surface has air bubbles, about 1 1/2 minutes. Use spatula to turn and cook until browned, about 1 minute more. Set aside on baking sheet to keep warm in 200-degree oven. Cook remaining pancakes, adding butter to pan as needed. (If desired, pancakes can be made a few hours ahead and kept at room temperature, lightly covered with foil. Before serving, place in single layer on greased pan. Reheat, uncovered, in 200-degree oven 6 minutes.)