DEFINITION of 'Market Out Clause'

A stipulation in an underwriting agreement that allows the underwriter to cancel the agreement without penalty. A market out clause can be activated for specific reasons such as souring market conditions or simply because the underwriter is having difficulty in selling the company's stock. However, though the reasons can be varied, they must be noted in the market out clause.

BREAKING DOWN 'Market Out Clause'

The underwriter for an initial public offering (IPO) contracts with the issuing company to market and sell the company's stock to investors in the primary market. Of course, this entails a fair amount of risk resulting from overhype (witness Groupon) and other factors. Hence, a market out clause is generally invoked when the market has hit a rough patch or other IPOs have underperformed.

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