Market Out Clause

When Facegroomers, Inc. decided to take their facial hair care product company public and were looking for an IPO underwriter, our firm stepped in and said we’d be their huckleberry. It seemed like a no-brainer at the time. Six months later, the CEO of Facegroomers has been indicted for tax fraud, the CFO has been accused of cooking the company’s books, the CAO is due in court regarding her third DUI, and (and this was just the icing on this whole disastrous cake), it turns out the company’s spokesperson’s beard is fake. We’re beginning to think that there is no way we’ll be able to sell Facegroomers stock for anything near what we once thought we would.

Luckily for us, our underwriting agreement has a “market out clause,” which means we have the option of just walking away from this entire mess. Market out clauses exist to protect the underwriting firm against circumstances that make it difficult (or, in the case of Facegroomers, dang near impossible) to deliver what was promised: decent stock sales.

These circumstances have to be spelled out in the underwriting agreement. For example, we can’t just decide one day that fake beards are a dealbreaker and walk away. Typically, those circumstances fall into one of two categories: either something has happened that’s going to severely damage the organization’s IPO and make it impossible to sell their stock (like what’s going on with Facegroomers), or the market in general is behaving so badly that no one’s making money selling anything.