What is the purpose of a market out clause?

• A. To provide investors with guaranteed returns
• B. To allow an underwriter to cancel agreement without penalty
• C. To outline the rights of shareholders
• D. To restrict the resale of securities

Answer: (B)

The purpose of a market out clause is to allow an underwriter to cancel an agreement without penalty under specific circumstances, typically related to changes in market conditions or other factors that could adversely affect the offering. This clause provides a level of protection for the underwriter, allowing them to exit the commitment if the market becomes unfavorable or if there are unforeseen negative developments that might impact the securities being offered. By having this clause in place, underwriters can manage their risk effectively and ensure they are not locked into agreements that could lead to financial loss.

In this context, having guaranteed returns for investors or outlining shareholder rights does not address the core function of a market out clause, which is primarily focused on the underwriter's ability to navigate changes in market dynamics. Similarly, restricting the resale of securities pertains to different regulatory aspects and does not relate to the purpose of the market out clause, which is concentrated on the conditions under which an underwriter can withdraw from a commitment.