Endogenous retroviruses (ERVs) have rewired host gene networks. To explore the origins of co-option, we employed an active murine ERV, IAPEz, and an embryonic stem cell (ESC) to neural progenitor cell (NPC) differentiation model. Transcriptional silencing via TRIM28 maps to a 190 bp sequence encoding the intracisternal A-type particle (IAP) signal peptide, which confers retrotransposition activity. A subset of "escapee" IAPs (∼15%) exhibits significant genetic divergence from this sequence. Canonical repressed IAPs succumb to a previously undocumented demarcation by H3K9me3 and H3K27me3 in NPCs. Escapee IAPs, in contrast, evade repression in both cell types, resulting in their transcriptional derepression, particularly in NPCs. We validate the enhancer function of a 47 bp sequence within the U3 region of the long terminal repeat (LTR) and show that escapee IAPs convey an activating effect on nearby neural genes. In sum, co-opted ERVs stem from genetic escapees that have lost vital sequences required for both TRIM28 restriction and autonomous retrotransposition
