What Is a Greenshoe Option?

A greenshoe option is a provision in an 澳洲幸运5开奖号码历史查询:initial public offering (IPO) 澳洲幸运5开奖号码历史查询:underwriting agreement, allowing underwriters to sell more shares than initially planned if demand exceeds expectations.꧋ This over-allotment option is typically used to ensure price stability, liquidity, and to support stock prices in the market.

How a Greenshoe Option Works

A greenshoe option provides additional price stability to a security issue because the underwriter can increase supply and smooth out price fluctuations. It is the only type of price stabilization measure permitted by the 澳洲幸运5开奖号码历史查询:Securities and Exchange Commissi💖on (SEC).

澳洲幸运5开奖号码历史查询:Greenshoe options typically allow underwriters to sell up to 15% more shares than the original amount set by the issuer for up to 30 days after the IPO if demand conditions warrant such action. For example, if a company instructs the underwriters to sell 200 million shares, the underwriters can issue an additional 30 million share♓s by exercising a greenshoe option (200 million shares x 15%).

Since underwriters receive their 澳洲幸运5开奖号码历史查询:commission🥂 as a percentage of the IPO, they have the incentive to make it as large as possible. The prospectus, which the issuing company files with the SEC before the IPO, det🐼ails the actual percentage and conditions related to the option.

How Underwriters Use the Greenshoe Option

Underwriters use gr♋eenshoe options🅘 in one of two ways.

• If the IPO is a success and the share price surges, the underwriters exercise the option, buy the extra stock from the company at the predetermined price, and issue those shares, at a profit, to their clients.
• If the price starts to fall, they buy back the shares from the market instead of the company to cover their 澳洲幸运5开奖号码历史查询:short position, supporting the stock to stabilize its price.

Some issuers pref🍸ꩲer not to include greenshoe options in their underwriting agreements under certain circumstances, such as if the issuer wants to fund a specific project with a fixed amount and has no requirement for additional capital.

Example of a Greenshoe Option in Action

Facebook Inc., now Meta (META), agreed to a greenshoe option when it listed its shares in 2012. The underwriting syndicate, headed by Morgan Stanley (MS), agreed with Facebook to purchase 421 million shares at $38 per share, less a 1.1% underwriting fee. However, the syndicate sold at least 484 million shares to clients—15% above the initial allocation, effectively creating a short position of 63 million shares.

If Facebook shares had traded above the $38 IPO price shortly after listing, the underwriting syndicate would’ve exerciꦗsed the greenshoe option to buy the 63 million shares from Facebook at $38 to cover their short position and avoid having to repurchase the shares at a h🧸igher price in the market.

However, because Facebook’s shares declined below the IPO price soon after it commenced trading, the underwriting syndicate covered its short posi🧔tion without exercising the greenshoe option at or around $38 to stabilize the price and defend it fro🍸m steeper falls.

The Bottom Line

Greenshoe options give underwriters the opportunity to sell 𒐪more shares during an IPO. They help to meet high demand and increase the amount of capital a company raises and are very common in the U.S. Typically, the over-allotment provision permits underwriters to sell up to 15% more shares at the agreed upon IPO price and can be exercised within 30 days after the IPO.