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What Is A Greenshoe?

November 6, 2023

The Greenshoe Option, also known as an overallotment option, is a provision typically included in the underwriting agreement of an initial public offering (IPO). It allows the underwriters to sell additional shares of the company's stock to the public if there is strong demand.

An IPO underwriter is an investment banking institution that assists a company in going public by purchasing, setting the price and distributing its initial public offering (IPO) shares to investors.

If the demand for the IPO shares exceeds the number initially offered, the underwriters can exercise the Greenshoe Option to purchase more shares from the company at the offering price. This creates a larger float while also adding to the total amount of money raised for the company. This additional supply can help stabilize the stock's price and may help avoid or reduce excessive price spikes or volatility in the days following the IPO.

The name "Greenshoe" originates from the first company to use this provision, Green Shoe Manufacturing (now part of StrideRite), which introduced it in the 1960s. The Greenshoe Option is intended to benefit both the company going public and investors by ensuring a smoother IPO process and reducing potential price fluctuations.

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