Series 79: “Green Shoe” Or Over-Allotment Option

“Green Shoe” or Over-Allotment Option

Underwriters in a distribution normally ask the issuer for an over-allotment option, which is also referred to as the “green shoe,” “greenshoe,” or sometimes just the “shoe.” (The name is not derived from a peculiar fashion choice, but rather from the fact that it was first used in an offering by the Green Shoe Manufacturing Company, now Stride Rite.) To help stabilize the price of the new issue, underwriters sell more shares than the amount listed in the prospectus, thus creating a short position. This is called over-allotting. The over-allotment option permits the underwriters to cover their short position by having the issuer issue additional shares. The green shoe is limited to 15% of the shares originally offered for sale; it is not based on the total number of registered shares. Unless the issuer needs or wants only a limited amount of new capital, the green shoe poses little downside to the issuer.

The green shoe option gives underwriters flexibility and can serve multiple purposes. If the offering is popular and demand exceeds supply, the option allows the underwriters to meet demand by buying additional shares from the issuer at the