The Concept of Green Shoe Option
Project Report on
“GREEN SHOE OPTION”
DEFINATION “Green Shoe Option means an option of allotting equity shares in excess of the equity shares offered in the public issue as a post listing price stabilizing mechanism”
A Green Shoe (sometimes "green shoe"), legally called an "over-allotment option" (the only way it can be referred to in a prospectus), gives underwriters the right to sell additional shares in a registered securities offering at the offering price, if demand for the securities exceeds the original amount offered. The greenshoe can vary in size up to 15% of the original number of shares offered.
The greenshoe option is popular because it is one of a few SEC-permitted means for an underwriter to stabilize the price of a new issue post-pricing, and it presents no risk to the underwriter. Issuers will sometimes not permit a greenshoe on a transaction when they have a specific objective for the offering and do not want the possibility of raising more money than planned. The term comes from the first company, Green Shoe Manufacturing now called Stride Rite Corporation to permit underwriters to use this practice in its offering.
The SEC also permits the underwriters to engage in naked short sales of the offering. The underwriter creates a naked short position either by selling short more shares than the amount stated in the greenshoe option, or by selling short shares where there is no greenshoe option. It is theoretically possible for the underwriters to naked short sell a large percentage of the offering.
The SEC also permits the underwriting syndicate to place stabilizing bids on the stock in the after-market. However, underwriters of initial and secondary offerings in the United States rarely use stabilizing bids to stabilize new issues, and instead engage in short selling the offering and purchasing in the after-market to stabilize new offerings. "Recently, the SEC “staff has learned that in the US syndicate
“GREEN SHOE OPTION”
DEFINATION “Green Shoe Option means an option of allotting equity shares in excess of the equity shares offered in the public issue as a post listing price stabilizing mechanism”
A Green Shoe (sometimes "green shoe"), legally called an "over-allotment option" (the only way it can be referred to in a prospectus), gives underwriters the right to sell additional shares in a registered securities offering at the offering price, if demand for the securities exceeds the original amount offered. The greenshoe can vary in size up to 15% of the original number of shares offered.
The greenshoe option is popular because it is one of a few SEC-permitted means for an underwriter to stabilize the price of a new issue post-pricing, and it presents no risk to the underwriter. Issuers will sometimes not permit a greenshoe on a transaction when they have a specific objective for the offering and do not want the possibility of raising more money than planned. The term comes from the first company, Green Shoe Manufacturing now called Stride Rite Corporation to permit underwriters to use this practice in its offering.
The SEC also permits the underwriters to engage in naked short sales of the offering. The underwriter creates a naked short position either by selling short more shares than the amount stated in the greenshoe option, or by selling short shares where there is no greenshoe option. It is theoretically possible for the underwriters to naked short sell a large percentage of the offering.
The SEC also permits the underwriting syndicate to place stabilizing bids on the stock in the after-market. However, underwriters of initial and secondary offerings in the United States rarely use stabilizing bids to stabilize new issues, and instead engage in short selling the offering and purchasing in the after-market to stabilize new offerings. "Recently, the SEC “staff has learned that in the US syndicate