What is greenshoe?
When an initial public offering is put forward, a greenshoe is a provision that may be included in the underwriting document. It gives the underwriter the option to sell investors more shares than originally planned by the issuer if demand is higher than expected.
Where have you heard about greenshoe?
One of the most famous examples in recent years is the Facebook IPO in 2012. Underwriters initially agreed to sell 421 million shares but the issue proved so popular that they used their greenshoe option, resulting in the sale of 484 million shares.
What you need to know about greenshoe.
Its official name in a prospectus is "over-allotment option". The name greenshoe comes from Green Shoe Manufacturing, now known as Stride Rite, which was the fist company to permit the practice in an IPO. The size of the greenshoe may vary, but it's not usually more than 15% of the original number of shares offered. Underwriters famously used their greenshoe option during the IPO for Alibaba Group in 2014. This was the largest IPO in history at that time, at $25 billion.
Find out more about greenshoe.
Check out our guide to reverse greenshoe to find out what happens when underwriters sell shares back to the issuer.