Overallotment

Over-allotment, often referred to as a "greenshoe option," is a provision in an underwriting agreement for an initial public offering (IPO) or other securities issuance. It grants the underwriter the right to sell more shares than the originally planned number to investors. This is typically done when the demand for the shares is higher than anticipated.

The purpose of the over-allotment option is to stabilize the stock price in the aftermarket. If the stock price rises above the IPO price, the underwriter can exercise the option to purchase additional shares from the issuer at the IPO price and sell them to investors at the higher market price, thereby profiting from the difference. Conversely, if the stock price falls below the IPO price, the underwriter can buy back shares in the open market at the lower price to cover the over-allotted shares, which helps to support the stock price.

The over-allotment option is usually exercisable for a limited period, typically 30 days, following the IPO. The size of the over-allotment is generally capped at a certain percentage, commonly 15%, of the total shares offered in the primary offering. This mechanism provides flexibility for both the issuer and the underwriter, aiming to facilitate a smoother trading debut for the newly public company.