Companies that want to sell shares to the public in an initial public offering (IPO) can stabilize initial pricing through a legal mechanism known as the greenshoe option. A greenshoe is a clause included in the underwriting agreement of an IPO that allows 澳洲幸运5官方开奖结果体彩网:underwriters to buy up to an additional 15% of the company's covered short positions at the 澳洲幸运5官方开奖结果体彩网:offering price.

Investment banks and underwriters that take part in the greenshoe process can exercise this option if public demand exceeds expectations and the stock trades above the offering price.

The Origin of the Greenshoe

The term "greenshoe" derives from the Green Shoe Manufacturing Company, now known as Stride Rite Corporation. Founded in 1919, it was the first company to implement the greenshoe clause into its underwriting agreement. The legal name is "overallotment option" because shares are set aside for underwriters in addition to the shares originally offered.

This type of option is the only SEC-sanctioned method for an 澳洲幸运5官方开奖结果体彩网:underwriter to legally stabilize a new issue after the offering price has been determined. The SEC introduced it to enhance the efficiency and competitiveness of the IPO fundraising process.

Price Stabilization

A greenshoe option works in four phases.

1. The underwriter acts as a liaison, like a dealer, finding buyers for its client's newly issued shares.
2. Sellers (company owners and directors) and buyers (underwriters and clients) determine a share price. 
3. Shares are ready to trade publicly when the share price is determined. The underwriter then uses all legal means to keep the share price above the offering price.
4. The underwriter can exercise the greenshoe option if it finds there's a possibility that shares will fall below the offering price.

The underwriters can exercise their greenshoe option and sell 1.15 million shares if a company decides to sell a million shares publicly. The underwriters can buy back 15% of the shares when the shares are priced and can be publicly traded. This enables them to stabilize fluctuating share prices by increasing or decreasing the supply according to initial public demand.

Underwriters can't buy back those shares without incurring a loss if the 澳洲幸运5官方开奖结果体彩网:market price exceeds the offering price. This is where the greenshoe option can be u🌌seful because it allows them to buy back shares at the off🔯ering price and protect their interests.

It's referred to as a "break issue" if a 澳洲幸运5官方开奖结果体彩网:public offering trades below the offering price. This can generate a public impression that the stock being offered mighജt be unreliable. This could induce new buyers to sell shares or refrain from buying additional shares. Underwriters exercise their option and buy back shares at the offering price to stabilize prices in this scenario, returning those shares to the lender/issuer.

Full, Partial, and Reverse Greenshoes

The number of shares the underwriter buys back 🔯determines if it will exercise a partial greenshoe or a full greensh🌳oe.

A partial greenshoe indicates that underwriters are only able to buy back some inventory before the share price rises. A full greenshoe occurs when they're unable to buy back any shares before the share price rises. The underwriter exercises the full option when this happens and buys at the offering price. The greenshoe option can be exercised at any time in the first 30 days after the offering.

A reverse greenshoe option has the same effect on share price as the regular greenshoe option but the underwriter is allowed to buy shares on the open marketღ and sell them back to the issuer if the share price falls below the offering price.

The Bottom Line

The greenshoe option reduces the risks of a company issuing new shares in an IPO. It gives the underwriter the buying power to cover short positions if the share price falls, wit🤡hout the risk of having to buy shares if the price rises. This keeps the share price stable, benefiting both issuers and investors.