Series 14: 6.1.7.3. Greenshoe Options And Syndicate Covering Transactions

6.1.7.3. Greenshoe Options and Syndicate Covering Transactions

An underwriter will often sell more shares than will be issued at the public offering. This practice is known as over-allotment and it’s a way for the underwriter to have some control over the price of the security in the secondary market, as well as a way to make additional money. An over-allotment option, also called a greenshoe option, is a provision in a UA that gives the underwriter the option to require the company to issue up to 15% more shares in the offering. Most stock offerings have a greenshoe option, but one is not required. If the issuer agrees to a greenshoe option, it must be written into the UA. It cannot be granted later. The registration statement must include the number of shares that could potentially be created if the greenshoe option is exercised.

The number of additional shares the syndicate owes due to over-allotment is called the syndicate short position. The syndicate must eventually cover its short position, which it will choose to do in one of two ways,