What Is an Overallotment?
An overallotment is an selection incessantly available to underwriters that allows the sale of additional shares that a company plans to consider an initial public offering or secondary/follow-on offering. An overallotment selection shall we in underwriters to issue as many as 15% additional shares than at first planned. The selection may also be exercised within 30 days of the offering, and it does no longer must be exercised on the identical day.
It is sometimes called a “greenshoe selection.”
Overallotment Outlined
The underwriters of such an offering would perhaps elect to exercise the overallotment selection when name for for shares is best and shares are purchasing and promoting above the offering price. This case shall we within the issuing company to boost additional capital.
Other circumstances, the purpose of issuing further shares is to stabilize the price of the stock and prevent it from going beneath the offering price. If the stock price drops beneath the offering price, the underwriters must acquire once more one of the most shares for less than they’d been presented for, lowering the availability and optimistically increasing the cost. If the stock rises above the offering price, the overallotment agreement shall we within the underwriters to buy once more the excess shares at the offering price, so that they don’t lose money.
Example of an Overallotment
In March 2017, Snap Inc. presented 200 million shares at $17.00 in line with proportion in a much-anticipated IPO. Shortly after striking the original 200 million shares, the underwriters exercised their overallotment approach to push any other 30 million shares available in the market.
