Overallotment

What Is an Overallotment?

An overallotment is an option usually accessible to underwriters that permits the sale of extra shares that a company plans to issue in a initial public offering or optional/follow-on offering. An overallotment option permits underwriters to issue according to plan. The option can be exercised in no less than 30 days of the offering, and it doesn't need to be exercised around the same time.

It is likewise called a "greenshoe option."

Overallotment Explained

The underwriters of such an offering might choose for exercise the overallotment option when demand for shares is high and shares are trading over the offering price. This scenario permits the responsible company to raise extra capital.

Different times, the purpose of giving extra shares is to settle the price of the stock and keep it from going below the offering price. On the off chance that the stock price dips under the offering price, the underwriters can buy back a portion of the shares for short of what they were sold for, decreasing the supply and ideally expanding the price. Assuming the stock transcends the offering price, the overallotment agreement permits the underwriters to buy back the excess shares at the offering price, so they don't lose money.

Illustration of an Overallotment

In March 2017, Snap Inc. offered 200 million shares at $17.00 per share in an eagerly awaited IPO. Not long after setting the original 200 million shares, the underwriters exercised their overallotment option to push one more 30 million shares in the market.