What Is an Overallotment?
Let me explain what an overallotment is—it's an option that underwriters often have, allowing them to sell additional shares when a company issues stock in an initial public offering or a secondary/follow-on offering. You should know that this option lets underwriters issue up to 15% more shares than what was originally planned. They can exercise it within 30 days of the offering, and it doesn't all have to happen on the same day.
People also call this a 'greenshoe option.'
Overallotment Explained
Underwriters might choose to exercise the overallotment option if demand for the shares is strong and they're trading above the offering price. In that case, it helps the issuing company bring in more capital.
Sometimes, the goal is to keep the stock price stable and prevent it from falling below the offering price. If the price does drop, underwriters can buy back some shares cheaper than they sold them, which reduces supply and should push the price up. If the stock goes above the offering price, the overallotment lets them buy back the extra shares at the offering price, avoiding any losses.
Example of an Overallotment
Take Snap Inc. in March 2017—they offered 200 million shares at $17.00 each in their highly anticipated IPO. Right after placing those original shares, the underwriters exercised their overallotment option and released another 30 million shares into the market.
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