What is a greenshoe option and what is a greenshoe option

Greenshoe options (greenshoeop-tion) are named after the first to be used by U.S. greenshoe companies during their initial public offerings** (IPOs). It is customary for the issuer to enter into a preliminary letter of intent (letterofintent) with the lead underwriter to give the lead underwriter an option equivalent to 15% of the original issue amount from the issuer at the issue price within 30 days after the issuance. The purpose is to provide buy-side support for the transaction without exposing the lead underwriter to excessive risk.

Once this option is obtained, the lead underwriter can (and indeed always) sell at 115% of the original issue**. When the stock price rises after the issuance, the lead underwriter exercises the greenshoe option at the issue price, buys 15% of the excess from the issuer to offset its short position in the over-offering, and charges a fee for the over-offering. At this time, the actual number of issuance is 115% of the original plan.

When **is snubbed and the stock price after issuance**, the lead underwriter will not exercise the option, but will buy back the over-issued ** from the market to support ** and hedge the short position, and the actual number of issues will be equal to the original amount. Since the market price is lower than the issue price at this time, the lead underwriter will not suffer a loss by doing so. In practice, the amount of oversale is determined by negotiation between the issuer and the lead underwriter, generally in the range of 5% to 15%, and the option can be partially exercised.

The "green shoe option" (also known as green shoe option or over-allotment option) refers to Article 48 of the Administrative Measures for the Issuance and Underwriting promulgated by the China Securities Regulatory Commission in 2006, which stipulates that "if the number of shares in the initial public offering is more than 400 million, the issuer and its lead underwriter may adopt the over-allotment option in the issuance plan". The "over-allotment option" is commonly known as the greenshoe mechanism.

This mechanism can stabilize the stock price trend after the listing of ** shares and prevent the stock price from fluctuating. ICBC adopted the "green shoe mechanism" for IPO in 2006.

Green shoes"It was first used in the 1963 initial public offering** (IPO) of the Boston Green Shoe Manufacturing Company in the United States, and is a colloquial name for the over-allotment option system. The greenshoe mechanism is mainly used in situations where the market sentiment is not good, and the outcome of the issuance is not optimistic or unpredictable. The purpose is to prevent the stock price of new shares from being below the issue price or issue price after the issuance and listing, enhance the confidence of investors participating in the primary market subscription, and realize the smooth transition of the new stock price from the primary market to the secondary market.

The use of "green shoes" can adjust the scale of financing according to market conditions, so that supply and demand are balanced.

Introduction to Greenshoe Options Greenshoe options are part of an underwriting agreement between the issuer and the lead underwriter in the primary offering market, academically known as the over-allotment option, and were named after the U.S. Greenshoe Company used in its initial public offering in 1963. A greenshoe option is a right granted by the issuer to the lead underwriter, and the lead underwriter who is authorized to do so may normally have a period of 30 days after listing, depending on the status of the market subscription.

The over-allotment option, commonly known as the "green shoe", is a clause of the underwriting agreement. Underwriters are allowed to conduct certain market operations according to the stock price trend within the first month after the company's IPO, so as to stabilize the stock price and protect the stability of the company's market value.

Specifically, the greenshoe mechanism.

If you want to play a role, there will be three parties involved - institutional investors, Qixu companies, and underwriters and surplus merchants.

The Company granted the underwriters an over-allotment option. During the IPO, the underwriters place to institutional investors in an international placement.

Over-allotment of up to 15% of the number of shares offered globally, obtaining corresponding funds, and then borrowing these shares from institutional investors.

The greenshoe mechanism is the capital market.

It is an important achievement of the improvement of the capital market by flexibly adjusting the issuance volume and responding to market fluctuations, thereby reducing its impact and making the company's issuance and listing more stable and controllable.

Introduction of Greenshoe Options The Greenshoe option is part of an underwriting agreement between the issuer of the primary issuance market and the lead underwriter Ling Shenzao, academically known as the over-allotment option, and was named after the U.S. Greenshoe Company used in its initial public offering in 1963. The greenshoe option is a right granted by the issuer to the lead underwriter, and the lead underwriter authorized by this authority can be dismantled for a period of 30 days after the listing of ** according to the market subscription status.

A greenshoe option is an option given to an investment bank when issuing new shares. That is, the investment bank has the right to issue a part of the new ** in a period of time after the issuance of new shares. The existence of greenshoe options has two significances, one is to help investment banks control the stock price after issuance and reduce volatility.

The other is to reduce the loss of investment bank IPO pricing deviation. It is important to note that the greenshoe option does not increase the pre-determined issuance, but simply divides it into two parts. Here's an example.

Investment bank A made an IPO for a company, issued 1 million shares, 100,000 green shoe options, and the issue price was 100 yuan.

1. A actually only issued 900,000 new shares at the time of the first issuance, and at the same time borrowed 100,000 old shares from the company's original major shareholders and put them into the open market, a total of 1 million shares.

2. At this time, A can also issue 100,000 new shares.

3. After the issuance: the stock price is sharply ** to 120 yuan, at this time A will exercise the green shoe option and issue the 100,000 new shares in his hand at 120 yuan. At this time, the supply of ** in the market increases, the stock price will fall slightly, and A will buy back 100,000 shares from the market and return it to the major shareholder.

4. After the issuance: the stock price is significantly higher than 80 yuan, at which time A will give up the exercise of the right and directly buy it back from the market at 80 yuan and return it to the major shareholder. A's ** behavior will cause the stock price to rise slightly.

That is, only 900,000 shares were actually issued. It is equivalent to A selling those old shares for 100 yuan, and then returning 80 yuan ** to the major shareholder).