A Green Shoe

A Green Shoe, also known by its legal title as an "over-allotment option" (the only way it can be referred to in a prospectus), gives Underwriters the right to sell additional shares in a registered securities offering if demand for the securities is in excess of the original amount offered. The Green Shoe can vary in size up to 15% of the original number of shares offered.

The Green Shoe option is popular because it is the only SEC-permitted means for an underwriter to stabilize the price of a new issue post-pricing. Issuers will sometimes not permit a greenshoe on a transaction when they have a very specific objective for the offering, and do not want the possibility of raising more money than planned. The term "Green Shoe" comes from a company founded in 1919 as Green Shoe Manufacturing Company, now called Stride rite corporation, which was the first company to permit this practice to be used in an offering.

A green shoe option is a clause contained in the underwriting agreement of an initial public offering (IPO). The green shoe option, which is also often referred to as an over-allotment provision, allows the underwriting syndicate to buy up to an additional 15% of the shares at the offering price if public demand for the shares exceeds expectations and the stock trades above its offering price