Hedge Fund Glossary

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Green Shoe

a special type of purchase Option named in honor of the Green Shoe Company — the first Issuer to have this provision. Green Shoe is the nickname for the Over-Allotment Option granted to the Underwriters in the Underwriting Agreement. The Green Shoe is an Option, typically for up to 30 days, to allow the Underwriters to purchase up to 15 percent (a cap imposed by FINRA rules) more shares than the original number sold by the Issuer in the offering. The purchase price per share for exercising the Green Shoe is the same price as in the related offering. The Green Shoe provides protection that allows Underwriters to “over-allot,” meaning to sell more shares than the number being sold in the offering. The Underwriters can later use the Green Shoe to cover the syndicate short position created by the Over-Allotment sales if the Option price is less than the then-prevailing market price per share. Underwriters generally use the Over-Allotment Option when demand for a Security proves higher than expected and therefore it is too expensive to buy additional shares back in the open market to cover the syndicate short position. Also referred to as “the Shoe.” Note the 15 percent cap does not apply to 144A Offerings.

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