What is overuse?
An over-allotment is an option commonly available to underwriters that allows the sale of additional shares that a company plans to issue in the context of an initial public offering or a secondary / follow-up offer. An over-allotment option allows the underwriters to issue up to 15% more shares than initially planned. The option can be exercised within 30 days of the offer and must not be exercised on the same day.
It is also called the “green shoe option”.
The underwriters of such an offer may choose to exercise the over-allotment option when the demand for shares is high and the shares are trading above the offer price. This scenario allows the issuing company to raise additional capital.
Other times, the purpose of issuing additional shares is to stabilize the share price and prevent it from falling below the offer price. If the share price falls below the offer price, the Underwriters may buy back some of the shares at a lower price than they were sold, which decreases the offer and hopefully increases the price. If the share exceeds the offer price, the over-allotment agreement allows the underwriters to redeem the excess shares at the offer price, so that they do not lose money.
Example of overuse
In March 2020, Snap Inc. sold 200 million shares at $ 17.00 per share in a highly anticipated IPO. Shortly after placing the initial 200 million shares, the underwriters exercised their over-allotment option to push an additional 30 million shares into the market. Coincidentally, within 12 months of listing, SNAP never reached the original price of $ 17 per share.