The green shoe option, also known as an over-allotment option, was first introduced in the United States in the 1930s by the investment banking firm, Green Shoe Manufacturing Company. The company’s initial public offering was oversubscribed, indicating a higher demand for shares than the number of shares available for sale. To address this demand, the underwriters of the offering exercised an option to sell additional shares, which was informally dubbed the “Green Shoe” option after the company’s name.
Over time, the green shoe option became a standard provision in underwriting agreements for IPOs. The Securities and Exchange Commission (SEC) officially recognized the green shoe option in 1954 and established regulations for its use.
Since then, the green shoe option has become a common practice in the underwriting of IPOs, both in the United States and globally. It has been employed in various industries, including technology, healthcare, and consumer goods, among others. The option has proven effective in helping underwriters manage the risk of IPOs and has provided companies going public with greater flexibility.