One sign of a stock market top is the arrival of deals that might otherwise never see the light of day. And since I’m expecting a correction soon, I was not surprised to get an email from an online broker this week offering me the opportunity to participate in the IPO of a small company by the name of Funko (NasdaqGS: FNKO) that is looking to raise $200 million from individual investors like you and me.

Funko describes itself as a “leading pop culture products company.” I’ll be the first to admit that I’m not an expert on pop culture, so I will not attempt to evaluate the commercial viability of its products “that enable fans to express their affinity for their favorite “something”—whether it is a movie, TV show, video game, musician or sports team.”

I have no idea what that really means, but after reviewing the prospectus I realized that I don’t need to know much about pop culture to recognize that this IPO is a bad deal for investors. That’s because virtually all of the money being raised will end up in the pockets of the existing private shareholders.

Pay Me Now…

It’s not unusual for the venture capitalists that finance a private company when banks will not to cash out during an IPO. That’s known as an “exit strategy”, and allows them to reinvest that capital into the next potential IPO. They took a lot of risk and deserve to be rewarded when the gamble pays off.

However, it is unusual for almost none of the proceeds from an IPO to end up as working capital for the company so it can grow its business. If the only thing an IPO accomplishes is transferring equity in the business from one set of shareholders to another group of investors, then the company is no better off financially.

I can tell you who will be much better off financially as a result of this deal: the existing shareholders of Funko that will end up receiving most of the proceeds. Of the expected $162 million in net proceeds (assuming a $15 IPO price, and after $38 million, or 19%, of the gross proceeds, is paid in fees to the underwriters of the offering), most of it will be used to purchase stock from existing shareholders and pay down debt.

Of that amount, approximately $116 million will be used to repay outstanding promissory notes and pay down credit lines. Normally, paying off debt is a good thing since that frees up capital that would otherwise be spent servicing that debt. That will happen here, except the purpose of those loans is questionable based on the following.

And Pay Me Later

According to page 84 of the prospectus, so far this year the company has paid $37.4 million to existing shareholders as “cash tax distributions”, and in 2016 and 2015 distributed another $33.5 million for the same purpose. Additionally, the company also paid a “special distribution” earlier this year of $49.2 million to those same recipients.

Altogether, that adds up to roughly $120 million in cash payments to the selling shareholders. That means over the past two years while as a private company, existing shareholders received the equivalent of nearly three-quarters of the expected net proceeds from this IPO.

What is particularly galling about this offering is that it is being made through a relatively new online brokerage firm that appeals to millennials. That partnership makes sense in terms of Funko’s hipster image, but it targets this deal at inexperienced investors less able to discern what’s really going on behind the scenes.

Sausage Stew

It wasn’t that hard for me. Earlier in my career, I was the “syndicate coordinator” for a regional brokerage firm, which means I directed the placement of IPO shares within our local office. I had a front row seat to how an IPO is marketed, so I know how the sausage is made.

In this case, it isn’t hard to figure out if you know where to look. The challenge is in wading through the prodigious amount of legalese to get to the good stuff. The lawyers who write offering documents for IPOs have a favorite saying: You can’t be sued for it if you disclose it.

That’s why this prospectus comes loaded with just about every warning you can imagine (plus a few I’d never seen before). In fairness, all IPOs are inherently risky, but some are riskier than others, and in this case, the fact the company will derive virtually no working capital from the deal makes it particularly hazardous.

That doesn’t mean the company will necessarily fail, but it does mean it has less margin for error since the next time it tries to raise money it may have to give up a lot more equity to do so. In that event, the shares bought in this IPO will be worth considerably less. Just say no to Funko.