The Real Deal New York

Crowdfunding pioneer iFunding sued for fraud

Boutique investment bank CapStack alleges foul play over two real estate deals

January 08, 2016 06:49PM
By Konrad Putzier

William Skelley

William Skelley

IFunding, one of the early pioneers of real estate crowdfunding, is being sued for fraud. The complaint by a former business partner, filed in New York State Supreme Court late last month, highlights concerns that the young and lightly-regulated crowdfunding industry could be prone to misconduct.

The plaintiff, boutique investment bank CapStack Partners, is suing over two real estate financing deals the firms partnered on with iFunding last year.

The suit alleges that iFunding failed to raise the agreed-upon sum through its platform, and then repeatedly lied about its performance in a series of intentional delays and brinkmanship, causing CapStack “injury and detriment.”

CapStack is also suing iFunding for breach of contract, breach of fiduciary duty, fraudulent inducement, fraudulent concealment and deceptive business practices, and seeks damages of at least $585,000.

New York-based iFunding, which raises funds for real estate projects through an online platform, rubbished the accusations. “We believe the lawsuit is completely without merit and intend to contest it vigorously,” the firm’s founder and CEO William Skelley told The Real Deal.

In August, CapStack and iFunding signed separate deals to crowdfund two real estate developments, one in Missouri and one in Ohio. IFunding would raise the funds through its website, CapStack would act as an intermediary between the platform and the developers, and the two would split the brokerage fees 50/50. According to the suit, iFunding agreed to raise $2 million for the first project and $3.2 million for the second, but soon fell short.

It ended up raising only $1 million and $1.25 million, respectively, from investors, CapStack claims. The suit alleges iFunding repeatedly lied to Capstack about how much money it had raised and about supposed commitments from individual investors. It also claims that iFunding lied to its own investors about how much money it had raised for the projects, inflating numbers on its website.

On Oct. 9, three days before the Ohio deal was scheduled to close, iFunding’s CEO William Skelley allegedly told CapStack that he would only release the $1.25 million raised if CapStack agreed to “double the money” – i.e. double the share of the fees iFunding would get.

“Acting in extreme bad faith, (iFunding’s counsel Robin Sosnow) and Skelley made clear that if iFunding refused to immediately sign the revised agreement, iFunding would not deliver the investors’ funds and the entire transaction would collapse,” the suit alleges. Put under the gun, CapStack agreed to the revised terms, it alleges, meaning it didn’t get its share of the fees.

“IFunding’s and Skelley’s conduct was wanton, willful and malicious and warrants the imposition of punitive damages,” the complaint reads.

Skelley called the accusations “completely unfounded.”

“We are very proud to have raised over $4 million dollars in a matter of ten days for two projects that CapStack brought to us late last year,” he said.

Founded in 2012, IFunding was a trailblazer in the real estate crowdfunding space. In April, TRD reported on a falling-out the company had with former New York governor David Patterson, who briefly served on the startup’s board.

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