Crowdfunding startup iFunding got hit with its second lawsuit since December, after investor Michael J. Turner filed a complaint seeking to liquidate the company.
According to the complaint, filed in a Delaware state court, Michael J. Turner Enterprises, a Connecticut-based contractor, invested a total of $100,000 in the company in 2012 and 2013 in return for a 20-percent ownership stake. iFunding, which allows small-time savers to invest in real estate projects through an online platform, was then in its infant stages.
The suit alleges that iFunding’s co-founders William Skelley and Sohin Shah (who has since left the firm) subsequently refused to recognize Turner’s stake, and froze him out of the company’s operations. Turner claims that the alleged freeze-out violated their operating agreement, and seeks the “dissolution of iFunding and an appointment of a liquidation trustee.” Turner also wants unspecified monetary damages and a court order mandating the purchase of his 20-percent stake.
“The lawsuit is without merit and we will defend it vigorously,” Skelley told The Real Deal. “He can’t liquidate the company and has no right to even request it.”
Turner’s complaint is the second lawsuit filed against iFunding within a month. In late December, boutique investment bank CapStack Partners alleged that iFunding had lied about the funds it had raised for real estate projects the two firms had partnered on in the midwest.
It’s unclear whether Turner’s suit has any chance of succeeding, but it does raise the question of what would happen to iFunding’s customers if the firm were to get shut down. Richard Morris, a securities lawyer at Herrick, Feinstein LLP, could not speak to iFunding specifically, but argued that crowdfunding investors generally have little to worry about in that scenario. As long as real estate crowdfunding platforms like iFunding simply connect investors and borrowers (which most of them do), he explained, investors could still expect to be repaid even if the platform goes bust. “It’s as if you bought stock at another company, and the placement agent or broker-dealer went bust,” he said. “It’s irrelevant.”