I actually had this identical issue with the inverse solution. I had upgraded a .NET project to .NET 4.0 and then reverted back to .NET 3.5. The app.config in my project continued to have the following which was causing the above error in question:
<startup>
<supportedRuntime version="v4.0" sku=".NETFramework,Version=v4.0"/>
</startup>
The solution to solve the error for this was to revert it back to the proper 2.0 reference as follows:
<startup>
<supportedRuntime version="v2.0.50727"/>
</startup>
So if a downgrade is producing the above error, you might need to back up the .NET Framework supported version.