The real problem is that the legal system isn't set up for a bunch of small investors to try to sue a company/officers doing genuinely fraudulent things.
If the stock is carved up over 100 people, it's very difficult to get unified action, so fraud tends to linger on.
I do think it would be great if we could find a way for everyone to participate in startups, but until we find a way to keep the scammers out then deregulation is not likely to end well for the unsophisticated investor.
The solution to preventing scamming is to make it harder for scammers to raise money than genuine businesses. The major difficulty is it is very difficult for unsophisticated investors (actually all investors) to make accurate judgments into the character of founders of start-ups. Even if we had a good reputational system for start-up founders (we don't), most founders (especially the most innovative ones) are not going to have a lot of history to support any such reputation system.
On the topic of reputation, Linkin^ has a good platform to monetrise this demand. They could charge users (and pay other users) for reputation endorsement (not just skill endorsement). They could have users provide an enormous amount of biographical detail and then have others verify (or not verify) this data. Make enough links and it will be very hard for a scammer to succeed over the honest.
^ Actually this could be a great idea for a start-up. Have people upload massive amounts of biographical data and then pay other people to endorse each data point - probably someone is doing it already and will soon tell me all about it :)
Using the tried and true methods that already exist in the public key infrastructure of the web, I think the problem of tracking reputation online (in a reliable way) is something that will be solved in our lifetimes.
Note what happens every time somebody tries to start "Yelp for doctors". Now add an extra couple zeros at stake for "Yelp for investment" and watch how many lawyers start flying when a negative review comes in.
I think accountability in an online reputation tracking system would come from the network's ability to easily match the online reputation of the individual to the real identity of that individual.
If a person's real identity is at risk I think they're generally going to be far more cautious / conservative about what they put out there. Also makes it less likely that a person with a poor reputation online will be able to redeem that poor reputation just by creating a new profile.
Having a good reputation in the real world takes hard work. Not so much online.
Further, I'm a sophisticated investor, I've done very well with complex derivative investments. I knew there was going to be a housing bubble in 2001 and profited from it until 2007. How many people were saying there was no bubble at that time?
I'm the very definition of a successful sophisticated investor, but I've been kept out of investing in startups-- the industry where I've worked for nearly 30 years-- because people like you think its "dangerous"?
Requiring me to have $1M in assets does not measure ones sophistication. Make it a $50k a year salary and a swear-under-penalty-of-perjury type form to cover the startup's butt and I'm ok with "accreditation".
Until then, it's just yet another way regulations give rich people better opportunities than regular people.
Casinos are highly regulated so I am not sure this is a good example.
I actually don't think it is dangerous because people will lose money, I think it is dangerous because scammers would have a major advantage over non-scammers in a deregulated start-up investment market. Like Gresham's Law [1] we would soon be left with a market totally dominated by scammers and all trust would soon be lost in start-ups (i.e 1920s). This was why the regulations in this area were brought in - to restore the trust of the public in the stock market.