Nobody's saying people shouldn't also read the prospectus. But if people can lie in the pitch and then get out of responsibility through an obscure note in the prospectus, more people will lie. It allows classic "the large print giveth and the small print taketh away" scams.
Civil litigation is a terrible method for enforcement. The longer the feedback loop, the more opportunity for things to go wrong. Short-sightedness is a defining characteristic of most scammers. And litigation will only happen when there's enough money at stake and the chances of recovery are high. Small investors are fucked from the start, as is anybody who gets taken by somebody who spends the money in ways where there's little to recover.
Also, your "bad actors" vs "good actors" thing is a total false dichotomy. Actors aren't the problem; it's actions. If you make it easier for "bad actors" to act, you will have more (and more severe) bad actions. Further, through competitive effects, you push everybody in the direction of bad actions.
The problem with "ex ante" regulations governing conduct is you force a lot of wasteful work on a lot of people and companies that becomes a drag on the economy, productivity, whatever you want to call it.
Let's make an analogy that's appropriate for this time of year. Some people cheat on their taxes. Some cheaters get audited and caught, some don't. Since we know that some people cheat on their taxes and an audit will uncover it should we force every tax filer in the US to submit receipts and other documentation for every deduction claimed on their return, at the time of filing?
Can you imagine how much time that would take for filers and the IRS? Can you imagine the outrage on the part of filers?
The Taibbi article sites to a Bloomberg opinion piece that baldly states that people can lie in their pitch and get away with it. However, if you read the legislation (or at least credible legal analysis of it): A) the pre-prospectus presentations can only be made to qualified investors and institutions (meaning you are supposed to be a sophisticated investor, not the general public and will read or pay someone to read the prospectus when it is filed) and B) the actual regulations that will enact the law haven't been written yet.
There definitely will be (and need to be) reasonable regulations to enact this law, I don't argue that at all. I just think the whole tone and content of this article is over the top and biased. I enjoyed reading his evisceration of GS, but I do think it has influenced his writing about anything having to do with the securities markets or finance in general.
Take food. The US has reasonably strong food laws. Nobody in their right mind would suggest that we go for China-style food safety laws (mmm, melamine infant formula and "meat" made from whatever fits in the grinder) and then hope that suits from individual sick people fixes it.
Also, you're ignoring half the costs. I have confidence that I can buy pretty much any food in any store or restaurant in my city with very low odds of getting sick and zero odds of getting poisoned. Complying with food safety regulations may be expensive for the producer, but removes very expensive burdens from consumers.
Moreover, a well-regulated market is more friendly to consumers via increased competition. If our food safety laws were poor, then I'd only buy from producers who had very strong reputations. The risk of trying a new product or a cheaper competitor would be much higher, so innovation would be lower and overall prices would be higher.
I think investment in the US is closely analogous. Well-regulated markets can help all participants, buyers and sellers alike.
Also, Taibbi's skepticism of Wall Street is well earned. The recession we are still working out of was mainly caused by financial shenanigans, but nobody is in jail and regulatory fixes have been minimal. Anthony Mozillo, for example, made north of $600m; his eventual punishment was to have to give back 10% of that. Lesson learned, I'm sure!
The JOBS Act could be entirely innocuous, but "once bitten, twice shy" seems reasonable to me.
You're asserting this based on religious beliefs; you've read and heard this statement a lot in the popular media, and it's part of the Republican catechism. But it's false. In fact, the truth is quite the opposite - a heavily regulated environment is the BEST for business, the economy, and productivity. The United States is a good place for business precisely because it is heavily regulated. Nobody steals your plant equipment because there are lots of cops and Marines. People pay their end of the contract because there are lots of courts. Banks don't steal your deposits because the bank regulators are strong, well, that one may be inoperative in 2012 but it used to be true.
The closer the United States comes to non-regulated countries like Somalia, the closer its economy will be to Somalia's.
There's also tendency toward convenient over-simplification that's common among we nerds. It's a valuable tool; classical mechanics is a lot easier to learn and reason about if you ignore things like air resistance. One of the most important skills for a software developer is willfully ignoring 99% of the complexity to extract the 1% it's worth teaching the computer about.
But it's also dangerous. The simplifying assumptions of economics are things like perfect information, perfect rationality, unlimited mental processing power, unyielding will, and entirely unbiased cognition. That's useful in theory, but misleading in practice. Misleading twice over, because that's how people would like to see themselves. "I don't need regulation! I'm too smart to ever be fooled!"
This has always been the case. The stock market, corporate bonds, land trusts, and any other investment made by a person who isn't an expert in the field is just putting their money into a big black box, crossing their fingers, and hoping more money comes out.
If you've got $100k to invest, go buy a car wash. It's a much safer bet than randomly sticking your money into the mystical black box.
If you've got $10k to invest, find 10 friends and buy a McDonald's. Yeah, it might be buying a job, but those things print money, and if you lose money, you will have lost it betting on yourself.
These are far more sensible solutions to manage your extra cash than throwing it into a mutual fund or a 401k or a savings account managed by someone you don't know in a way that you don't understand. You're just setting yourself up to be victimized when you thought you were 5 years away from retirement.
I think you vastly underestimate the costs of real businesses. Looking at BizBen.com, maybe 3% of car washes for sale are under $100k. The average McDonald's grosses $2.2m/yr and is reported to have profits in the 7% range, which would be ~$150k/yr. There's no way you can buy $150k/year in income for $100k.
You also don't account for the opportunity cost of the time and energy, or the increased risk. If I'm taking my investment money and buying myself a job, then if my investment fails my job is gone too. For a lot of people it's better just to put the money in a (tax-advantaged) 401k and spend their energy on what they're actually good at, which is probably not the evaluation and operation of small businesses.
If you're focussed on returns, unless you have significant control over the companies you invest in, investing anything but a low-overhead tracker of a well-known index is not investing but just plain betting.
If you're not just focused on returns though, you should invest 'on principal' in what you believe in.
I always believed that small companies would in general do/be better, therefore I would've invested in small-caps. Some people want to fund a more eco-friendly world and invest in CleanTech funds. Now if you believe want a world with more startups, you can invest in that.
But yes, having a managed 401k is giving your money to a bunch of dispassionate bureaucrats which in general is not that smart of move.
[EDIT: I didn't know that 401k has tax benefits which might offset the overhead of the bureaucrats.]
As wpietri correctly assumed, I thought that a 401k was by definition a managed fund and my comment was directed at managed funds in general.
That's a reasonable suspicion. Warren Buffett's involved in a million-dollar bet on the same topic: http://longbets.org/362/