The problem with your reasoning is no, everyone doesn't know how risky their "investments" are. Pirateat40 investors didn't, "insured pass-through" investors didn't, and, judging by the wailing & gnashing of teeth everywhere from ActM to Cloudhashing to Labcoin to choose-your-stock, those "investors" didn't either.
I see nothing wrong with a exchange offering securities where it is up to the investor to make decisions.
I can trade forex and on the NASDAQ with no one telling me what to do or someone telling me I must go back to the Xbox because this is too risky for me, if this is the case why can we not have an exchange offering similar odds but for far smaller companies?
Also I can buy facebook and soon twitter shares, the SEC does not do the due diligence for me, the SEC has determined that they are not cooking books and that they are not lying in the reports and that seems to be the extent. The SEC is not being a nanny, many companies during the dot com bubble failed and that was just nature.
The only difference here is that setting up a company to list on an established exchange is too expensive for the potential gains, and this new law seeks to rectify that issue.
Please Crumbs, when was the last time SEC vetted the business models of the companies listed on public exchanges in the US?