The main problem for investors is the principal-agent problem - simply that the managers of the company will use the funds invested into it for their own advantage instead of advancing the company. There are degrees of this - from blatant fraud to slightly overpaying themselves or making deals with their friends instead of best offerers. It is impossible to entirely stop this - but there are ways to diminish the impact.
1. Become involved in the company - this can work only if you have a big stake in the company (with dispersed ownership you get collective action problems) and the company is a big stake of your activities (you cannot get involved much in many companies).
2. Lend not buy equity (and require collateral etc).
3. The laws for public offerings - with all that red tape involved: the strict accounting, governance rules, information disclosure rules, etc.
4. Investing in startups. This is a small special case where investing can be something between becoming fully involved in the company operations and being a small shareholder of a public company. This relies on the theory that startups goal is to grow a 100 times or die - so small continues extractions by the executives are ruled out.
The crowdfunding initiatives, try to reduce the red tape involved in a public offering of equity - but they don't even try to address the problem that the bureaucracy addresses in the first place.
1. Become involved in the company - this can work only if you have a big stake in the company (with dispersed ownership you get collective action problems) and the company is a big stake of your activities (you cannot get involved much in many companies).
2. Lend not buy equity (and require collateral etc).
3. The laws for public offerings - with all that red tape involved: the strict accounting, governance rules, information disclosure rules, etc.
4. Investing in startups. This is a small special case where investing can be something between becoming fully involved in the company operations and being a small shareholder of a public company. This relies on the theory that startups goal is to grow a 100 times or die - so small continues extractions by the executives are ruled out.
The crowdfunding initiatives, try to reduce the red tape involved in a public offering of equity - but they don't even try to address the problem that the bureaucracy addresses in the first place.