It isn't. In fact, it's almost certainly
better.
All else being equal, the total loss to the economy when a doomed company goes under is the same. If $50m was invested, that $50m has been lost, almost always with nothing at all to show for it. Of course, if no debt was involved, that money didn't go away, it just went somewhere else. Most likely, since it was paid out as wages, that somewhere else was China.
The ability to sell a worthless security at a loss as opposed to holding it until it is eventually canceled when the corporation is wound down does not change this. All it does is spread the loss out: the first investor loses whatever he put in less what he gets for the stock later, and whoever buys it at that point eats the rest of the loss (or at least until she sells it at a loss too, and so on). The total loss doesn't change; all that changes is the distribution of losses across the economy.
However, it's not that simple. An IPO invariably entails the issuance of shares that did not exist previously. That is, some portion of the raise is new investment. When the company fails, all investment made in it is lost, so any additional investment increases the total loss to the economy. So the world actually becomes poorer when a company is able to go public before failing (or, more broadly, each additional round of funding whether public or private increases the total loss). The longer a bubble is allowed to inflate, the greater the total loss to malinvestment.
So, is it better for 225k "qualified" investors to eat the entire loss, or for several million retail investors to share in a somewhat larger loss? Your answer probably depends on which you are. Overall, though, all that matters is how much total investment was made in companies that fail without ever paying a dividend.