Think of it this way. Imagine if instead of "Magic Microwave Death" Kayaba instead just put a tiny bomb in every single NervGear.
Would VR-tech itself be to blame? Is it the NervGear itself, or the bomb that's dangerous? Or would people just say "Oh, just don't build one with a bomb in it."
Following that, there seems to be a bit of confusion between Government Regulation and Free-Market Capitalism. Maybe the public IS too scared of it. So it doesn't sell and the company goes bankrupt, oh well. ( I mentioned before, but a dedicated portion of hardcore gamers would likely be willing to try out a new game regardless of the risks)
But that's different from the government stepping in and banning stuff, rather than just getting heavily involved in the regulation of it.