You are completely correct that the issuer can just keep re-issuing more and more colored coins.  It's seems like a weird concept if you imagine doing it yourself, but this is very similar to how companies issue shares or bonds today.  Corporation A can issue as many shares as it likes.  The money that it raises legally belongs to the company, but of course the president could probably find a way to use that money to pay himself a huge salary or an accountant could embezzle it.  

But the free-market will self regulate: if BTCorp keeps issuing new bonds and selling them on an exchange, it will drive its own bond price down and thus its effective interest rate up.  So BTCorp wouldn't do this because it just increases its funding costs (unless it is planning to sell as many bonds as possible and then default, but that would fraud and fraud is still a crime even if it's done with bitcoins.)

I really like colored coins because it makes the fact that they are promises obvious: bitcoins themselves have no counterparty risk, while colored coins are only as good as the promise of the issuer.  

By using a colored-coin block explorer, holders of IOUs could determine the amount outstanding and observe any unexpected increases or decreases.

Although holders cannot stop the issuers from over issuing, there are at least two practical solutions if subscribers are concerned:

  -  The issuer can create a document that clearly describes the terms of the colored coin notes.  If he signs this document with the private key(s) used to create the colored coins, then I think the subscribers would have a strong case for litigation should the issuer breach the contract.

  -  I believe that the multisig technique can be used to create colored coins.  If I am correct, this means that the company could be setup with, say, 5 directors.  It could take, for example, signatures from 3 of the 5 directors to issue more notes.