Since the 1960s, U.S. securities law has mandated that any investor acquiring more than 5% of a public company's shares, with an intent to acquire or control it, must disclose relevant information to regulators within a specified timeframe. Annually, the U.S. Securities and Exchange Commission (SEC) receives tens of thousands of such filings. However, the legal team of Tesla (TSLA.US) CEO Elon Musk is now mounting a fundamental challenge to this very system.

According to a legal memorandum submitted to a federal court in Washington, D.C. on Wednesday, Musk's camp not only argues that the aforementioned 5% disclosure requirement is unconstitutional but also asserts that the very structure of the SEC itself is inconsistent with the U.S. Constitution. Musk is currently defending himself against an SEC allegation which claims he failed to file the required ownership reports on time during his aggressive purchase of Twitter (now renamed X) stock in early 2022.

The SEC stated that by March 14, 2022, Musk had accumulated a stake exceeding 5% in Twitter. Under the applicable Rule 13D at the time, disclosure was required by March 24 at the latest, yet the actual filing occurred on April 4. (Rule 13D stipulates that investors holding more than 5% of a public company's shares with control intent must disclose information to regulators within a short period.)

The SEC believes the facts of the case are clear and liability is straightforward. In a motion last August, the regulator characterized it as a "straightforward, strict liability" disclosure violation case and asked the court to hold Musk liable without a trial or further fact-finding. The SEC is seeking the disgorgement of hundreds of millions of dollars in trading profits and the imposition of a corresponding penalty.

In response, Musk stated in the latest filing that the delayed filing resulted from a "good faith mistake" by his asset manager and broker. They mistakenly believed the filing deadline was at the year's end, not the 10-day period required by the rule, and completed the disclosure immediately upon realizing the error.

More notably, Musk's lawyers are mounting a constitutional challenge against Rule 13D. They argue that only investors deemed to be "seeking corporate control" are required to disclose their stakes within a shorter timeframe, while those considered passive investors are granted a more lenient filing deadline. This distinction is claimed to violate the First Amendment of the U.S. Constitution because it "compels disclosure based on the investor's ideas and subjective intent."

Furthermore, the legal team pointed out that, against the backdrop of recent U.S. Supreme Court rulings affirming the President's authority to remove heads of some independent agencies, the SEC's long-held self-perception of an "independent" governance structure itself lacks a constitutional foundation. Therefore, enforcement cases initiated under this outdated, "protected" system should be dismissed in their entirety.

At the very least, Musk's side argues that he should have the right to question the SEC about its three-year investigation process before the court issues a ruling. An SEC spokesperson declined to comment on Musk's constitutional claims.