Send rejected participants to wait list?
If you look at the participant statuses (Administer>CiviEvent>Participant Statuses) you can customize these any way you want. You can use the wait list by manually changing to that. The key is how they are counted. If you look at the class column you will see the following:


Positive - paid in full, etc.  
pending - counted but awaiting payment, can from pay later or just moved off wait list.
waiting on wait list or some other state (not counted) 
negative - rejected or not approved, etc.


You can manage the statuses in what ever way best fits your process. You want to make sure your reporting reflects how you decide to use statuses. Also, make sure you aware of which statuses are being counted against the participant total. 

Hope this helps