Hemp CBD After the Farm Bill

2018 Farm Bill: An Overview

The Agricultural Improvement Act of 2018, commonly known as the “2018 Farm Bill,” is an omnibus piece of legislation that Congress uses to set national agricultural, nutrition, conservation and forestry policy. The 2018 Farm Bill is particularly relevant to the burgeoning CBD product market because Congress removed hemp and its derivatives, including CBD, from the Controlled Substances Act, meaning that it is no longer a violation of the Controlled Substances Act to possess hemp, hemp products or CBD derived from hemp. However, marijuana and CBD derived from marijuana is still a Schedule I controlled substance in the United States.

The 2018 Farm Bill defines hemp as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol [(“THC”)] concentration of not more than 0.3 percent on a dry weight basis.” Any part of the Cannabis sativa L. plant that contains more than 0.3 percent THC is considered marijuana and therefore a controlled substance.

The removal of hemp from the Controlled Substances Act did not create a regulation-free marketplace in which to sell hemp and products derived from it. The U.S. Food & Drug Administration (the “FDA”) is still authorized to regulate CBD under the Food, Drug and Cosmetics Act (the “FDCA”), and state agencies may also regulate CBD. The FDA’s statement on December 20, 2018, affirms that the FDA intends to enforce its position, stating:

[I]t is unlawful under the [FDCA] to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived.”

However, the FDA has recognized that there is significant interest in these products and that there are numerous products are already on the market. Because of this, the FDA has stated that it will continue to investigate whether CBD may be added to products intended for human consumption and whether those products can be regulated as both pharmaceuticals and dietary supplements.

The 2018 Farm Bill also allows for interstate commerce of hemp and hemp products produced in accordance with the 2018 Farm Bill. What this means is that States and Indian Tribes are prohibited from impeding the transportation or shipment of hemp or hemp products through their state or tribal land, so long as the hemp or hemp products are produced in accordance with the provisions of the 2018 Farm Bill and the U.S. Department of Agriculture’s (the “USDA”) regulations, which are still being drafted. However, States and Indian Tribes retain the right to prohibit the production and sale of hemp or hemp products, including hemp-derived CBD, within or on their state or tribal land.

Tensions in the Market

FDA Enforcement is Lacking

Notwithstanding the FDA’s position on CBD, many companies have been selling hemp-derived CBD products. During the last several years, the FDA has sent cease and desist letters to only a relatively small number of companies selling hemp-derived CBD, and these letters objected to health-related claims about the product rather than the use of CBD itself. Since the FDA made its renewed policy statement in December, we do not believe the FDA has increased its enforcement focus on CBD.

State Enforcement is Uneven

Some states, like California and New York, have taken the position that the sale of CBD in food products within the state is unlawful. However, California does permit marijuana and hemp-derived CBD to be sold in edibles in the regulated marijuana market. Some of these states are actively working to embargo food and drink products containing CBD. Other states have taken a hands-off approach and are waiting to see how the FDA decides to regulate the product at the federal level.

Hemp & CBD Regulation: The Next 12 Months

The 2018 Farm Bill directed Congress to study the hemp production pilot programs developed by states under the 2014 Farm Bill. These pilot programs will remain in place until one year after the USDA releases its regulations governing hemp production. The USDA is expected to release draft regulations within the next twelve months, but the timing of a full program as described in the 2018 Farm Bill is unknown. At this time, the industry continues to be governed by the 2014 Farm Bill pilot programs at the state level.

U.S. Department of Agriculture Regulations

The USDA held its first listening session on March 13th where it solicited public comments on the 2018 Farm Bill dealing with hemp and the USDA’s forthcoming regulations. The listening session was intended to allow industry participants to help the USDA in its rulemaking efforts as it relates to the production of hemp. The USDA is required under the 2018 Farm Bill to create regulations and guidelines “as expeditiously as possible.” Regulations are expected prior to the 2020 planting season.

U.S. Food & Drug Administration

The FDA has reiterated its position that CBD and CBD-based products may only be sold pursuant to the FDA’s approval under the FDCA. Although the FDA announced that it plans to hold a public hearing sometime in April, the recent resignation of Commissioner Gottlieb may delay that hearing. Before his departure, former Commissioner Gottlieb stated that the FDA was “deeply focused” on the issue of how to regulate CBD-based foods and formed a working group to begin working on potential new regulations. One possible framework suggested by Gottlieb was to regulate products with high concentrations of CBD as drugs and to allow lower concentrations to be included in foods and sold under the regulations applicable to dietary supplements.

State Programs

Some States have already started working on new hemp cultivation regulations to comply with the provisions of the 2018 Farm Bill. These States will likely continue to modify their regulations as the USDA releases more information about what the USDA expects to see in each State’s plan. In the meantime, States may continue to operate under the 2014 Farm Bill and may implement pilot programs to study the viability of hemp as an agricultural product. The 2014 Farm Bill does not expressly permit commercial sale of hemp products produced pursuant to a state’s pilot program, but some states have interpreted the ability to research the “marketing” aspects of hemp as permitting commercial activity, at least to some extent.

Banking

By removing hemp from the Controlled Substances Act, the federal government has removed a barrier for hemp companies to access banking services. Companies engaged in activities that are not clearly permitted by a state’s pilot program may continue to have difficulty accessing banking services until the USDA and FDA issue regulations or guidance. Most banks have not yet changed their policies in response, but it is likely that many will allow hemp companies to bank.

Insurance

Insurance companies are starting to look at their internal processes to determine if they can insure companies that participate in the hemp and hemp product markets. The 2018 Farm Bill also explicitly permits industrial hemp to be insured under the Federal Crop Insurance Act.

Capital Markets

Companies selling hemp, hemp products and hemp-derived CBD products may find it easier to access needed capital. By removing hemp and hemp products from the Controlled Substances Act, traditional avenues to access capital will likely reopen for companies so long as those companies are not also involved in the marijuana business.

About Dorsey & Whitney LLP

Dorsey is an international law firm with over 575 attorneys across the United States, Canada, Europe and Asia with expertise assisting U.S.-based companies with accessing the Canadian securities markets. Dorsey provides U.S. legal advice in Canada.

Christopher J. Barry

Chris has over 30 years of experience in public and private securities offerings, stock exchange listings, mergers and acquisitions, tender offers, proxy contests, contests for corporate control and shareholder disputes, corporate governance and general business counseling, new businesses formation and venture capital transactions.

Michael Weiner

Michael is a partner in Dorsey's Corporate Group and the head of the Corporate department in Denver. His practice focuses on the representation of emerging growth companies in the areas of corporate formation, mergers and acquisitions, venture capital and angel finance, and securities regulation.

Stephanie Gambino

As an associate in Dorsey’s Corporate Group, Stephanie’s practice focuses on corporate and transactional matters. She supports clients in both domestic and cross-border transactions ranging from corporate governance matters to securities offerings and general commercial transactions. Stephanie also supports clients with a variety of U.S. regulatory issues, including advising on issues relating to securities offerings and other highly regulated industries.

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