Tag Archives: Act

A Dank Opportunity: Private Equity in the Cannabis Industry & Compliance with the Securities Act

By Kayla Kuri
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Under current federal law, financial institutions are extremely limited in the services and resources that they can offer to cannabis companies. Without access to traditional financing, cannabis companies have been forced to turn to outside investments to finance their operations. The private equity approach can be a “dank” opportunity for cannabis companies; however, these companies should be cognizant of the securities laws implications that are present with this type of business structure. The focus of most cannabis companies when forming their business is compliance with the regulatory scheme of their jurisdiction as it relates to the operation of a cannabis business. While compliance with these laws is important, it is also important that these companies ensure that they are compliant with the Securities Act of 1933 (the Securities Act) before accepting investments from outside sources.

Securities Act Application

Oftentimes, smaller companies don’t realize that they are subject to the Securities Act. However, the definition of a “security” under the Securities Act is very broad1 and under S.E.C. v. W.J. Howey Co., an investment in a common enterprise, such as a partnership or limited liability company, where the investor expects to earn profits from the efforts of others is considered a “security” and thus, subject to the rigorous requirements of the Securities Act.2 In general, all companies offering securities within the United States are required to register those securities with the Securities and Exchange Commission (SEC) unless a registration exemption is available.3 A company can register its securities (i.e., its ownership interests offered to investors) with the SEC by filing a Registration Statement. These statements generally offer investors certain information about the company in order to enable investors to be able to make an informed decision about their investment. Filing a Registration Statement can be both time-consuming and costly, and most companies want to avoid filing one if they can. Luckily, the Securities Act offers certain exemptions from registration requirements to companies who meet certain standards.4 While there are numerous exemptions from securities registration, the most common exemptions used are the Regulation D5 exemptions, which provides three different exemptions based on the size of the offering and the sophistication of the investors, and the Rule 1476 Intrastate exemption.

Regulation D Exemptions

Rule 504-Limited Offerings

Rule 504, often called the “Limited Offering” exemption, provides an exemption from securities registration for companies who limit the offer and sale of their securities to no more than $5,000,000 in a twelve-month period.7 Unlike the other Regulation D exemptions, which are discussed in further detail below, the Limited Offering exemption does not have any limitations on the level of sophistication or number of investors.8 This means that companies who rely on this exemption do not have to verify the net worth or income of their investors or limit the number of investors in the company. Like all Regulation D exemptions, companies relying on the Limited Offering exemption are required to file a “Form D” with the SEC within 15 days of the first securities sale.9 A Form D is a relatively simple form which provides basic information about a company to the SEC, including the registration exemption that is being relied upon. A copy of Form D can be found here.

Rule 506(b)

The “Private Offering” exemption can be found at Rule 506(b) of Regulation D.10 This exemption is commonly used for larger investment offerings with varying levels of investor sophistication. The Private Offering exemption can be used for investment offerings of any size so long as the company: (1) does not use general solicitation or advertising, such as newspaper articles or seminars, to attract investors; and (2) limits the number of “non-accredited investors” to no more than 35.11 “Accredited investors” are those investors whom the Securities Act deems sophisticated enough to properly weigh the risk of their investment in the company. In order to qualify as an accredited investor, the investor must:

  1. Have an individual income of more than $200,000 in the past two years
  2. Have a joint income with their spouse of more than $300,000 in the past two years
  3. Have an individual net worth, or joint net worth with their spouse, in excess of $1,000,000 or:
  4. Be a director, executive officer or manager of the Company.12

If the investor is a corporation, partnership, limited liability company or other non-trust entity, then to qualify as an accredited investor, it must either have assets in excess of $5,000,000 or each of its equity owners must meet one of the requirements for individuals listed above.13 If the investor is a trust, then the trust must: (1) have total assets in excess of $5,000,000 and the investment decision must be made by a “sophisticated person” (i.e., the person who is making the investment decision has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of an investment in the company); (2) have a trustee making the investment decision that is a bank or other financial institution; or (3) be revocable at any time and the grantor(s) of the trust must meet one of the requirements for individuals listed above.14

The Private Offering exemption allows a company to have an unlimited number of accredited investors, but only up to 35 non-accredited investors. However, companies should be very cautious of allowing non-accredited investors to invest in the company. The Securities Act requires that companies make extensive disclosures to non-accredited investors which are essentially the same requirements as the company would have to provide in a registered security offering. These requirements include providing investors with financial statements, operations plan, detailed descriptions of the company’s business, description of all property owned, discussion and analysis of the company’s financial condition and the results of operations, biographies of and descriptions of each officer and director, as well as other descriptions regarding the details of the company.15 Failure to provide the necessary information to non-accredited investors can disqualify companies from the benefits offered by the Private Offering Exemption. Companies should be very cautious when relying on the Private Offering exemption. If a company does choose to utilize the Private Offering exemption, they must file a Form D with the SEC within 15 days of the first securities sale.

Rule 506(c)

Rule 506(c), the “General Solicitation” exemption, is similar to the Private Offering Exemption. Unlike the Private Offering exemption, companies relying on the General Solicitation exemption are permitted to use general solicitation and advertising to advertise their securities to potential investors.16 However, investors relying on the General Solicitation exemption must only sell their securities to accredited investors.17 Under Rule 506(c), the company selling the securities must take steps to verify the accredited-investor status of their investors.18 These steps can include reviewing past tax returns, reviewing bank statements, or obtaining confirmation from the investor’s attorney or accountant that such person is an accredited investor.19 Like the other Regulation D exemptions, companies relying on the General Solicitation exemption should file a Form D with the SEC.Private equity can be a dank opportunity for cannabis companies, but it is critical that these companies ensure that they are in compliance with all applicable securities laws.

Intrastate Exemption

Rule 147, known as the “Intrastate” exemption, provides an exemption from securities registration for companies who limit the offer and sale of their securities to investors who are residents of, if they are an individual, or have its principal place of business in, if they are an entity, the state where the company is organized and has its principal place of business.20 The Intrastate exemption permits general solicitation to investors who are in-state residents, and there are no limitations on the size of the offering or the number of investors, whether accredited or unaccredited. In addition, companies relying on this exemption are not required to file a Form D with the SEC. The Intrastate exemption can be very desirable to companies who wish to obtain a small number of key investors within their communities.

State Requirements

In addition to complying with the Securities Act, companies are also required to comply with the securities laws of each state where their securities are sold. Each state has its own securities laws which may place additional requirements on companies in addition to the Securities Act. Most states (including California, Colorado, Oregon, and Oklahoma) require that a copy of the Form D filed with the SEC be filed with the state securities commission if securities are sold within that state. Before offering securities for sale in any state, companies should thoroughly review the applicable state securities laws to ensure that they are in compliance with all state requirements in addition to the requirements under the Securities Act.

Additional Considerations for Cannabis Companies

Despite the fact that the purchase and sale of cannabis is illegal under federal law, cannabis companies are still subject to the Securities Act in the same manner as every other company. However, the SEC has issued a warning to investors to be wary of making investments in cannabis companies due to the high fraud and market manipulation risks.21 The SEC has a history of issuing trading suspensions against cannabis companies who allegedly provided false information to their investors.22 Cannabis companies who wish to rely on any of the registration exemptions under the Securities Act should ensure that they fully disclose all details of the company and the risks involved in investing in it to all of their potential investors. While cannabis companies are permitted to rely on the registration exemptions under the Securities Act, the SEC appears to place additional scrutiny on cannabis companies who offer securities to outside investors. It is possible to fully comply with the onerous requirements of the Securities Act, but cannabis companies should engage legal counsel to assist with their securities offerings. Failure to comply with the Securities Act could result in sanctions and monetary penalties from the SEC, as well as potentially jeopardize a cannabis company’s license to sell cannabis. It is extremely important that companies seek advice from legal counsel who has experience in these types of offerings and the requirements of the Securities Act and applicable state securities laws. Private equity can be a dank opportunity for cannabis companies, but it is critical that these companies ensure that they are in compliance with all applicable securities laws.

References

  1. See 15 U.S.C § 77b(a)(1)
  2. 328 U.S. 293 (1946).
  3. 15 U.S.C § 77f.
  4. See 15 U.S.C § 77d.
  5. 17 CFR § 230.500.
  6. 17 CFR § 230.147.
  7. 17 CFR § 230.504.
  8. Id.
  9. Id.
  10. 17 CFR § 230.506(b).
  11. Id.
  12. 17 CFR § 230.501.
  13. Id.
  14. Id.
  15. 17 CFR § 230.502; 17 CFR § 239.90; 17 CFR § 210.8; 17 CFR § 239.10.
  16. 17 CFR § 230.506(c).
  17. Id.
  18. Id.
  19. Id.
  20. 17 CFR § 230.147.
  21. Investor Alert: Marijuana Investments and Fraud. (2018, September 5).
  22. Investor Alert: Marijuana-Related Investments. (2014, May 16).

Did Strip Clubs Open the Door for Cannabis Businesses to Receive PPP Loans?

By Steve Levine, Megan Herr
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In our previous posts, we discussed why state-legal medical and recreational cannabis businesses are likely not eligible to receive federal financial assistance under the Paycheck Protection Program due to the fact that these businesses are inherently engaged in federally illegal activities.

While our view has not necessarily changed, this post is intended to highlight the implications of a recent temporary restraining order prohibiting the U.S. Small Business Administration (SBA) from excluding strip clubs from receiving financial relief under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the “Act”).

The Case for Strip Clubs to Receive SBA Assistance

The Facts

Last month, DV Diamond Club of Flint LLC (dba Little Darlings) sued the SBA in the U.S. District Court for the Eastern District of Michigan claiming, among other things, that the agency exceeded its authority under the CARES Act by excluding otherwise eligible strip clubs from receiving Paycheck Protection Program (PPP) loans.

Little Darlings Night Club in Flint, Michigan

On April 6, 2020, Little Darlings, an adult entertainment establishment licensed in Flint, Michigan, applied for a PPP loan to mitigate its business losses as a result of the COVID-19 pandemic.

Due to rapidly diminishing PPP funds and the rejection of applications submitted by other seemingly eligible adult entertainment establishments, Little Darlings filed a claim against the SBA alleging that the agency’s April 15, 2020 “Business Loan Program Temporary Changes; Paycheck Protection Program “ Rule (the Interim Rule) exceeded the SBA and Department of Treasury’s regulatory authority under the CARES Act.

The Interim Rule, in part, provided that:

“Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110 and described further in SBA’s Standard Operating Procedure (SOP) 50 10, Subpart B, Chapter 2, except that nonprofit organizations authorized under the Act are eligible.” 1

The Interim Rule effectively clarified that those businesses that “are identified” in 13 C.F.R. § 120.110 (the Ineligibility Rule) and “described further” in Standard Operating Procedure 50 10 5(K) are “not eligible for PPP loans.”

The Ineligibility Rule – 13 C.F.R. §120.110

In 1996, the SBA declared that certain types of businesses are not eligible to participate in SBA lending programs. Under the Ineligibility Rule (codified at 13 CFR § 120.110), certain sexually oriented businesses2 and “businesses engaged in any illegal activity,”3 in addition to other enumerated businesses, were barred from receiving SBA financial assistance.

The SOP

In 2019, the SBA issued “Standard Operating Procedure for Lender and Development Company Loan Programs 50 10 5(K)” (the SOP) providing guidance to lenders regarding how to administer the Ineligibility Rule. The SOP explained that certain business types such as “Businesses Providing Prurient Sexual Material”i and “Businesses Engaged in any Illegal Activity,ii” among others, may be “ineligible” to participate in SBA programs.4

The Argument

In addition to arguing that the SBA’s regulations violated Little Darlings’ Constitutional rights under the First and Fifth Amendments, Little Darlings alleged that the SBA lacked authority to promulgate regulations clarifying what businesses were eligible for PPP loans, as Congress intended to “increase eligibility” for PPP loans under the CARES Act by establishing only two criteria for PPP eligibility. Moreover, Little Darlings relied on the fact that Congress explicitly provided that “any business concern . . .  shall be eligible” for a PPP loan if it met the criteria identified in 15 U.S.C. § 636(a)(36)(D)(i) of the CARES Act.

As a result, Little Darlings sought a Temporary Restraining Order (TRO), Preliminary and Permanent Injunction enjoining the SBA from enforcing or utilizing the Ineligibility Rule or SOP to exclude otherwise eligible PPP loan applicants. As part of the orders, the SBA would be required to immediately notify all SBA lending banks to immediately discontinue utilizing 13 CFR § 120.110 or the SOP as criteria for determining PPP eligibility and to process all PPP loan applications without reference to such regulations and procedures.

On May 11, 2020, U.S. District Judge Matthew Leitman granted Little Darlings’ TRO blocking the SBA from enforcing the Ineligibility Rule and SOP finding that Congress intended to provide temporary paycheck support to “all Americans employed by all small businesses that satisfied the two eligibility requirements – even businesses that may have been disfavored during normal times.”5

Notably, the Sixth Circuit refused to overturn the TRO reasoning that withholding loans from previously “ineligible” businesses, such as strip clubs, conflicts with the broad interpretation of the CARES Act.

Similar cases have also been brought in Illinois and Wisconsin on behalf of adult entertainment businesses that have been denied PPP relief. Notably, on April 23, 2020, the U.S. District Court for the Eastern District of Wisconsin issued a comparable injunction blocking the SBA from denying federal financial assistance to multiple Wisconsin gentlemen clubs.

Implications for Cannabis Businesses

As we previously discussed, one of the largest hurdles for cannabis businesses to receive federal financial assistance from the SBA is that applicants must make a good faith certification that they are not engaged in any federally illegal activity.6

The SBA has historically relied on both the Ineligibility Rule and SOP to uphold its position that “illegal activities” include both Direct Marijuana Businessesiii and Indirect Marijuana Businessesiv that “make, sell, service, or distribute products or services used in connection with illegal activity.”7

However, should Judge Leitman’s interpretation hold true and continue to prohibit the SBA from utilizing the Ineligibility Rule or the SOP as criteria for determining PPP eligibility, cannabis businesses (namely Indirect Marijuana Businesses8) may be eligible to receive PPP loans so long as they satisfy the eligibility requirements identified in the CARES Act.

Although it would ordinarily be absurd to conclude that Congress intended to provide financial assistance to businesses operating in clear violation of federal law (such as Direct Marijuana Businesses), the U.S. District Court for the Eastern District of Michigan and the Sixth Circuit have concluded that the expansive definition of “any business concern” in the CARES Act is not subject to SBA limitations.

U.S. District Judge Matthew Leitman

As Judge Leitman elaborated in his May 11, 2020 order:

“Congress’s decision to expand funding to previously ineligible businesses is not an endorsement or approval of those businesses. Instead, it is a recognition that in the midst of this crisis, the workers at those businesses have no viable alternative options for employment in other, favored lines of work and desperately need help. It is not absurd to conclude that in order to support these workers, Congress temporarily permitted previously excluded businesses to obtain SBA financial assistance.”

Therefore, although we believe it to be highly unlikely that cannabis businesses will actually receive PPP loans due to their continued violation of the Controlled Substances Act (CSA) and need to make a good faith certification that they are not engaged in any federally illegal activity, the door has been opened for certain types of cannabis businesses to potentially receive PPP loans should the SBA remain prohibited from relying on the Ineligibility Rule or SOP to disqualify otherwise eligible applicants.

References

  1. See Interim Rule, p. 2812
  2. 12 C.F.R. § 120.110(p) Businesses which: (1) Present live performances of a prurient sexual nature; or (2) Derive directly or indirectly more than de minimis gross revenue though the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature
  3. 12 C.F.R. § 120.110(h) Businesses engaged in any illegal activity.
  4. See the 2019 SOP, ECF No. 12-11, PageID.570
  5. Specifically, U.S. District Judge Matthew F. Leitman reasoned that: “While Congress may have once been willing to permit the SBA to exclude these businesses from its … lending programs, that willingness evaporated when the COVID-19 pandemic destroyed the economy and threw tens of millions of Americans out of work…” In response to the SBA’s argument that such an interpretation would lead to “absurd results,” Judge Leitman stated: “[T]hese are no ordinary times, and the PPP is no ordinary legislation. The COVID-19 pandemic has decimated the country’s economy, and the PPP is an unprecedented effort to undo that financial ruin.”
  6. See Borrower Application Form, page 2; see also COVID-19 Economic Injury Disaster Loan Application
  7. See SOP 50 105(K) at Ch. 2(III)(A)(8).
  8. It is our position that Indirect Marijuana Businesses (or non plant-touching businesses that service state licensed marijuana establishments) will have an easier time alleging that they are not operating in violation of federal law than those businesses whose existence is inherently premised on cultivating and distributing marijuana in violation of the Controlled Substances Act

i Businesses Providing Prurient Sexual Material (13 CFR § 120.110(p))

  1. A business is not eligible for SBA assistance if:
  2. It presents live or recorded performances of a prurient sexual nature; or
  3. It derives more than 5% of its gross revenue, directly or indirectly, through the sale  of  products,  services  or  the presentation  of  any  depictions  or  displays  of  a  prurient sexual nature.
  4. SBA has  determined  that  financing  lawful  activities  of  a prurient sexual nature is not in the public interest. The Lender must  consider  whether  the  nature  and  extent  of  the  sexual component causes the business activity to be prurient.

ii Businesses Engaged in any Illegal Activity (13 CFR § 120.110(h))

  1. SBA must not approve loans to Applicants that are engaged in illegal activity under federal, state, or local law. This includes Applicants that make, sell, service, or distribute products or services used in connection with illegal activity, unless such use can be shown to be completely outside of the Applicant’s intended market.
  2. Marijuana-Related Businesses:
  3. Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity. Therefore, businesses that derive revenue from marijuana-related activities or that support the end-use of marijuana may be ineligible for SBA financial assistance.

iii “Direct Marijuana Business” mean “a business that grows, produces, processes, distributes, or sells marijuana or marijuana products, edibles, or derivatives, regardless of the amount of such activity. This applies to recreational use and medical use even if the business is legal under local or state law where the applicant business is or will be located.”

iv “Indirect Marijuana Business” means “a business that derived any of its gross revenue for the previous year (or, if a start-up, projects to derive any of its gross revenue for the next year) from sales to Direct Marijuana Businesses of products or services that could reasonably be determined to aid in the use, growth, enhancement or other development of marijuana. Examples of Indirect Marijuana Businesses include businesses that provide testing services, or sell or install grow lights, hydroponic or other specialized equipment, to one or more Direct Marijuana Businesses; and businesses that advise or counsel Direct Marijuana Businesses on the specific legal, financial/ accounting, policy, regulatory or other issues associated with establishing, promoting, or operating a Direct Marijuana Business. However … [the] SBA does not consider a plumber who fixes a sink for a Direct Marijuana Business or a tech support company that repairs a laptop for such a business to be aiding in the use, growth, enhancement or other development of marijuana. Indirect Marijuana Businesses also include businesses that sell smoking devices, pipes, bongs, inhalants, or other products if the products are primarily intended or designed for marijuana use or if the business markets the products for such use.”

SAFE Banking Act Included in COVID-19 Legislation

By Aaron G. Biros
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UPDATE: Late in the evening on May 15, the House of Representatives passed the HEROES package, voting 208-199 (with 23 abstentions). The bill now now heads to the Senate where its fate is more uncertain. 

Earlier today, Speaker Nancy Pelosi debuted the latest piece of legislation to help Americans impacted by the coronavirus pandemic. The Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act) is a large bill containing emergency supplemental appropriations more than 1,800 pages long.

On page 1,066, those in the cannabis industry will find a very exciting addition: the Secure and Fair Enforcement (SAFE) Banking Act. For the uninitiated, the SAFE Banking Act would ensure access to financial services for cannabis-related businesses and service providers.

Currently, federally regulated financial institutions face penalties for dealing with cannabis companies due to the Controlled Substances Act. The bill, if passed, would eliminate the possibility of any repercussions for doing business with cannabis companies.

The impact of this bill becoming law would be widespread and immediate for both the cannabis market and banks looking to invest in the cannabis industry. With banks given the green light to conduct business with the cannabis industry, there is no doubt that many financial institutions will rush to the opportunity. Cannabis businesses will benefit greatly, no longer having to deal with massive quantities of cash and gain access to things like loans, bank accounts and credit lines. Furthermore, cannabis companies will benefit from the rush of banks getting in the game, leading to a competitive and affordable banking market.

It is no secret that cannabis businesses have had a cash problem for decades now. Given the coronavirus pandemic, CDC guidelines dictate minimizing the handling of cash and encourage payment options like credit cards. Cannabis businesses dealing with large quantities of cash puts them, their employees, their customers and even regulators at risk.

Aaron Smith, executive director of NCIA

According to Aaron Smith, executive director of the National Cannabis Industry Association (NCIA), the cash problem is a serious, unnecessary health risk. “On behalf of the legal cannabis industry, we commend the congressional leadership for prioritizing public health and safety by including sensible cannabis banking policy in this legislation,” says Smith. “Our industry employs hundreds of thousands of Americans and has been deemed ‘essential’ in most states. It’s critically important that essential cannabis workers are not exposed to unnecessary health risks due to outdated federal banking regulations.”

In fact, it was the NCIA and a handful of other industry organizations that lobbied Congress last week to include language from the SAFE Banking Act in the HEROES Act, citing the known fact that cash can harbor coronavirus and other pathogens, along with the “personal proximity required by cash transactions as reasons for urgency in addition to the other safety and transparency concerns addressed by the legislation.”

The SAFE Banking Act was already approved by the House of Representatives. In September of 2019, the bill made a lot of progress through Congress, but stalled once it made it to the Senate Banking Committee.

The HEROES Act will be debated by the House of Representatives prior to a floor vote. If it passes the House, it moves to the Senate, which is about as far as it made it the last go around. However, because the banking reform is included in coronavirus relief legislation, there is a newborn sense of hope that the bill could be signed into law.

Cannabis Businesses Remain Ineligible To Receive Federal Financial Assistance

By Steve Levine, Megan Herr
1 Comment

In our previous post, we touched on the fact that state-legal medical and recreational cannabis businesses (including indirect cannabis businesses) could not receive federal financial assistance due to the continued Schedule I status of cannabis under the Controlled Substances Act (CSA). While state-legal medical and recreational cannabis businesses have been adversely affected due to government imposed shelter-in-place restrictions across the United States, they are unable to take advantage of the multi-trillion dollar stimulus packages that are designed to help small businesses because they are engaged in “federally illegal” activities. As described below, applicants applying for federal loans must certify, under penalty of perjury, that they are not engaged in “illegal” activity.

While it is our view that state-legal medical and recreational cannabis businesses should be entitled to assistance as they are hurting like every other business, we explain why such businesses cannot receive financial assistance under the Paycheck Protection Program and the SBA’s Economic Injury Disaster Loan Program due to the facts that these businesses do not comply with federal law.

CARES Act

As previously discussed, Section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the “Act”) directed $349 billion to the Small Business Administration (SBA) to administer to small businesses harmed by COVID-19. As a result, businesses can apply for Paycheck Protection Program (PPP) loans and other SBA financial assistance, including Economic Injury Disaster Loans (EIDLs), traditional 7(a) loans, 504 loans, and microloans, and can also receive investment capital from the Small Business Investment Company program.

Paycheck Protection Program (PPP)

Generally, the following businesses are eligible to receive loans under the PPP:

  • Any business, 501(c)(3) nonprofit organization, 501(c)(19) veterans organization or Tribal business with not more than 500 employees whose principal place of residence is in the United States;
  • Any business that meets the SBA employee-based size standards for the industry in which it operates (if applicable);
  • Any business that is a “small business concern” as defined in Section 3 of the Small Business Act, 15 U.S.C. 632, and meets the SBA employee-based or revenue-based size standards corresponding to its primary industry; or
  • Any business that is a “small business concern” under the SBA’s “alternative size standard” as of March 27, 2020, which standard is met if the business has not more than:
    • (i) maximum tangible net worth of $15 million, and
    • (ii) an average net income of $5 million (after Federal income taxes, excluding any carry-over losses) for 2 full fiscal years before the date of application.

Importantly, to apply for PPP, an applicant must make a good faith certification that the applicant is eligible to receive a PPP loan. An applicant must certify, under penalty of perjury, that it “is not engaged in any activity that is illegal under federal, state or local law.” (Borrower Application Form, page 2).

Consequently, because state-legal marijuana businesses (including indirect marijuana businesses) are operating in violation of federal law, applicants cannot make such certification, they remain ineligible to participate in the PPP.

 Economic Injury Disaster Loans (EIDLs)

 The CARES Act also provided a slew of changes to the SBA’s pre-existing EIDL program, which provides small businesses with working capital loans of up to $2 million to assist to help overcome the temporary loss of revenue as the result of a declared disaster.

The Act set out new rules making it easier for small businesses harmed by COVID-19 to receive loans quickly and efficiently; the Act added $30 billion to the EIDL loan fund, with an additional $10 billion added for the EIDL Grants connected to the EIDL loans.

The CARES Act also expanded eligibility to include businesses with no more than 500 employees, any individual operating as a sole proprietor or an independent contractor, and tribal businesses, cooperatives and ESOPs with no more than 500 employees. Small business concerns and small agricultural cooperatives who meet the SBA’s applicable size standards are also eligible, as well as most nonprofits.

However, to receive an EIDL loan, applicants must make a good faith certification that the applicant is eligible to receive an EIDL. An applicant must certify, under penalty of perjury, that it “is not engaged in any illegal activity (as defined by Federal guidelines).” (COVID-19 Economic Injury Disaster Loan Application).

The SBA has clarified that the limitation on applicants “engaged in any illegal activity” (13 CFR § 120.110 (h)) refers to all applicants engaged in “illegal activity under federal, state, or local law.”

In a Statement of Position issued on April 1, 2019 (the SOP), the SBA clarified that “illegal activity” includes “[a]pplicants that make, sell, service, or distribute products or services used in connection with illegal activity, unless such use can be shown to be completely outside of the Applicant’s intended market.” (SOP 50 10 5(K))

The SOP indicated that both (i) Direct Marijuana Businesses1 and (ii) Indirect Marijuana Businesses2 cannot receive SBA assistance due to the limitation on applicants “engaged in any illegal activity.”

It is the SBA’s position that, “because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity.”

Consequently, because state-legal cannabis businesses (including indirect marijuana businesses) are operating in violation of federal law, applicants cannot certify that they are “not engaged in any illegal activity,” they are not eligible to receive EIDLs.

  1.  “Direct Marijuana Business” mean “a business that grows, produces, processes, distributes, or sells marijuana or marijuana products, edibles, or derivatives, regardless of the amount of such activity. This applies to recreational use and medical use even if the business is legal under local or state law where the applicant business is or will be located.”
  2. “Indirect Marijuana Business” means “a business that derived any of its gross revenue for the previous year (or, if a start-up, projects to derive any of its gross revenue for the next year) from sales to Direct Marijuana Businesses of products or services that could reasonably be determined to aid in the use, growth, enhancement or other development of marijuana. Examples of Indirect Marijuana Businesses include businesses that provide testing services, or sell or install grow lights, hydroponic or other specialized equipment, to one or more Direct Marijuana Businesses; and businesses that advise or counsel Direct Marijuana Businesses on the specific legal, financial/ accounting, policy, regulatory or other issues associated with establishing, promoting, or operating a Direct Marijuana Business. However … [the] SBA does not consider a plumber who fixes a sink for a Direct Marijuana Business or a tech support company that repairs a laptop for such a business to be aiding in the use, growth, enhancement or other development of marijuana. Indirect Marijuana Businesses also include businesses that sell smoking devices, pipes, bongs, inhalants, or other products if the products are primarily intended or designed for marijuana use or if the business markets the products for such use.”

CARES Act – Stimulus Package Won’t Aid the Cannabis Industry

By Steve Levine, Megan Herr
3 Comments

On Wednesday, March 25, the United States Senate approved an estimated $2-trillion stimulus package in response to the economic impact of the COVID-19 outbreak. The legislation, formally known as the “Coronavirus Aid, Relief, and Economic Security Act” (or the CARES Act), was approved by the Senate 96-0 following days of negotiations. One of the most highly anticipated provisions of the CARES Act, the “recovery rebates” for individuals, will provide a one-time cash payment up to $1,200 per qualifying individual ($2,400 in the case of eligible individuals filing a joint return) plus an additional $500 for qualifying children (§6428.2020(a)). The CARES Act, which remains subject to House approval, also prescribes an additional $500 billon in corporate aid, $100 billion to health-care providers, $150 billion to state and local governments and $349 billion in small business loans in an effort to provide continued employment and stabilize the economy. The legislation further provides billions of dollars in debt relief on existing loans.

CARES Act – Paycheck Protection Program 

Under the CARES Act, small businesses who participate in the “Paycheck Protection Program” can receive loans to cover payroll expenses, group health care benefits, employee salaries, interest on mortgage obligations, rent, and utilities (§1102(F)(i)). To qualify for these small business loans, businesses must employ 500 employees or less, including all full-time and part-time employees (§1102(D)). Eligible recipients must also submit the following as part of their loan application: (i) documentation verifying the number of full-time equivalent employees on payroll and applicable pay rates; (ii) documentation verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments; and (iii) a certification that the documentation presented is true and the amounts requested will be used to retain employees and make necessary payments (§1106(e)). The CARES Act delegates authority to depository institutions, insured credit unions, institutions of the Farm Credit System and other lenders to provide loans under this program (§1109(b)). The Treasury Department will be tasked with establishing all interest rates, loan maturity dates, and all other necessary terms and conditions. Prior to issuing these loans, lenders will consider whether the business (i) was in operation as of February 15, 2020, (ii) had employees for whom the business paid salaries and payroll, or (iii) aid independent contractors as reported on a Form 1099-MISC (§1102(F)(ii)(II)).

What Does This Mean for Cannabis Businesses?

Due to the continued Schedule I status of cannabis (excluding hemp) under the Controlled Substances Act (CSA), cannabis businesses are not eligible to participate in the Paycheck Protection Program intended to keep “small businesses” afloat during the current economic crisis. Because federal law still prohibits banks from supporting marijuana businesses, financial institutions remain hesitant to service the industry, as anti-money laundering concerns and Bank Secrecy Act requirements (31 U.S.C. 5311 et seq.) are ever-present. As a result, even if cannabis businesses technically qualify to receive federal assistance under the Paycheck Protection Program, they will face an uphill battle in actually obtaining such loans.

Cannabis Businesses Are Also Precluded from “Disaster” Assistance

Moreover, the conflict between state and federal law continues to prevent cannabis business from receiving assistance from the U.S. Small Business Administration (SBA) under the Coronavirus Preparedness and Response Supplemental Appropriations Act (H.R. 6201). In light of the COVID-19 outbreak, the SBA revised its “Disaster Loan” process to provide low-interest “Disaster Loans” to eligible small businesses. To qualify for these loans, a state must submit documented business losses for at least five businesses per county. The problem, however, is that the SBA still refuses to assist state-legal cannabis businesses in equal need of small business loans. Specifically, in a 2018 Policy Notice, the SBA reaffirmed that cannabis businesses – and even some non “plant-touching” firms who service the cannabis industry – cannot receive aid in the form of federally backed loans, as “financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity.” The 2018 Policy Notice clarified that the following business are ineligible to receive SBA loans:

(a) “Direct Marijuana Business” — a business that grows, produces, processes, distributes, or sells marijuana or marijuana products, edibles, or derivatives, regardless of the amount of such activity. This applies to personal use and medical use even if the business is legal under local or state law where the applicant business is or will be located.

 (b) “Indirect Marijuana Business” — a business that derived any of its gross revenue for the previous year (or, if a start-up, projects to derive any of its gross revenue for the next year) from sales to Direct Marijuana Businesses of products or services that could reasonably be determined to support the use, growth, enhancement or other development of marijuana. Examples include businesses that provide testing services, or sell grow lights or hydroponic equipment, to one or more Direct Marijuana Businesses. In addition, businesses that sell smoking devices, pipes, bongs, inhalants, or other products that may be used in connection with marijuana are ineligible if the products are primarily intended or designed for such use or if the business markets the products for such use.

More recently, the SBA provided further clarification that cannabis businesses are not entitled to receive a cut of the federal dollars being appropriated for disaster relief because of the CSA’s continued prohibition of the sale and distribution of cannabis. Last week, the SBA reiterated that:

“With the exception of businesses that produce or sell hemp and hemp-derived products [federally legalized under the 2018 Farm Bill], marijuana related businesses are not eligible for SBA-funded services.” (@SBAPacificNW)

Consequently, because of the continued Schedule I status of cannabis under federal law, cannabis businesses will not be entitled to receive Disaster Loans from the SBA, regardless of whether they qualify as a struggling small business.

Resolving the Issue

While the federal government has been considering legislation, such as SAFE Banking and the STATES Act, to create a more rational federal cannabis policy, neither of these bills are likely to pass any time soon given the current COVID-19 pandemic.

At the end of the day, until Congress passes some form of federal cannabis legalization, these small businesses will remain plagued by the inability to receive financial assistance, as evinced by the Paycheck Protection Program.

How to Protect Your Business from the Emerging Vaping Crisis

By Tom BeLusko, Kelly McCann
No Comments

The year 2020 may become a pivotal year for cannabis operators and service providers, including increased access to financial services, and increased exposure to product liability lawsuits. On a positive note, if enacted, the Secure and Fair Enforcement Banking Act of 2019 (SAFE Banking Act) promises to enable cannabis businesses to gain access to financial services previously unavailable to them, including banking and insurance services. The House of Representatives passed the SAFE Banking Act of 2019 on September 25th, 2019. Skopos Labs, an automated predictive intelligence service, predicts there is a 52% chance of the SAFE Banking Act of 2019 becoming law. A recent discovery that vitamin E acetate is likely the culprit in the vaping-related illness epidemic may increase the exposure to costly litigation that cannabis businesses face.

An uptick in litigation like that currently affecting the vaping industry may soon affect cannabis businesses. More litigation affecting the vaping industry is due in large part to the growing number of lung injuries and deaths linked to vaping. As of November 13th, 2019, the CDC reported 2,172 cases of lung injury, and 42 deaths linked to vaping. The cases of lung injury and death have predictably resulted in an increase in litigation facing the vaping industry. Most of the plaintiffs in these cases allege they became addicted to vaping but at least two lawsuits go further. In one, a Connecticut man alleges that he suffered a massive, debilitating stroke as a result of vaping, while in another the parents of a teenage girl allege in a proposed class action suit that their daughter has suffered seizures linked to vaping. On November 14th, 2019, the CDC identified vitamin E acetate as a chemical of concern among people with vaping use associated lung injury. Vitamin E acetate is an additive commonly used as a cutting agent in vape cartridges. About 86% of individuals who have either vaping-related lung injuries, or died due to vaping had used a product containing THC.

The increase in perceived exposure cannabis businesses face has increased their interest in obtaining insurance, but unfortunately insurers are not always interested in insuring them. There are at least two reasons that getting insurance can be difficult for cannabis businesses: (1) insurance industry appetite for cannabis risk is very low due to its status under federal law and (2) express coverage exclusions or limitations of cannabis exposures from standard-form coverage are becoming more common. However, even if cannabis businesses are able to obtain insurance, their insurance may cover them for far less than they believe.

The product liability coverage (which is increasingly crucial for both growers and manufacturers given the mounting litigation facing the vaping industry) may cover far less than it at first appears. The interplay of exclusions and limited coverages in many cannabis-specific policies may leave a cannabis business uninsured.

It is vital now more than ever to ensure you are properly protected against loss.Crucial for cannabis businesses to appreciate is the distinction between “occurrence” and “claims-made” coverage triggers as it relates to both the premises on which cannabis businesses operate their business, and the products they sell.

Many cannabis businesses have an occurrence-based general liability insurance that might actually exclude: (1) product-liability risks; (2) any tobacco-related risks; and (3) any risk associated with governmental investigation or enforcement. These exclusions oftentimes concern cannabis businesses because there is a high likelihood one of these risks could manifest itself as an uninsured loss. Still, the costs of eliminating these exclusions in an occurrence-based general liability insurance policy is often large, assuming an insurer is willing to eliminate the exclusions on an occurrence basis at all. Therefore, cannabis businesses often pair their general liability insurance policy with a “claims-made” coverage trigger for products liability. Navigating the waters of managing the differences between “occurrence” and “claims-made” forms are best left to a qualified and experienced insurance professional.

Consult a local insurance professional that understands how to help your business become properly protected in what would be considered a tumultuous market for this burgeoning industry.

It is vital now more than ever to ensure you are properly protected against loss. As a first step, you must determine what your current insurance policy does and does not cover. After a loss, it is too late to change policies. Rely upon someone that knows the market of insuring this industry and has deep experience in managing both occurrence and claims-made policies.

Matt Engle
Soapbox

Insurers Must Play Catch-Up to Meet Cannabis Industry Needs

By Matt Engle
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Matt Engle

As the cannabis industry continues to grow, demand for insurance products is also increasing. While insurers have been cautious about entering a market that carries the stigma of a Schedule I drug, the cannabis industry is clamoring for insurance coverage options tailored to meet the needs of key players— distributors, growers, processors and retail dispensaries.

The escalating need for insurance products tailored to these cannabis business sectors has not expedited an increase in coverage offerings. The slow entry of insurance carriers into the cannabis sector can be tied to a reluctance to insure an industry with emerging and often unknown risks. This will begin to change as more information becomes available on what loss ratio trends look like in the cannabis industry.

For now, there is a wait-and-see stance held by insurance carriers. This presents a major concern for cannabis-related businesses that are subject to risk at every stage of the supply chain, with particular exposure for theft, general liability, crop loss, and product liability.some degree of crime and theft coverage is needed for these enterprises to help manage the risks associated with a cash-based business

Theft

For cannabis companies, the use of paper currency is a huge part of their risk exposure. Federal banking regulations have limited these businesses to dealing mostly in cash, which makes them a prime target for crime and fraud. Currently, only one carrier will insure coverage for cash and theft risk, and the policy is limited to $1 million for most risks. This is inadequate coverage since many operators have more than that amount on-site.

In states with legislation legalizing cannabis, the cannabis sector will be able to move away from operating in cash if Congress passes the Secure and Fair Enforcement (SAFE) Banking Act, which would protect financial institutions from liability for federal prosecution that could arise from servicing cannabis-related businesses authorized under state law. Until banking regulations give the cannabis industry the ability to operate as legitimate businesses with the stability and safety that would deter criminal activity, some degree of crime and theft coverage is needed for these enterprises to help manage the risks associated with a cash-based business.

General Liability

Cannabis-related businesses need the same general liability coverage as other businesses to protect their premises and operations from lawsuits involving public contact. However, standard general liability policies—which exclude Schedule I substances from coverage—were not created with cannabis businesses in mind. It is still difficult for these businesses to obtain adequate general liability as a result of the legal uncertainty associated with the industry.

Product Liability

Product liability exposures for cannabis businesses encompass a wide range of areas, including edibles, vaporizers, pesticides, mold/fungus, misrepresentation, label claims, breach of warranty, deceptive practices, and failure to warn.

A major area of exposure concerns accidents resulting from impairment. A cannabis cultivator, processor, distributor, or retailer potentially may be considered liable in the event a product defect results in injury after reasonable use or when label defects fail to warn users that a product may have psychoactive effects.

Another area of risk exposure involves products that contain THC, the psychoactive compound that gives cannabis users a high. As the number of THC-containing products such as edibles and tinctures increases, so does the potential exposure to product liability claims for manufacturers and retailers.

The California Cannabis Track-and-Trace (CCTT) system also has implications for product liability. The CCTT is a statewide system used to record the inventory and movement of cannabis and related products through the commercial supply chain. All state cannabis licensees, including those with licenses for cultivation, manufacturing, retail, distribution, testing labs and microbusinesses, are required to use this system. The product liability impact lies in its capacity to determine responsibility along the supply chain from seed to sale.

For example, if a plastic vape pen explodes, a product liability lawsuit could have repercussions for many touch points across the supply chain beyond the manufacturer of the pen–all of which can be identified through CCTT. Entities that touch cannabis products such as soil suppliers or delivery persons also have product liability risk exposure. Personal injury attorneys can find incident-related parties easily and determine liability. This makes it particularly important to add these parties to the policy as additional insureds to help reduce claims exposure.

Crop Loss

Another area of concern for risk exposure is crop loss. Crop insurance is generally hard to obtain due to the significantly different nature of cannabis crops compared to traditional crops like corn or soybeans.

Fires in Sonoma County devastated cannabis crops in Northern California back in 2017.

An indoor crop insurance policy covers cultivators when there is loss resulting from threats such as fire, theft, and sprinkler leakage. However, crop insurance policies generally do not cover losses resulting from mold, rot, disease, changes in climate, or fertilization issues. Many growers forgo this coverage and instead elect to absorb losses and regrow their crops.

Outdoor crop coverage is generally unavailable, or the cost is prohibitive. Any potential for writing outdoor crop insurance for the cannabis industry essentially disappeared as a result of the recent wildfires in California. These devastating fires highlighted the pressing need for property damage and business interruption coverage for growers and dispensaries and other downstream businesses whose supply was disrupted. This lack of available outdoor crop insurance is one of the more notable gaps in available cannabis business insurance coverage.

While cannabis businesses operating in states that have legalized medical and/or recreational cannabis use have challenges getting adequate insurance coverage, there is some good news on the insurance front for those in California. Last year, California’s insurance commissioner announced approval for carriers to offer insurance coverage specifically to cannabis businesses. The state also approved a cannabis business-owners policy (CannaBOP) program that provides a package policy containing both property and liability coverage for qualifying dispensaries, distributors, manufacturers, processors and storage facilities. Colorado is on the verge of being the second state to approve its version of a CannaBOP program.

While more insurance carriers are beginning to write cannabis coverage, the limited insurance options and policies with restrictive plans currently offered todaydo not meet the needs of the cannabis industry. Insurers must catch up to the coverage requirements of this sector by offering more options tailored to growers, retail dispensaries, processors and distributors with better terms and better pricing.

FDAlogo
Soapbox

Hemp Products & Confusion Over FDA Remains

By Charlotte Peyton
4 Comments
FDAlogo

Hemp

The hemp industry is the marijuana industry’s half-sister. Both are variations of the plant Cannabis sativa and both were made illegal in 1937 with the passing of The Marijuana Tax Act. Despite this federal status, in recent years 33 individual states have legalized some type of medicinal marijuana use and 11 states now allow legal recreational marijuana within their borders. This prompted congress to modify the legality of hemp which was addressed in The Agricultural Act of 2014, but it only allowed hemp to be used for research purposes. The Agriculture Improvement Act of 2018 (known as the 2018 Farm Bill) that was signed into law on December 20, 2018 was a huge step forward for public access to hemp and hemp products. The 2018 Farm Bill legalized the growing of hemp in states with a state-mandated hemp program and removed hemp and its derivatives from Drug Enforcement Administration (DEA) Schedule I status. Schedule I drugs, substances, or chemicals are defined as drugs with no currently accepted medical use and a high potential for abuse. Some examples of Schedule I drugs are heroin, lysergic acid diethylamide (LSD), 3,4-methylenedioxymethamphetamine (ecstasy), methaqualone, and peyote. Consumers and the cannabis industry alike were very excited about this legalization of hemp…. but that was when the confusion began.

FDA & Hemp

FDAlogoWithin two hours of the 2018 Farm Bill being signed, the Commissioner of the FDA, Dr. Scott Gottlieb, issued a statement reiterating the FDA stance on cannabis products and cannabidiol (CBD) in products for human and animal consumption: “Congress explicitly preserved the agency’s current authority to regulate products containing cannabis or cannabis-derived compounds under the Federal Food, Drug, and Cosmetic Act (FD&C Act) and section 351 of the Public Health Service Act.” Currently the FDA only permits CBD products submitted as an Investigational New Drug (IND) Application as a pharmaceutical. There is only one such accepted CBD product, Epidiolex, manufactured by G.W. Pharma. All other CBD products are illegal for interstate shipment.

Every product for sale in the US which is either ingested or applied to a human or animal body has a regulatory category in the FDA. Hemp-derived CBD products will have to fit into one of those categories or it will not be legal. Many hemp manufacturing companies will argue with the illegality of CBD products, but it will get them nowhere. If you manufacture and sell hemp products inside of a state with a state mandated hemp program, you are legal and protected under state laws, but the minute you sell across state lines, it becomes the jurisdiction of the federal government and, more specifically, the FDA. Section 10113 of the 2018 Farm Bill states that (c) Nothing in this subtitle shall affect or modify:

  • (1) the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 301 et seq.);
  • (2) section 351 of the Public Health Service Act (42 U.S.C. 262); or
  • (3) the authority of the Commissioner of Food and Drugs and the Secretary of Health and Human Services- ‘‘(A) under- ‘‘(i) the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 301 et seq.); or ‘‘(ii) section 351 of the Public Health Service Act (42 U.S.C. 262); or ‘‘(B) to promulgate Federal regulations and guidelines that relate to the production of hemp under the Act described in subparagraph (A)(i) or the section described in subparagraph (A)(ii).”

There is nothing unclear about this issue. The same 2018 Farm Bill that hemp manufacturing companies use to justify the legality of hemp and CBD products is the same bill that spells out the authority of the FDA in this matter.

The mission of the FDA is “to ensure the safety, effectiveness, and security of human and veterinary drugs, vaccines and other biological products for human use, and medical devices.” The agency also is responsible for “the safety and security of our nation’s food supply, cosmetics, dietary supplements, products that give off electronic radiation, and for regulating tobacco products.” Health or medical claims not supported by clinical proof will not be tolerated. An unsafe, unclean or untested product will also not be tolerated in the marketplace.

CBD Oil vs. Isolate

The structure of cannabidiol, one of 400 active compounds found in cannabis.

Then there is the matter of CBD as either a full spectrum oil vs. an isolate…Unlike marijuana flower which is a very popular product, hemp flower is very rarely sold at the retail level. Full spectrum oil is extracted from the plant, and depending on the solvent used, produces an oil with the same, or close to the same, naturally occurring chemicals from the plant. The oil therefore, includes all the cannabinoids present along with any terpenes, lipids or other compounds present in the plant. Full spectrum oil is a botanical extract and is a dark thick oil. Isolate is produced by separating the constituents of the full spectrum oil by molecular weights or boiling points to have very pure chemicals in the 95%+ purity range. CBD isolate is a white crystalline substance and bears the greatest resemblance to a synthetic raw material and at its purest form cannot be distinguished as coming from a plant in the dirt or a synthesized chemical. Epidiolex is produced from hemp isolate and was approved by the FDA as a pharmaceutical. Full spectrum hemp oil is a botanical extract, often as an ethanol extraction. Full spectrum oil bears the greatest resemblance to a botanical dietary supplement. It remains to be seen what the FDA will allow in the future.

Product Labeling

The FDA has made it abundantly clear in numerous warning letters issued to the cannabis industry that drug claims (articles intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease) regarding CBD, oil or isolate, cannot be made without pharmaceutical approval of the Drug Facts (Epidiolex) lest there be enforcement consequence.

An excerpt of an FDA warning letter sent to a CBD company in November of 2017

The labeling of other types of products are less clear. Dietary supplements are a category of foods with the FDA and as such both the labeling of dietary supplements and foods are dictated in 21 CFR 111, Food Labeling. Botanical dietary supplements frequently call out a chemical constituent within a particular botanical material or extract on the Supplement Facts Panel: Milk thistle seed extract containing standardized and labeled silymarin is such an example. Is this strategy acceptable for CBD with the FDA? What about “naturally occurring” CBD? Food claims are indicated in the Nutrition Facts, what can these be for CBD? Cosmetic product claims can only address articles intended to be applied to the human body for cleansing, beautifying, promoting attractiveness, or altering the appearance without affecting the body’s structure or functions. What is the purpose of CBD in a cosmetic?

FDA guidance would be very beneficial in all of these labeling areas, and there is hope. The FDA is promising public hearings this spring to discuss a path forward for having hemp food and dietary supplements. The FDA will ask for public comment and hopefully, there will be a lot of public comments provided to them. The public’s huge demand for CBD products will bear pressure on the FDA to at least listen and consider.

cGMPsRegulatory compliance will be difficult, and it will be expensive.

Those currently in the hemp manufacturing industry should pay attention and take the FDA seriously. If the FDA allows hemp products with CBD to be sold in the future, it will be the FDA who makes those regulations and those products will have to fit into an already existing FDA category: human food, animal food, dietary supplement, pharmaceutical or cosmetic. If you are a hemp product manufacturer, you must learn the applicable requirements for Current Good Manufacturing Practices (cGMPs) by hiring experienced FDA compliance personnel, and/or seeking out FDA regulatory consultants, to develop and implement a quality system accordingly:

  • 21 CFR 117, Current Good Manufacturing Practice, Hazard Analysis, and Rick-Based Preventative Controls for Human Food
  • 21 CFR 507, Current Good Manufacturing Practice, Hazard Analysis, and Rick-Based Preventative Controls for Food for Animals
  • 21 CFR 111, Current Good Manufacturing Practice in Manufacturing, Packaging, Labeling, or Holding Operations for Dietary Supplements
  • 21 CFR 210, Current Good Manufacturing Practice in Manufacturing, Processing, Packing, or Holding of Drugs; General
  • 21 CFR 211, Current Good Manufacturing Practice for Finished Pharmaceuticals
  • FDA Draft Guidance for Industry, Cosmetic Good Manufacturing Practice, June 2013

I believe in this industry and I am rooting for the pioneers who have taken all the risk thus far, but the level of denial of the FDA’s authority that I am hearing in the hemp industry community is disturbing to me because those companies will not manage the transition to a regulated future. Most don’t understand it and they don’t think it applies to them or their products. Regulatory compliance will be difficult, and it will be expensive. The hemp pioneers deserve to benefit from their labor and the risk they have taken. For those hemp product companies that do not think compliance is worth the effort or cost, there are many FDA-compliant human food, animal food, dietary supplement, pharmaceutical, or cosmetic companies that are waiting to take your business…

Editor’s Note: While Cannabis Industry Journal typically does not use the term ‘marijuana,’ the author here is speaking from a regulatory point of view and creates an important distinction. Peyton chose the word “marijuana” instead of “cannabis” because the FDA has chosen “cannabis” to refer to both marijuana and hemp. 

PA Approves First Two Cannabis Labs

By Aaron G. Biros
No Comments

According to a PennLive article, Pennsylvania’s Department of Health approved the first two cannabis laboratories for their medical cannabis program. ACT Laboratories of Pennsylvania LLC and Keystone State Testing LLC are the companies that were approved to perform analytical testing for safety and quality in cannabis products.

Both laboratories expect to be operational before the end of 2017, according to the PennLive article. Those labs are required to test for CBD and THC content, pesticides, moisture content, residual solvents and microbiological contaminants.

The temporary lab testing regulations are somewhat comprehensive, detailing lab reporting, licensing, sampling protocols and ownership stipulations, among other rules. ACT and Keystone, the labs that were approved by the Department of Health, have their approval for two years and can renew their license after.

While the state still expects the program to be fully implemented by 2018, Health Secretary and Physician General Dr. Rachel Levine said last week they are hoping to launch the program sometime next year, according to a press release. December 2017 will mark a full year since the state opened applications for licensing businesses.

January 2018 has long been the goal for the full implementation of the program. “We have made significant progress in getting this program off the ground since Governor Wolf signed the Medical Marijuana Act into law last year,” says Dr. Levine. “These proposed regulations for patients and caregivers to participate are one of the final pieces we need to have in place to launch the program sometime next year.”

What’s Happening on Capitol Hill? Part 2: A Bill-By-Bill Review

By Brian Blumenfeld, J.D., M.A.
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Since the first session of the 115th Congress convened on January 3, 2017, twenty-four cannabis reform bills have been introduced, fifteen in the House and nine in the Senate. All of them address in varying ways the puzzles that have emerged as more and more states legalize cannabis in the face of federal prohibition. Some are narrow, some are broad, some are for medical cannabis only, some for recreational too, some have more bipartisan support than others, but all indicate in some manner the direction federal reform will eventually take.

H.R.1227 – Ending Federal Marijuana Prohibition Act of 2017

Understanding the content and status of these bills and what they would mean for the industry if/when they are enacted, will help stakeholders anticipate changes that we know are bound to drop, and therefore be better prepared to adapt to them when they do.

Generally lacking in the journalism on cannabis is coverage and analysis of federal proposals deep enough to provide a useable understanding of the policies they stand to codify. As CIJ is dedicated to providing just such useable information to industry-insiders, this bill-by-bill review fills the gap.

All twenty-four bills fit rather neatly into one of three categories: De-scheduling/State Control Reform, Medical Cannabis Reform and Banking/Tax Reform. This second article in the series will look at the first category, and the next article will wrap up the last two.

De-Scheduling/State Control Reform

HR 1227 – Ending Marijuana Federal Prohibition Act of 2017

Policy: The bill proposes two major changes to the CSA. The first is to strike cannabis from the statute, essentially leaving the regulation or prohibition of it up to each state. The second is to insert into the CSA a provision that makes it a federal offense to transport cannabis from one state to another in any way that violates state law. In other words, if a state wished to continue prohibiting cannabis, it would be both a federal and state crime for anyone to transport cannabis into that state. Likewise, if a state wished to legalize and regulate cannabis, but wanted to prevent out-of-state cannabis from entering, the transportation provision would permit that state to do so.

Impact: Industries in states that have already legalized cannabis will structurally remain the same. Banking will open up for these state businesses, and so will the opportunity to write-off ordinary business expenses. Questions about contract enforcement and risks of federal prosecution will become moot, and when state regulatory bodies make decisions on how to govern the industry, they will no longer have to concern themselves with U.S. DOJ enforcement and/or prosecutorial policies. The big potential change will be seen if two or more contiguous states that have legalized cannabis decide to permit transport of the drug between their states. Markets will expand, opening access to new customers and challenges from new competitors. Licensees may also have the option to venue shop, and we could see states themselves competing with one another to attract cannabis business with the carrot of favorable regulations.

Representative Thomas Garett (R-VA)
Photo: C-SPAN

One possible pitfall to keep in mind is that this legislation could violate something in constitutional law known as the Dormant Commerce Clause—a topic CIJ will cover should it surface.

Procedural Status:

  • Introduced on February 27, 2017 by Representative Thomas Garett (R-VA)
  • Cosponsors: 4 Republican, 11 Democrat, 1 At-Large
  • Referred to House Committees on:
    • Judiciary
      • Subcommittee on Crime, Terrorism, Homeland Security, and Investigations
    • Energy and Commerce
      • Subcommittee on Health

HR 2528 – Respect States’ and Citizens’ Rights Act of 2017

Policy: This bill would add to the CSA a provision specifically declaring no congressional intent to preempt state cannabis laws.

Representative Diana DeGette (D-CO)
Photo: Center for American Progress Action Fund, Flickr

Impact: HR 2528 would rule out the potential for a judicial resolution to the federalism controversy. Most legal challenges to state legalization regimes have relied on a theory of Supremacy Clause preemption. Most notably was the 2014 case initiated by Oklahoma and Nebraska against Colorado, which you can find broken down here. Although the Supreme Court denied to hear that case, the issue is outstanding and remains an important factor, if not the central factor, in cannabis cases currently pending in federal court. Under this reform, state cannabis laws would be safe from invalidation, but it is less clear whether a mere anti-preemption clause would strip the federal government of its other powers under the CSA, or alter in any way the current status of cannabis as a Schedule I controlled substance. Questions arising under such uncertainty would likely have to go through long and hotly contested litigation before we have concrete answers. So although this proposal would resolve the ticklish issue of preemption, it leaves unaddressed the many other conundrums posed by federal-state divergence.

Procedural Status:

  • Introduced on May 18, 2017 by Representative Diana DeGette (D-CO)
  • Cosponsors: 1 Republican
  • Referred to House Committees on:
    • Judiciary
      • Subcommittee on Crime, Terrorism, Homeland Security, and Investigations
    • Energy and Commerce
      • Subcommittee on Health

HR 1841 – Regulate Marihuana Like Alcohol Act

Policy: This bill sets to accomplish a number of different reforms: remove cannabis from CSA; allow for import and export except into states that wish to prohibit cannabis altogether and/or prohibit its importation into the state; decriminalize cannabis use on national forest land; require a permit from the Secretary of the Treasury to import cannabis and to engage in any cannabis business activity; mandate businesses that obtain a Treasury permit to also comply with all State laws (so if state wants to continue to prohibit, they may); share jurisdiction over the administration and enforcement of the new federal laws between the DEA and the Bureau of Alcohol, Tabaco, Firearms and Explosives which is to be renamed the Bureau of Alcohol, Tobacco, Marijuana, Firearms and Explosives.

Representative Jared Polis (D-CO)
Photo: Joshua Lawton, Flickr

Impact: If enacted, this bill will have many of the same impacts as the abovementioned HR 1227- Ending Marijuana Federal Prohibition Act of 2017. The IMPACT section for that bill will also pertain to this bill, with the following exception: by requiring a permit to operate a cannabis business from the Department of Treasury, the bill would add a layer of regulation on top of state law. Treasury Permits would be conditioned on permitees complying “with all other Federal laws relating to production, sale and consumption of marijuana.” Although §302 of the bill limits Treasury’s discretion in denying applications to only certain, enumerated disqualifying factors, the “other Federal laws” the bill refers to could embody any number of policy and jurisdictional preferences either enacted by the Congress or promulgated by the executive agencies charged with administration. At the current stage of speculation the best we can say is that descheduling cannabis under this bill would be a benefit to the industry, but out of all of the present proposals the provisions authorizing federal regulation present the greatest uncertainty for the shape the future of the industry might take.

Procedural Status:

  • Introduced on March 30, 2017 by Representative Jared Polis (D-CO)
  • Cosponsors: 1 Republican, 14 Democrat
  • Referred to House Committees on:
    • Judiciary
    • Energy and Commerce
    • Ways and Means
    • Agriculture
      • Subcommittee on Conservation and Forestry
    • Natural Resources
      • Subcommittee on Federal Lands

HR 975

Statute: Adds one sentence to the CSA that excludes its application to any person acting in compliance with State cannabis laws.

Representative Dana Rohrabacher (R-CA)
Photo: Gage Skidmore, Flickr

Impact: The bill would have the same impact as the above HR 1227 – Ending Marijuana Federal Prohibition Act of 2017, with the only exception that the transportation provision in HR 1227 makes it clear that states will be permitted to prohibit the importation of cannabis from other states if they want to. This bill, without speaking directly to the matter of interstate importation, could leave the question open-ended until resolved through judicial interpretation.

Procedural Status:

  • Introduced on February 7, 2017 by Representative Dana Rohrabacher (R-CA)
  • Cosponsors: 8 Republican, 12 Democrat, 2 At-Large
  • Referred to House Committees on:
    • Judiciary
      • Subcommittee on Crime, Terrorism, Homeland Security, and Investigations
    • Energy and Commerce
      • Subcommittee on Health

Legislative Update

On Tuesday, August 1st, Senator Cory Booker (D-NJ) introduced the twenty-fourth cannabis reform bill. The bill has yet to be assigned a number or referred to committee, but it is called the Marijuana Justice Act of 2017, and makes some interesting contributions to the lineup of reform proposals.

Sen. Cory Booker (D-NJ)
Photo: Nick Fisher, Flickr

For legalization purposes, the bill both removes cannabis from the CSA and removes prohibitions on importing and exporting. The above analysis for descheduling and import/export would apply to Booker’s bill in the same way. The interesting twist thrown in is how criminal and racial justice objectives are linked to incentives for states to legalize. The ultimate decision to legalize or not in a given state will continue to be the prerogative of each state, but the catch is that if a state does not legalize cannabis and the number of arrests for cannabis offenses in that state disproportionately impacts minority or low-income citizens, then the federal government will pull funding it provides to that state for criminal justice-related programs. This could push more states who would otherwise not legalize onto the reform bandwagon. Such states will have to pit how much they value federal funds against how much they value criminalizing cannabis. If the former outweighs the latter, policy logic will dictate that they legalize. Updates on this bill, and movement on any others, will be tracked by CIJ.

For the next piece in this series, we will review the bills currently pending in Congress that cover medical cannabis reform and banking/tax reform. Stay tuned for the latest on what’s happening around Capitol Hill and in federal cannabis policy circles.