The rule is a classic example of the federal agency’s resistance to cannabis reform. It states that legal hemp products can be converted to products containing more than 0.3% THC, the threshold established in the 2018 Farm Bill, thus becoming an illegal controlled substance.
Under the Interim Hemp Rule, the DEA could arrest and prosecute legal hemp processors if they are in possession of hemp or CBD oil that contains more than 0.3% THC at any time, even if only for a temporary moment in the extraction process. This creates a lot of criminal risk for hemp companies as it is an almost inevitable step in the extraction process.
Almost every state in the country has an established USDA-compliant hemp program and the NCIA believes the Interim Hemp Rule is in direct conflict with the USDA’s rulemaking authority. According to Aaron Smith, co-founder and chief executive officer of the NCIA, the DEA is overstepping its authority and going outside of its jurisdiction. “Given this agency’s history of doing everything in its power to maintain the criminalization of cannabis in any form, this rule was clearly not proposed to help the thousands of small farmers who are participating in approved hemp programs and could put them in unnecessary danger,” says Smith. “Failure to rescind it immediately is a clear violation of congressional intent and established law.”
ZOSI Analytical, a third-party hemp testing lab based in Georgetown, Texas, announced last week that they have achieved ISO 17025:2017 accreditation from Perry Johnson Laboratory Accreditation (PJLA). ZOSI Analytical is actually the very first hemp lab in Texas to be DEA-registered.
The 2018 Farm Bill has a stipulation for all hemp compliance testing labs to be ISO 17025:2017 accredited by October 2021. ZOSI is a bit ahead of that deadline, but ready to test products for retailers and processors looking to confirm their potency levels below the 0.3% THC federal legal threshold.
According to Amy Lummus, CEO of ZOSI Analytical, they have a turnaround time of about 48-72 hours from receipt of a hemp sample. “Although regulations continue to change at the Federal level and vary widely at State levels, one thing has remained consistent and that has been the understanding that third-party testing laboratories need to show a level of commitment and accountability to quality,” says Lummus. “Our accreditation is one more step in our commitment to helping the industry to produce and sell safe products.”
According to a press release sent out last week, the American Association for Laboratory Accreditation (A2LA) announced the accreditation of Trichome Analytical to ISO/IEC 17025:2017. Trichome Analytical is the first cannabis testing lab accredited to the standard in the state of New jersey.
Based in Mount Laurel, New Jersey, Trichome Analytical is a DEA-registered third-party cannabis testing lab that offers hemp compliance testing for state and federal guidelines.
Kristen Goedde with Trichome Analytical says they are hoping to provide testing for consumer safety and accurate labeling for the state’s new hemp market. “The evolution of the hemp and cannabis industries increasingly demands rigorous, high quality analytical testing,” says Goedde. “Obtaining accreditation is an essential measure for laboratories seeking to ensure consumer safety and reliable labeling. Trichome is honored to have our quality systems validated by A2LA, and we look forward to elevating cannabis and hemp operations to new heights – right here in our home state.”
By Seth Mailhot, Steve Levine, Emily Lyons, Megan Herr 1 Comment
On August 20, 2020, the Drug Enforcement Administration (DEA) published an Interim Final Rule on industrial hemp and hemp derivatives (the interim rule), which immediately went into effect, to conform DEA regulations with the Agriculture Improvement Act of 2018 (the 2018 Farm Bill).
The 2018 Farm Bill effectively removed industrial hemp from the definition of “marijuana” in the Controlled Substances Act (CSA). Additionally, tetrahydrocannabinols contained in industrial hemp, such as cannabidiol (commonly known as CBD), were also removed from the purview of the CSA.
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 concentration of not more than 0.3 percent on a dry weight basis.
Accordingly, because cannabis and its “derivatives, extracts, [and] cannabinoids” are not considered “marihuana,” so long as their delta-9 tetrahydrocannabinol (THC) concentration is at or below 0.3% on a dry weight basis, the regulation of hemp fell outside the authority of the DEA. However, the DEA’s interim rule attempts to draw a hard line in the sand as to when the plant, and any products derived therefrom, are considered “marihuana,” thereby still subject to the DEA’s purview.
Specifically, the interim rule promulgates the DEA’s position that hemp processors can convert otherwise legal hemp into illegal “marihuana,” thereby bringing it back under the DEA’s authority, if such processing and extraction increases the THC content above the 0.3% THC threshold, even momentarily. Specifically, the interim rule states:
[T]he definition of hemp does not automatically exempt any product derived from a hemp plant, regardless of the Δ9-THC content of the derivative. In order to meet the definition of ‘hemp,’ and thus qualify for the exemption from [S]chedule I, the derivative must not exceed the 0.3% Δ9-THC limit. The definition of ‘marihuana’ continues to state that ‘all parts of the plant Cannabis sativa L.,’ and ‘‘every compound, manufacture, salt, derivative, mixture, or preparation of such plant,’ are [S]chedule I controlled substances unless they meet the definition of ‘hemp’ (by falling below the 0.3% Δ9-THC limit on a dry weight basis) or are from exempt parts of the plant (such as mature stalks or non-germinating seeds) . . . As a result, a cannabis derivative, extract, or product that exceeds the 0.3% Δ9-THC limit is a [S]chedule I controlled substance, even if the plant from which it was derived contained 0.3% or less Δ9-THC on a dry weight basis.
Accordingly, the DEA’s stance creates a substantial risk for processors who will be considered to be in possession of a Schedule I controlled substance during the extraction process if the THC content exceeds the 0.3% THC threshold at any point during processing, an almost inevitable result of the extraction process. Nevertheless, the interim rule states:
the definition of hemp does not automatically exempt any product derived from a hemp plant, regardless of the Δ9-THC content of the derivative. In order to meet the definition of ‘hemp,’ and thus qualify for the exemption from [S]chedule I, the derivative must not exceed the 0.3% Δ9-THC limit.
Although the DEA impliedly recognizes the fact that hemp processing can result in a temporary increase in THC content, it still took the position that, should the THC content exceed 0.3% THC at any point during the extraction process, processors will be considered to be in possession of a Schedule I controlled substance, regardless of whether the finished product complies with federal law.
Consequently, the interim rule creates significant criminal risk for anyone processing industrial hemp, as the DEA has asserted that the processing of hemp into extracts, derivatives and isolated cannabinoids (which are arguably legal under the 2018 Farm Bill) can result in unintentional violation of federal law, thereby subjecting processors to the risk of significant criminal liability. That said, the interim final rule does not appear to be a shift in DEA policy since the passage of the 2018 Farm Bill in December 2018, nor has DEA issued any warnings to industrial hemp manufacturers or otherwise signaled a change in enforcement policy by issuing the Interim Final Rule.
In addition, the DEA took several other steps in the interim final rule towards the deregulation of hemp products:
Adding language stating that the definition of “tetrahydrocannabinols” does not include “any material, compound, mixture, or preparation that falls within the definition of hemp set forth in 7 U.S.C. § 1639o”.
Removing from Schedule V a “drug product” in an FDA-approved finished dosage formulation that contains cannabidiol (CBD) and no more than 0.1 percent (w/w) residual tetrahydrocannabinols (e.g. Epidiolex).
Removing DEA import and export controls for hemp extract that does not exceed the statutory 0.3% THC limit.
The consumer-facing CBD industry operates in a regulatory gray zone even as it grows in prominence. Illegal to market as an unapproved drug, dietary supplement or food additive under the Food, Drug & Cosmetic Act, nevertheless, the CBD industry has flourished with ingestible products widely available. With the increased consumer interest in CBD, headwinds in the form of mislabeled or contaminated products and unsubstantiated therapeutic claims, combined with regulatory uncertainty, continue to be a drag on legitimate market participants and consumer perception of CBD products. The regulation of hemp-derived CBD falls under the purview of the Food and Drug Administration (FDA) and its charge to protect the public health. Despite having jurisdiction to regulate CBD products, the FDA has done little to bring regulatory certainty to the CBD marketplace. However, the FDA, with the assistance of the National Institute of Standards and Technology (NIST), recently took important steps that can be described as “getting their ducks in a row” for the eventual regulation of hemp-derived CBD in consumer products. Always looming is the threat of criminal enforcement of the Controlled Substances Act (CSA) by the Department of Justice’s Drug Enforcement Administration (DEA) for plants and products not meeting the definition of hemp.
Prior to July 2020, the FDA’s regulation of the CBD industry was limited to a public hearing, data collection, an update report to Congress on evaluating the use of CBD in consumer products, and issuing warning letters to those marketing products for treatment of serious diseases and conditions. The FDA recognizes that regulatory uncertainty does not benefit the Agency, the industry or consumers and, therefore, is evaluating a potential lawful pathway for the marketing of CBD products. In furtherance of this effort, the FDA took several recent actions, including:
Producing a CBD Testing Report to Congress1
Providing draft guidance on Quality Considerations for Clinical Research2
Sending a CBD Enforcement Policy to the Office of Management and Budget for pre-release review and guidance3
Not to be overlooked, the NIST announced a program to help testing laboratories accurately measure compounds, including delta-9 tetrahydrocannabinol (THC) and CBD, in marijuana, hemp and cannabis products, the goal being to increase accuracy in product labeling and to assist labs in identifying THC concentrations in order to differentiate between legal hemp and federally illegal marijuana. These actions appear to be important and necessary steps towards a still be to determined federal regulatory framework for CBD products. Unfortunately, a seemingly innocent interim final rule issued by the DEA on August 21, 2020 (Interim Final Rule), may prove to be devastating to hemp processors and the CBD industry as a whole.4 While the DEA describes its actions as merely conforming DEA regulations with changes to the CSA resulting from the 2018 Farm Bill, those actions may make it exceedingly difficult for hemp to be processed for cannabinoid extraction without violating the CSA in the process.
FDA Report to Congress “Sampling Study of the Current Cannabidiol Marketplace to Determine the Extent That Products are Mislabeled or Adulterated”
On July 8, 2020, the FDA produced a report to the House and Senate Committees on Appropriations detailing the results of a sampling study to determine the extent to which CBD products in the marketplace are mislabeled or adulterated. The study confirmed what the FDA, Congress and the marketplace already knew – that in this regulatory vacuum, there are legitimate concerns about the characteristics of consumer CBD products. These concerns include whether products contain the CBD content as described in the label, whether products contain other cannabinoids (including THC) and whether products were contaminated with heavy metals or pesticides. With these concerns in mind, the FDA tested 147 CBD and hemp products purchased online for the presence of eleven cannabinoids, including determinations of total CBD and total THC, and certain heavy metals. The key tests results included the following:
94% contained CBD
2 products that listed CBD on the label did not contain CBD
18% contained less than 80% of the amount of CBD indicated
45% contained within 20% of the amount listed
37% contained more than 20% of the amount of CBD indicated
49% contained THC or THCA at levels above the lowest concentration that can be detected
Heavy metals were virtually nonexistent in the samples
Due to the limited sample size, the FDA indicated its intention to conduct a long-term study of randomly selected products across brands, product categories and distribution channels with an emphasis on more commercially popular products. In furtherance of this effort, on August 13, 2020, the FDA published a notice soliciting submissions for a contract to help study CBD by “collecting samples and assessing the quantities of CBD and related cannabinoids, as well as potential associated contaminants such as toxic elements, pesticides, industrial chemicals, processing solvents and microbial contaminants, in foods and cosmetics through surveys of these commodities.”5
Even though this report was not voluntarily produced by the FDA, rather it was required by Congress’ Consolidated Appropriations Act of 2020, it importantly solidified a basis for the need for regulation. With less than half of the products tested falling within the 20% labeling margin of error, this suggests rampant and intentionally inaccurate labeling and/or significant variability in the laboratory testing for cannabinoids.
NIST Program to Help Laboratories Accurately Measure Compounds in Hemp, Marijuana and Cannabis Products
Proper labeling of cannabinoid content requires reliable and accurate measurement of the compounds found in hemp, marijuana and cannabis products. As part of NIST’s Cannabis Quality Assurance Program, NIST intends to help labs produce consistent measurement results for product testing and to allow forensic labs to distinguish between hemp and marijuana.6 As succinctly stated by a NIST research chemist, “When you walk into a store or dispensary and see a label that says 10% CBD, you want to know that you can trust that number.” Recognizing the lack of standards due to cannabis being a Schedule I drug for decades, NIST intends to produce standardized methods and reference materials the help labs achieve high-quality measurements.
NIST’s efforts to provide labs with the tools needed to accurately measure cannabis compounds will serve as an important building block for future regulation of CBD by the FDA. Achieving nationwide consistency in measurements will make future FDA regulations addressing CBD content in products achievable and meaningful.
FDA Industry Guidance on Quality Considerations for Clinical Research on Cannabis and Cannabis-Derived Compounds
On July 21, the FDA released draft guidance to the industry addressing quality considerations for clinical research of cannabis and cannabis-derived compounds related to the development of drugs. These recommendations are limited to the development of human drugs and do not apply to other FDA-regulated products, including food additives and dietary supplements. However, by indicating that cannabis with .3% or less of THC can be used for clinical research and discussing testing methodologies for cannabis botanical raw material, intermediaries and finished drug products, the FDA is potentially signaling to the consumer-facing CBD industry how the industry should be calculating percentage THC throughout the product formulation process.
While testing of botanical raw material is guided by the USDA Interim Final Rule on Hemp Production,7 the FDA warns that manufacturing processes may generate intermediaries or accumulated by-products that exceed the .3% THC threshold and may be considered by the DEA to be Schedule I controlled substances. This could be the case even if the raw material and finished product do not exceed .3% THC. The FDA’s guidance may eventually become the standard applied to regulated CBD products in a form other than as a drug. However, through its guidance, the FDA is warning the CBD industry that the DEA may also have a significant and potentially destructive role to play in the manufacturing process for CBD products.
FDA Submits CBD Enforcement Policy Guidance to the White House
On July 22, 2020, the FDA submitted to the White House Office of Management and Budget a “Cannabidiol Enforcement Policy – Draft Guidance for Industry” for its review. The contents of the document are not known outside of the Executive Branch and there is no guarantee as to when, or even if, it will be released. Nevertheless, given the FDA’s interest in a legal pathway forward for CBD products, the submission is looked upon as a positive step forward. With this guidance, it is important to remember that the FDA’s primary concern is the safety of the consuming public and it continues to collect data on the effects of ingestible CBD on the human body.
It is doubtful that this guidance will place CBD products in the dietary supplement category given the legal constraints on the FDA and the lack of safety data available to the FDA. The guidance likely does not draw distinctions among products using CBD isolate (as found in Epidiolex), full or broad spectrum hemp extract, despite the FDA’s expressed interest in the differences between these compositions.8 Instead, the FDA is more likely to establish guardrails for CBD ingestible products without authorizing their marketing. These could include encouragement of Good Manufacturing Practices, accuracy in labeling, elimination of heavy metal and pesticide contamination, and more vigorous enforcement against marketing involving the making of disease claims. The FDA is not expected to prescribe dosage standards, but may suggest a maximum daily intake of CBD for individuals along the lines of the U.K.’s Food Standards Agency guideline of a maximum of 70 mg of CBD per day.9
Identifying concerns in the current marketplace; promoting accuracy in testing; highlighting the line between FDA regulation and DEA enforcement; and proposing guidance to the industry all appear to be signs of substantial progress on forging a regulatory path for ingestible CBD products.
The DEA’s Interim Final Rule Addressing Derivatives and Extracts Could Have a Devastating Impact on the Cannabinoid Industry
The seemingly benign Interim Final Rule published by the DEA in August with the stated intent of aligning DEA regulations with the changes to the CSA caused by the 2018 Farm Bill’s definition of hemp could cut the legs out from under the hemp-derived CBD industry.10 Claiming it has “no discretion with respect to these amendments,” the DEA rule states that “a cannabis derivative, extract, or product that exceeds the 0.3% delta-9 THC limit is a schedule I controlled substance, even if the plant from which it was derived contained 0.3% or less delta-9 THC on a dry weight basis.”11 Under this interpretation of the 2018 Farm Bill language and the CSA, it is unclear whether processors of hemp for cannabinoid extraction would be in possession of a controlled substance if, at any time, a derivative or extract contains more than 0.3% delta-9 THC even though the derivative or extract may be in that state temporarily and/or eventually falls below the 0.3% threshold when included in the final product. It would not be unusual for extracts created in the extraction process to exceed 0.3% delta-9 THC in the course of processing cannabinoids from hemp.
The implications of the rule may have a chilling effect on those involved in, or providing services to, hemp processors. It is known, as revealed by the Secretary of the USDA to Congress, that the DEA does not look favorably on the legalization of hemp and development of the hemp industry. The DEA’s position is that the rule merely incorporates amendments to the CSA caused by the 2018 Farm Bill’s definition of hemp into DEA’s regulations. In doing so, the DEA made explicit its interpretation of the Farm Bill’s hemp provisions that it presumably has held since the language became operative. What is not known is whether this changes the DEA’s appetite for enforcing the law under its stated interpretation, which to date it has refrained from doing. Nevertheless, the industry is likely to respond in two ways. First, by submitting comments to the Interim Final Rule, which will be accepted for a 60-day period, beginning on August 21, 2020. Anyone concerned about the implications of this rule should submit comments by the deadline. Second, by the filing of a legal challenge to the rulemaking on grounds that the rule does not correctly reflect Congressional intent in legalizing hemp and, consequently, the rulemaking process violated the Administrative Procedure Act. If both fail to mitigate harm caused to the CBD industry, the industry will have to look to Congress for relief. In the meantime, if the hemp processing industry is disrupted by this rule, cannabis processors holding licenses in legal states may be looked upon to meet the supply needs of the CBD product manufacturers.
The Interim Final Rule also addresses synthetically derived tetrahydrocannabinols, finding them to be Schedule I controlled substances regardless of the delta-9 THC content. This part of the rule could impact the growing market for products containing delta-8 THC. While naturally occurring in hemp in small quantities, delta-8 THC is typically produced by chemically converting CBD, thereby likely making the resulting delta-8 THC to be considered synthetically derived.
The hemp-derived cannabinoid industry continues to suffer from a “one step forward, two steps back” syndrome. The USDA’s highly anticipated Interim Final Rule on hemp production (released Oct. 31, 2019) immediately caused consternation in the CBD industry, and continues to, due to certain restrictive provisions in the rule. Disapproval in the rule is evident by the number of states deciding to operate under their pilot programs for the 2020 growing season, rather than under the conditions of the Interim Final Rule.12 With signs of real progress by the FDA on regulating the CBD products industry, yet another interim final rule could undercut the all-important processing portion of the cannabinoid supply chain by injecting the threat of criminality where there is no intent by processors to violate the law. It is not a stretch to suggest that both the USDA and FDA are being significantly influenced by the DEA. The DEA’s Interim Final Rule is just another troubling example of the legal-illegal dichotomy of cannabis that continues to plague the CBD industry.
U.S. Food & Drug Admin., Report to the U.S. House Committee on Appropriations and the U.S. Senate Committee on Appropriations, Sampling Study of the Current Cannabidiol Marketplace to Determine the Extent That Products are Mislabeled or Adulterated (July 2020).
U.S. Food & Drug Admin., Cannabis and Cannabis-Derived Compounds Quality Considerations for Clinical Research: Guidance for Industry(July 2020).
U.S. Food & Drug Admin., Cannabidiol Enforcement Policy: Draft Guidance for Industry (July 2020).
Implementation of the Agriculture Improvement Act of 2018, 85 FR 51639 (Aug. 21, 2020) (to be codified at 21 C.F.R. §§ 1308, 1312).
U.S. Food & Drug Admin., Collection and Analysis of Products Containing CBD and Cannabinoids, Notice ID RFQ_75F40120R00020 (Aug. 13, 2020).
Agricultural Improvement Act of 2018, Pub. L. 115-334, title X, 10113 (codified at 7 U.S.C. §§ 1639o-1639s).
U.S. Food & Drug Admin., Report to the U.S. House Committee on Appropriations and the U.S. Senate Committee on Appropriations, Cannabidiol (CBD), p. 14 (March 2020).
U.K. Food Standards Agency, Food Standards Agency Sets Deadline for the CBD Industry and Provides Safety Advice to Consumers (Feb. 2020) at https://www.food.gov.uk/news-alerts/news/food-standards-agency-sets-deadline-for-the-cbd-industry-and-provides-safety-advice-to-consumers.
At the outset of 2020, the cannabis industry appeared poised for a series of incremental changes: a number of states were considering decriminalization and legalization measures, and support was growing for federal legislation allowing cannabis businesses access to banks and financial services. Then the COVID-19 pandemic hit, which disrupted state legislative sessions (and legislative priorities), obstructed signature gathering for ballot initiatives, and reshuffled federal priorities. However, despite all of these changes, the cannabis industry has seen significant developments across the country. Beyond of course the many challenges and losses brought by the pandemic and its aftermath, in some ways, it may prove a boon for the industry.
Legalization and Decriminalization
Currently around a dozen states have legalized cannabis for recreational use, while just under two dozen states allow use of medicinal cannabis. With support for legalization measures steadily growing in most states, a number of major states seemed poised to pass legislation legalizing recreational cannabis, including large potential markets in the Northeast such as New York, New Jersey, Connecticut and Pennsylvania. And in many other states, advocacy groups were well underway gathering signatures to qualify legalization measures for the November 2020 ballot. When the pandemic hit, however, state legislatures largely suspended their normal operations, and signature gatherers were stymied by stay-at-home orders and social distancing requirements.
Despite these major obstacles, legalization and decriminalization legislation has continued to move forward in a number of states, and still others will have legalization referenda on the ballot for November’s election. Perhaps more important than these initiatives themselves are the diverse states that are moving toward loosening of restrictions around cannabis: rather than being limited to a handful of especially liberal states, cannabis advocates are seeing tangible progress is every geographic area, among states whose political leanings span the spectrum.
While the Northeast corridor had planned to undertake legalization efforts in a coordinated fashion this year, those results were put on hold given the seriousness of initial COVID-19 outbreaks in the greater New York area. However, the New Jersey General Assembly nevertheless passed decriminalization legislation, though the matter has not yet cleared the New Jersey Senate, and the appetite for full-scale legalization remains strong there, with a ballot initiative going directly to voters in advance of the New Jersey Legislature considering the issue. The Commonwealth of Virginia enacted decriminalization legislation also, and a legislative caucus in Virginia has pledged to introduce recreational legalization legislation this summer when Virginia convenes a special legislative session. Voters in Mississippi and South Dakota will be able to vote on ballot initiatives to legalize recreational cannabis, and similar ballot initiatives are underway or likely in Arizona and Nebraska. Advocates in Arkansas and Oklahoma had also hoped to bring initiatives to the ballot, but have encountered practical and legal obstacles to gathering the required signatures in time for this year’s election.
These myriad initiatives reflect a strong shift toward legalization of recreational cannabis across the country, and the ability to continue gathering signatures and momentum despite stay-at-home orders and social distancing underscores the growing popularity of the movement. Whether through the legislature or directly by the ballot, it seems all but certain that the number of states permitting recreational cannabis will grow significantly this year.
COVID-19 Business Closures
As the COVID-19 pandemic took hold in the early months of 2020, most states instituted various forms of stay-at-home orders that required the closure of nonessential businesses. While these policies had—and continue to have—serious impacts on businesses of every type, cannabis companies have largely seen strong economic growth notwithstanding.
One of the most important developments in this space came in the context of state and local governments designating certain businesses as “essential” for purposes of business closure orders. In nearly every state to consider the issue—Massachusetts being the main outlier—state and local governments recognized cannabis companies as essential, which allowed them to operate during the shutdown.
The “essential” designation largely carried between both recreational and medicinal cannabis jurisdictions. And this matters because of what it means for the industry. State and local governments clearly realize the important medicinal role that cannabis plays for patients dependent on it for treatment, and the overlapping customer bases of mixed dispensaries further contributed to keeping cannabis companies open during the pandemic. Even in states where certain dispensaries operate solely in a recreational capacity, those jurisdictions recognized the importance of allowing access to a safe recreational substance, like alcohol, during prolonged stay-at-home orders.
Similarly, likely as a result of those same stay-at-home orders, cannabis companies largely saw significant increases in sales revenue. More customers visited retail establishments, and those customers often purchased more product per visit. This resulted in better-than-expected sales revenue for cannabis companies, and also produced increased tax revenues for state and local governments.
The cannabis industry saw more than just increased sales, however. In the process of issuing emergency rules for the cannabis industry during quarantine, a number of state and local jurisdictions either began to allow cannabis deliveries or expanded its availability, a shift in policy that may stick around well after the pandemic subsides.
One final impact of the pandemic may also help push legalization initiatives forward in the coming years: decreased tax revenue and major budget gaps. Due both to a decrease in economic activity like shopping and dining, as well as the unexpected health care costs associated with responding to the COVID-19 crisis, state and local budgets are expected to see significant shortcomings for years to come. In response, state and local governments are starting to see cannabis as a significant and viable source of tax revenue. For example, various cities in California that had previously been reluctant to permit recreational cannabis are beginning to welcome cannabis companies in hopes of making up for lost tax revenue. Similarly, in New Mexico, where legalization has remained a heated topic of discussion, Gov. Lujan Grisham has explicitly expressed her regret that the state failed to legalize cannabis, recognizing that tax revenues from the industry could have reached upwards of $100 million. Other state and local governments are coming to similar realizations, which should help propel expanded access to legal cannabis in coming years.
Major changes in the cannabis industry in 2020 have not been limited to the states. In the midst of changes and crises across the country, the federal government has been making meaningful progress in two major respects, COVID-19 notwithstanding.
First, cannabis companies are edging closer to having full access to banks, bank accounts and related financial services. The SAFE Banking Act, championed by Rep. Perlmutter, has made it through the House of Representatives and is currently in the Senate Committee on Banking, Housing, and Urban Affairs. However, as Congress continues to toil away at future COVID-19 relief legislation, political signals from Washington, D.C., suggest there is a reasonable likelihood that the protections of the SAFE Banking Act will be included, in some form, in the next round of major COVID-19 legislation out of Congress. The enactment of these banking provisions will provide substantial relief to cannabis companies who have largely been excluded from opening bank accounts and utilizing the services major banks provide. Additionally, allowing access to banks and their services should further facilitate the rapid growth in the cannabis economy we are witnessing elsewhere, and this movement could further legitimize the industry as part of a broader push for federal legalization.
Second, after a four-year delay, the DEA has finally proposed draft rules to expand the DEA’s limited cannabis research program. For decades, all cannabis research to date has relied on limited supplies of cannabis grown at the University of Mississippi. Now the DEA is finally following through on its promise to further develop, refine and expand its research program by allowing additional suppliers and market participants to play a role in cannabis research. While the rules proposed are not without detractors and critiques—and the rules themselves have not been finalized—this marks an important step forward to a better understanding of the effects of THC on consumers, not only because more research is needed to understand a substance consumed by millions annually, but also because the limited supply of cannabis on which researchers currently rely has been shown to differ substantially in appearance, consistency and chemical composition from cannabis that is commercially available in states across the country. With an expanded research regime comes the hope that scientists will be able to develop new and innovative cannabis-derived medications, while also furthering our understanding of how THC affects health and the body.
At every level of government, the year in cannabis so far has proven to be far more eventful than many predicted. And the COVID-19 crisis has not slowed progress. There appears to be continued momentum to further mature how cannabis is treated at every level of government, which signals that significant changes are on the horizon. Industry observers will be closely focused on how the rest of the year proceeds, especially with a presidential election on the horizon.
Editor’s Note: This article was revised to clarify that New Jersey has not yet decriminalized marijuana. A decriminalization bill passed the New Jersey General Assembly, but the New Jersey Senate has not acted as of this writing.
The Agriculture Improvement Act, also known as the Farm Bill, was signed into law in December 2018. A major provision in the law legalizes hemp as an industrial crop. In August of 2016, USDA, DEA, and FDA published a Statement of Principles in the Federal Register (FR 53365) that defined industrial hemp as any part or derivative (including seeds) of the plant Cannabis sativa L. with a dry weight concentration of tetrahydrocannabinols not greater than 0.3% (wt/wt).
Globally, the hemp market was estimated at $3.9 billion in 2017 and the hemp seed segment is predicted to grow “at a CAGR of 17.1%” through 2025. Some of the markets affected by hemp production include nutraceuticals, food, textiles, construction materials, and personal care products. It is also anticipated that cannabidiol (a non-psychoactive cannabinoid extracted from hemp) production will grow to support the burgeoning recreational and medicinal cannabis markets in the U.S., Canada and other countries around the world.
In U.S. states and Canada where recreational or medicinal marijuana programs have been legalized, regulations have been defined to assure the safety and quality of the products sold to consumers. These regulations include analytical chemistry and biological assays to identify and quantify pesticides, mycotoxins, heavy metals, residual manufacturing solvents, terpenes, and microbial contaminates. With regards to hemp, the USDA recently released guidelines for testing of hemp. To date, the only required test from the Federal perspective is total ∆9-tetrahydrocannabinol (THC) content < 0.3% by weight. Total THC is essentially the sum of tetrahydrocannabinolic acid (THCA) and THC (Total THC = 0.877(THCA) + THC) but this may be eventually expanded to include all salts and isomers of cannabinols as noted above. Another complication: what constitutes “dry”? The CFR does not answer this.
Agilent Technologies has invested in the development and implementation of the analytical protocol, the services needed to support these assays, the required consumables, reagents, and supplies, and the training of sales and support personnel to comprehensively ensure compliance of hemp with USDA regulations.
On July 18, 2019, the Riverside County Sheriff’s Department in California served search warrants at 56 illegal cannabis cultivation sites. This operation was spearheaded by 390 law enforcement personnel, whose mission was to combat the ongoing problem of illegal cannabis cultivation sites throughout California.
The raids resulted in:
47,939 marijuana plants confiscated
2,132 pounds of processed cannabis
47 tons of cannabis plants disposed
2 Butane Honey Oil Labs located
The target of the operation was illegal cultivation sites. Individuals or licensed businesses with permits to grow cannabis legally were not affected.
Illegal cultivation is far from just a California problem. For example, if Oregon halted cannabis production today, the state would not experience a shortage as it has a six-year surplus.
The fear for investors and legal growers is that, if some growers turn to the black market to unload excess inventory, federal enforcement will come into play, which will set back the legal cannabis industry to the stone age. Oregon is currently making moves to limit licensure for legal production, but some active licenses may also need to be revoked, which would leave those licensees with vast investment losses. In other words, legalized cannabis’s massive economic market is not without financial problems of its own.
Don’t Make a Federal Case Out of It
Several states have legalized recreational cannabis with the intention of reimagining this vast underground market as an above-board business that bolsters the state’s economy via transparent dealings. To date, however, the federal government has refused to budge regarding cannabis’s status as an illegal Schedule 1 substance. This classification puts cannabis on a par with opioids. As such, those states that have legalized recreational cannabis are extremely motivated to keep these businesses on the up and up and not to pique federal interest.
Black Market Vulnerability
One of the tenets of legalizing cannabis is stemming the proliferation of black-market suppliers and minimizing the negative effects that the “war on drugs”has had in minority communities. These positive impetuses have yet to flourish. As a result of the illegal status of cannabis at the federal level, cannabis-legal states are forced to operate as islands.
Generally, taking legally purchased cannabis across state lines – from a legal to an illegal state – is illegal, and this is not only confusing but is also a recipe for complications. This leaves cannabis-legal states vulnerable to black market activity. These pockets of legal recreational cannabis that are popping up around the country loosen the constraints of the cannabis movement while the legality of this movement remains problematic. The results are an environment that’s extremely hospitable to black market activity.
Supply and Demand
The reality is that – due to supply and demand – cannabis costs about half as much in cannabis-legal states as it does in states in which it’s illegal. Black market growers in legal states destabilize the market. Those legit companies which remain above board, pay their taxes and jump through every legal hoop, cannot compete with black market interlopers who eschew such niceties.
The point made by detractors of legal cannabis isn’t lost on the rest of us – the black market is burgeoning.States that have legalized production have inadvertently made it easier for illegal producers to hide in plain sight, and the line between legal and illegal operations can become blurred. This creates new frustrations for law enforcement and naturally cuts into the legal cannabis trade. The situation has left some opponents to legalization demanding new crackdowns – others characterize such suggestions as amounting to a new war on drugs.
No Going Back
Detractors of legalized cannabis claim the somewhat chaotic effects related to the current patchwork approach to legalization are a result of opening the gates to legalization in the first place. However, putting the genie of legalized recreational cannabis back in the bottle simply isn’t feasible for operational, financial and political reasons. With the proliferation of attendant illegal operations, however, it is becoming more and more clear that leveling the playing field – via some form of federal legalization – is inevitable. The current state-by-state solution leaves too much wiggle room for the illegal transport of cannabis from those states with looser restrictions to those states with tighter protocols. If politics is choosing between the disastrous and the unpalatable, the billion-dollar cannabis conundrum is a great example. The question may no longer be should we legalize cannabis but, instead, how do we legalize cannabis.In other words, we need to find a path forward, and focusing only on the pitfalls that we’ve experienced so far isn’t going to get us where we need to be.
A Tale of Two Choices
The point made by detractors of legal cannabis isn’t lost on the rest of us – the black market is burgeoning. As such, we have an important decision to make. A blanket prohibition of cannabis may no longer be practicable, so we’re left to choose between legal and overt practices across the board or a hodgepodge of semilegal practices with covert ops in tow. Fostering illegal activity is rarely in our nation’s best interests, which leaves legalizing cannabis at the federal level as possibly the most practicable solution.
Protecting Public Health
As more states embrace the legalization of recreational cannabis, public health concerns remain an issue. Many of these illegal cultivators use chemicals that are banned in the United States and do not properly dispose of chemicals or waste products that destroy the environment, contaminate drinking water and have the potential to harm or even kill residents and domestic animals. Not only is this activity harmful, growers often steal electricity and water from surrounding residents.
Cobbling together a pastiche of laws, however, inevitably bolsters black market activity and does nothing to help protect public health. Even the staunchest proponents of legalizing cannabis don’t want minors involved in the equation. Additionally, few debate that unchecked usage is a healthy option. Quasi-legislation at the state level (and on a state-by-state basis), however, provides neither a check nor a balance.
Onward and Upward
The most likely next step for safeguarding public health, for stemming black-market activity, and for generating maximum revenues is toward thoughtful and comprehensive national legalization that comes sooner rather than later. In the meantime, law enforcement should protect the public, legal operations, investors, and the environment from the black market.
The opinions expressed are those of the author and do not necessarily reflect the views of Guidepost Solutions or its clients.
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
Within 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
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.
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.
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.
On December 20, President Trump signed the Agriculture Improvement Act of 2018 (the Farm Bill) into law, which included an important change to the way federal agencies regulate hemp farming and production. The Farm Bill essentially removes hemp-derived cannabidiol (CBD) from the Controlled Substances Act in states that choose to regulate it. It strips the Drug Enforcement Agency’s (DEA’s) authority from outlawing hemp and gives states the ability to regulate hemp markets on their own, with approval from the United States Department of Agriculture (USDA).
This gives the USDA the authority to regulate hemp farming, providing for things like access to banks, insurance, grants, certifications and gets rid of the need for a pilot program, which was previously the case under the 2014 Farm Bill. It also defines hemp a little better, to include cannabinoids, derivatives and extracts.
According to Aaron Smith, executive director of the National Cannabis Industry Association (NCIA), the signing of the Farm Bill is a crucial step towards full legalization. “The lifting of the federal ban on non-psychoactive hemp is a concrete sign that the ‘reefer madness’ which first led to its criminalization is finally coming to an end,” says Smith. “This Farm Bill is a step in the right direction for comprehensive cannabis policy reform and will help fuel discussions in Congress about the best ways to end federal prohibition and create a regulated national cannabis market.”
However, one particularly important caveat needs to be mentioned: The Food and Drug Administration (FDA) still retains regulatory authority over CBD products. In a statement released the same day that the Farm Bill was signed, the FDA addressed their oversight capabilities. “We’ll take enforcement action needed to protect public health against companies illegally selling cannabis and cannabis-derived products that can put consumers at risk and are being marketed in violation of the FDA’s authorities,” reads the FDA statement. “The FDA has sent warning letters in the past to companies illegally selling CBD products that claimed to prevent, diagnose, treat, or cure serious diseases, such as cancer. Some of these products were in further violation of the FD&C Act [Federal Food, Drug and Cosmetics Act] because they were marketed as dietary supplements or because they involved the addition of CBD to food.”
The FDA also notes that there are circumstances “in which certain cannabis-derived compounds might be permitted in a food or dietary supplement.” That means they are exploring opportunities for companies to develop, manufacture and market legal CBD products without going through the extensive drug approval process.States need to establish programs approved by the USDA and companies need to cooperate with the FDA, taking the necessary steps to get their products and marketing approved.
In the food ingredients realm, they have already taken steps to approve hulled hemp seeds, hemp seed protein and hemp seed oil as generally recognized as safe (GRAS). “Therefore, these products can be legally marketed in human foods for these uses without food additive approval, provided they comply with all other requirements and do not make disease treatment claims,” reads the FDA statement.
The Farm Bill signing opened the doors for hemp cultivation and production in the United States. It allows farmers to access the same goods and services extended to other commodities farming, it makes conducting business easier across state lines, it will pave the way for more research into hemp as an effective medicine and helps to end the debate over hemp’s legality. But this doesn’t mean any business can just start producing and selling CBD products. States need to establish programs approved by the USDA and companies need to cooperate with the FDA, taking the necessary steps to get their products and marketing approved.
In the coming months and years, we will see which states decide to develop hemp cultivation programs and how the proliferation of hemp-derived products will evolve under FDA regulatory oversight.
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