ASTM International, the renowned global standards body, has established a new subcommittee, D37.92, aimed at facilitating the exchange of ideas and information between policymakers, regulatory bodies, scientists, stakeholders and the public.
According to a press release, the new subcommittee, at the request of the U.S. Senate, has provided comments on the proposed Cannabis Administration and Opportunity Act (CAOA). The comments including the sharing of ASTM’s work in the cannabis industry, their organization, membership information, defining cannabis terms and their published standards related to facilities, consumer safety and other areas.
David Vaillencourt, frequent contributor to CIJ and chair of the new subcommittee
The subcommittee is headed up by David Vaillencourt, founder & CEO of The GMP Collective and frequent contributor to Cannabis Industry Journal. “With a patchwork of regulations across state, federal, and international levels, this subcommittee will be valuable to industry and government stakeholders as a means to collaborate,” says Vaillencourt, current chair of the new government liaison subcommittee. “It’s really going to facilitate dialogue that will be key as we look ahead to a global marketplace in the coming years.”
ASTM has been working with the cannabis industry through their D37 committee since March of 2017. Soon after the D37 committee launched, they began crafting cannabis standards and have grown their membership and subcommittees considerably over the past few years. In August of this year, they announced the development a new voluntary, consensus-based standard, the Change Control Process Management standard. The new committee, D37.92, is currently seeking public participation in their work to develop the new standard. To learn more about cannabis committee participation and membership, click here.
As we continue to witness and experience the medical cannabis industry grow and mature, many of us are wondering where the head-to-head clinical studies are, and why aren’t there more clinical research studies taking place?
Cannabis products created with the intention for medicinal use often state that their formulations and products stack up against traditional pharmaceutical treatments. However, without a substantial number of clinical studies being performed, it’s difficult to truthfully make such a claim. It’s one thing to share testimonials from people who use particular products and report what their experiences were like. However, to go head-to-head in a controlled environment where factors such as underlying conditions, height, weight, medication, lifestyle and nutrition habits are taken into account to accurately compare the efficacy of a traditional pharmaceutical product versus a cannabis-derived product are two completely different things.
The Need for More Capital
Wouldn’t you agree that if a company is having tremendous success with a particular product, that they’d reinvest capital into a true clinical study to have data to support their marketing efforts? Investing into proper studies would not only benefit a company working hard to earn market share, it would benefit those who are relying on a particular product to regain a quality life. As we’ve learned over the years from numerous scientists and researchers digging into the cannabis plant at a more granular level, there’s much more to the medicinal benefits than meets the eye. Discovering new information about how cannabinoids such as CBG and CBN combined with CBD and certain terpenes can create specific effects has helped make a greater impact on the medical cannabis community. Bringing these powerful blends of anti-inflammatory, cannabis-derived compounds and other immune boosting nutraceuticals to head-to-head clinical studies could be a huge step forward towards further legitimizing the healing effects that cannabis has to offer.
Measuring Efficacy Goes Beyond COAs & Product Reviews
Determining the efficacy of medical cannabis products should be viewed in the same light as traditional pharmaceutical products. Traditional clinical studies are designed with an Institutional Review Board (IRB) approval, subject recruitment, electronic data capture as well as electronic patient reported outcomes. Some companies within the cannabis space have made attempts to conduct surveys with measuring efficacy in mind, but using outdated survey technology that hasn’t been validated only leads to insufficient data collection.
Discovering new information about how cannabinoids can create specific effects has helped make a greater impact on the medical cannabis community. Image: Peggy Greb, USDA
There is nothing wrong with adult-use cannabis. However, for the medical cannabis space to be taken more seriously, it is time for organizations to step up their efforts and take note of certain practices from traditional biotech organizations when it comes to clinical research and collecting data to correctly quantify efficacy of certain products. Well-thought-out studies designed with clinical endpoints and validated questionnaires is a strategic way for the industry to take big steps towards doing what is right for patients.
Patients Are Asking For More Research
After speaking with patients who are interested in pursuing a treatment that includes the responsible use of medicinal cannabis, the one thing they all have in common is the desire for more information that they can rely on to make better decisions. Is it time for patients to push the envelope and not purchase products from companies that are not willing to perform the clinical studies? If companies suffered a loss in sales as a result, would they reconsider their stance on reinvesting capital into clinical trials with their products?
Equally as important as proper research is perpetual tele-monitoring. The value in perpetual tele-monitoring is the data. We can showcase miraculous, life-changing stories of how medical cannabis has helped people turn their lives around. However, when seeking greater buy-in from groups like the FDA, data is key. Qualitative data can go only go so far. It’s the quantitative data that will help move the medical cannabis community forward. The ability to be able to review data on an ongoing basis would enable medical cannabis companies to evaluate how products are working based on the electronic data capture, along with questions that a company may develop to ascertain individualized product feedback.
Imagine having the ability to see patients’ data based on real-time, daily, through something as convenient as a wearable device. Understanding test results and correspondence with doctors for patients would significantly improve.
As the legality and availability of hemp and non-hemp cannabis products continues to grow, having strong, recognizable brands will become increasingly important in order to stand out from the competition. Unfortunately, strong brands invite knock-offs and can require aggressive policing. Registering your trademarks makes policing much easier, but registration of marks used to sell hemp and non-hemp cannabis products requires strategy and forethought.
Why Register?
Trademark rights flow from use, so a registration is not required for enforcement. However, “common law” rights based on use alone must be proven in each instance, and you must show that your use of the mark has been sufficient such that consumers recognize and associate it with your goods or services. This can be difficult, expensive and time consuming. Also, common law rights are territorially limited. Even if you can prove such rights in Oregon (for example), you may have no right to prevent use of your mark in other states. State trademark registrations are similarly limited, but are presently all that is available for marks used exclusively to sell non-hemp cannabis products.
By contrast, a federal trademark registration provides the registrant a nationwide, exclusive and presumed right to use the mark in association with the designated goods and services. In addition, counterfeit use of a federally registered trademark can lead to statutory damages. That is, you don’t have to prove an amount of harm—a court may simply award damages based on statute. Yet another benefit is the ability to file based on an “intent to use.” You can thereby reserve a mark nationwide for up to three years before you must show use. Federal registration is available for marks used to sell hemp products, but with some strict limitations as discussed below.
Use in Commerce Requirement
Federal registrations are issued by the United States Patent and Trademark Office (the Office) once an application is approved and use in commerce is demonstrated. To satisfy the “use in commerce” requirement, an applicant must show that a mark is being used in association with the sale of goods or services that are legal to trade under federal law. Sale of products not legal under federal law simply does not count to establish trademark use for purposes of federal registration. This is where the vast majority of federal trademark applications for use with cannabis products get rejected. A search of the federal registry shows that, of over 8000 trademark applications for products containing cannabis extracts, only about 1,300 have resulted in registrations. But these 1,300 illustrate that there is a path to success.
Allowable Goods
The Office traditionally rejected all applications for use with products containing any cannabis extracts under the Controlled Substances Act (CSA). The Agricultural Improvement Act of 2018, commonly known as the Farm Bill, created an exception to the CSA for hemp, defined therein as cannabis extracts containing < 0.3% THC by dry weight. Based on this, the Office began allowing applications provided they designate only goods having 0.3% THC content or less. But even that limitation isn’t sufficient for some types of goods.
Unless specifically disclaimed, the Office will assume the presence of CBD in products containing cannabis extracts, regardless of THC quantity. On that basis it will reject applications for hemp products that are ingestible (food, drinks, nutritional supplements, etc.), or that claim a medical or therapeutic purpose, under the Food, Drug & Cosmetic Act (FDCA). The FDCA requires Federal Drug Administration (FDA) endorsement to add “drugs” to such products, the FDA classifies CBD as a “drug,” and the FDA has authorized only a few products that include CBD. Thus, an allowable good that is ingestible or therapeutic must not only contain the low THC disclaimer, but must also state an absence of CBD. Notably, the Office has not been rejecting products on the basis that they contain CBG (cannabigerol) or other naturally occurring non-THC, non-drug cannabinoids.
Are the Goods Sold Really Allowable?
Of course this scheme of word-smithing designations to obtain allowance of federal trademark registrations invites error, if not fraud. Registrations are subject to cancellation if use of the mark with the designated goods is not maintained, or if it can be shown that the registration was fraudulently obtained. Thus, critical to a claim of use is that the applicant offers products that actually meet the designation description. The Office does not check for THC levels or CBD presence, and most purveyors of hemp products don’t either. Indeed, there is not even a standardized method for measuring these things. However, studies show that more than half of hemp products either purposefully or accidentally misrepresent their actual THC and CBD levels.i Though legally untested, this presents a potential problem for many existing federal registrations.
If a mark registered for use with goods having < 0.3% THC is found to be used only with products that actually have a greater amount of THC in them, the registration could be canceled. The same fate could befall a registration for goods claiming to have no CBD that, when tested, actually do contain more than trace levels. Even if non-hemp cannabis products are legalized under federal level, registrations obtained with THC and/or CBD limitations would still require the registrant to use the mark with products meeting such limitations.
Keeping Evidence for Insurance
So long as a registrant has maintained use of the registered mark “in commerce” in association with the designated goods, the registration is insulated from attack based on claims of non-use or fraud. The fact that the registrant also uses the mark for goods that are not legal on the federal level is of no consequence to the registration. Thus, it is wise to include in the product lineup under the brand to be protected at least some good that meets the present requirements for federal trademark registration.
One option is to include a product where the only cannabis extract is from hemp seed oil. Without even testing it, you can be reasonably assured that such a product will contain little or no CBD or THC. Another option short of testing is to obtain a certification or warrant from your supplier that particular ingredients truly are hemp, i.e., have < 0.3% THC by dry weight. This could be relied on as evidence should no original product be available for testing to show that use was legitimate at the time registration was obtained. If you can’t obtain such a certification, testing the occasional sample and keeping records over time would also work. Product samples can now be tested for THC content for around $100 per sample, with results back in about a week.ii
Zone of Natural Expansion
Though non-hemp cannabis products cannot be covered directly by federal registrations, a federal registration for CBD/hemp products can have spillover benefits. This is because the scope of a registration may expand to cover things similar to what is designated. The question comes down to likelihood of confusion. Imagine a company holds a registration covering LOOVELA for “nutritional supplements containing hemp seed oil having no CBD and < 0.3% THC by dry weight.” It would be logical for a consumer to assume that non-hemp cannabis products sold under the LOOVELA mark would likely be made by the same company. Thus, provided the company actually sold products complying with its designation, it could assert the CBD-based registration to prevent sale of LOOVELA branded non-hemp cannabis products. Also, should such products be legalized federally, the company would likely be the only applicant able to obtain an additional federal registration for LOOVELA for use with them, because any competing attempt would be confused with their pre-existing registration for CBD/hemp products.
In conclusion, it should be noted that the law in this space is evolving rapidly and is nuanced. Every situation is unique in some way, and there are many reasons an application may fail or a registration may be attacked that are not addressed above. But there is value in obtaining a federal registration for your hemp brands, and there is an overall strategy to be employed for brand protection in the cannabis space.
The content above is based on information current at the time of its publication and may not reflect the most recent developments or guidance. Neal Gerber Eisenberg LLP provides this content for general informational purposes only. It does not constitute legal advice, and does not create an attorney-client relationship. You should seek advice from professional advisers with respect to your particular circumstances.
References
See, e.g., Bonn-Miller, Marcel O., et al., “Labeling Accuracy of Cannabidiol Extracts Sold Online,” Journal of the American Medical Association, Vol. 318, No. 17, pp. 1708-09 (Nov. 7, 2017); Freedman, Daniel A. and Dr. Anup Patel, “Inadequate Regulation Contributes to Mislabeled Online Cannabidiol Products,” Pediatric Neurology Briefs, Vol. 32 at 3 (2018).
Federal regulations have made compliant credit processing in the cannabis industry difficult to achieve. As a result, most cannabis retailers operate a cash-only model, limiting their ability to upsell customers and placing a burden on customers who might rather use credit. While some dispensaries offer debit, credit or cashless ATM transactions, regulators and payment processors have recently been cracking down on these offerings as they are often non-compliant with regulations and policies.
KindTap Technologies, LLC operates a financial technology platform that offers credit and loyalty-enabled payment solutions for highly regulated industries typically driven by cash and ATM-based transactions. KindTap offers payment processing and related consumer applications for e-commerce and brick-and-mortar retailers. Founded in 2019, the company is backed by KreditForce LLC plus several strategic investors, with debt capital provided by U.S.-based institutions.
We interviewed Cathy Corby Iannuzzelli, co-founder and chief payments officer at KindTap Technologies. Cathy co-founded KindTap after a career in the banking and payments industries where she launched multiple financial and credit products.
Aaron Green: Cathy, thanks for taking the time today. How did you get involved in the cannabis industry?
Cathy Corby Iannuzzelli, co-founder and chief payments officer at KindTap Technologies
Cathy Corby Iannuzzelli: I’ve been in the payments industry for a long time. I was doing some consulting a few years ago for a client in Colorado and that gave me exposure to the issues in cannabis like the fact that you couldn’t have real payments in cannabis. Then, a close family member with health issues turned to medical cannabis when nothing else seemed to work. I was amazed by the difference it made in her life. At that point, I put those two things together and I said, I need to focus on helping this industry get a real cannabis payments solution because I thought it was ridiculous that you had an industry of this size and importance that had been abandoned by the payments industry.
Aaron Green: Can you highlight some of your background prior to entering cannabis?
Corby Iannuzzelli: Throughout my career, I’ve been a banker, I’ve been a payment processing executive and I’ve been a consultant. So, I’ve kind of done it all in the payments and financial services space.
Aaron Green: Why is it that most dispensaries only take cash?
Corby Iannuzzelli: In the US, even though cannabis is legal in many states, it’s still illegal federally. There are big banks and card networks like Visa, MasterCard, etc., who are national, even global companies and frankly, the executives of those companies don’t want to end up in jail for violating national laws. So, they have put cannabis dispensaries on what’s called a “prohibited merchants” list. This means you cannot accept Visa, MasterCard, Discover, American Express, or similar payments as a cannabis business and so it’s forcing the industry to a cash-based solution.
About the only thing you’re seeing that’s not cash in dispensaries are ATMs. But if you think about it, ATMs are machines where the consumer goes and pulls cash out and pays upwards of $5 or more in fees for doing that. They then hand that cash back to the dispensary who then has the costs of having to deal with that cash. The industry is just stuck in a cash-based business until federal legislation changes.
Aaron Green: I’ve been to some dispensaries where they accept credit cards or debit cards. What is going on there?
Corby Iannuzzelli: I’ve heard reports of consumers who’ve been able to use a credit card or a debit card in a dispensary. Sometimes the processor who sold that solution to the dispensary says, “Oh, it’s compliant, I guarantee you it’s compliant.” But if you dig in, that’s not the case. And eventually, Visa or MasterCard figures it out and shuts it down. In some cases, it’s outright fraud where the processor who sold the payment terminal to the dispensary is misrepresenting it as say a doctor’s office rather than a dispensary. There’s no merchant category code in the payment networks that says this is for processing dispensary payments, so they pretend it’s something else until they get shut down.
When they do get shut down, I’ve heard of cases in Las Vegas where it was basically 100% Visa or MasterCard one day and 100% cash the next day. It completely disrupted the whole business. It’s not just the retail store, but the inventories and everything else throughout the business.
“About the only thing you’re seeing that’s not cash in dispensaries are ATMs”
There have also been some cases where you’ll see something called a cashless ATM. In a store, they call it a debit card transaction. It’s really a cashless ATM where the consumer is making what looks to the ATM network like a cash withdrawal in $10 or $20 increments, but the consumer is getting a receipt instead of cash, and they’re turning around and handing that receipt back to the dispensary who then makes a change because the cashless ATM only dispensed in $10 or $20 increments.
Now ATM networks are looking at these cashless ATM transactions to see if they are compliant. Do consumers know the fees that they’re paying? Are these transactions coming in and looking to the network like real cash when it’s not? Cashless ATM transactions are probably the most common thing you see, but that’s being called into question after the Eaze incident where a large company was misrepresenting its terminals. The federal government stepped in and called it bank fraud and the individuals behind it, the executives, are in jail. Since then, the networks are looking at this and saying, what about these cashless ATMs? Are those transactions within our rules, or is there something funny going on here?
Aaron Green: So, to summarize here: you’ve got federal regulations at the national level that says that cannabis banking is not allowed so major institutions are not offering it. Yet you found a way through the regulations and compliance issues. I’m curious can you pull back the curtains a little bit and tell us how you came up with a solutionhere?
Corby Iannuzzelli: Well, we came up with the solution by stubbornly refusing to believe that cannabis payment processing could not be done in a compliant manner. We just said, “there is a compliant way to do this, let’s figure it out.” We took the same components that are out there for the financial services and payments industry and reassembled them in such a way that we do not violate any rules. We do not use any of the Visa, MasterCard, Discover or Amex rails, we built our own network. We have direct contracts with the merchants and direct contracts with the consumers. We control everything and all the funds flow through regulated financial institutions. So, we designed something that looks and acts to consumers and retailers the way Visa and MasterCard look and act when a consumer goes to make a purchase, but they run on a separate set of payment rails and in compliance with banking regulations and state regulations. When you’re looking at the problem from a different perspective, sometimes you can come up with a better answer.
Green: On the consumer side, what does that user experience look like?
Corby Iannuzzelli: Our product is completely digital. The consumer experience starts with integration at the online checkout. When it’s an e-commerce shopping cart and somebody is placing an order, they will see a button called “Pay with KindTap.” The first time they click that button they’re automatically brought to our integrated web app where they do a quick and easy application for our digital revolving line of credit product. If approved, they instantly go back to the checkout screen and their first purchase will just happen immediately, with flexible payment options over time. If the consumer decides they don’t want our KindTap credit and would rather have a pay now-product where we pull the funds from their bank account, then the consumer can do so. So, there is no physical card per se, it’s integrated like PayPal or Affirm at the point of checkout online. For the consumers who use KindTap credit, there is a mobile app where they can see their transactions, view statements, pay their bills, etc.
Additionally, there is a loyalty program for all purchases – KindTap credit or through the consumer’s bank, because we feel very strongly that a lot of the reasons consumers choose to pay with one card over another is the points and the rewards that they get. So, we’re providing loyalty rewards with KindTap so that consumers can get rewarded for that spending with KindTap and it’s better for the retailers.
Green: On the retailer side, what does that experience look like and what is your business model?
Corby Iannuzzelli: We are not going store by store doing integrations, rather, we’re integrating with various software, delivery and e-commerce providers. That gives us broad reach and ability to expand rapidly in various state markets where cannabis is legal. Once a merchant says “yes, I want to be a member of the KindTap Merchant Network,” then we work to get them set up on our platform in a matter of days. The merchants receive continuous support from our success team, marketing co-investment and a depth of analytics reporting. We made the entire process and ongoing operations streamlined and frictionless for both merchants and consumers.
Aaron Green: What are the benefits of moving from cash to credit type of payments?
Corby Iannuzzelli: On the retail side, there are the obvious benefits of not having all the security, safety and theft issues associated with operating a physical cash business. Consumers very often don’t carry cash anymore, except when they’re making a cannabis purchase. There are a lot of hidden costs to retailers because payments are not just about moving money from the consumer to the business.
“I really am optimistic that with so many scientific breakthroughs we’ve had that we’re going to be able to figure this out.”Payment options – or lack thereof – can shape where people shop, how much they spend and what they buy. It’s a proven science how consumers make impulse purchases. If you’re a cash-based business in cannabis, and you’re trying to get somebody to make an impulse purchase, and they walked in with $100, then you can’t get them to spend more than $100, no matter how creative your marketing is! The consumer is limited by how much cash they have in their bank account or in their pocket at that point in time. So, it’s really about the upsell that comes with the bigger basket sizes that retailers experience when you move from a cash-based business to credit and suddenly, the merchant doesn’t have to deal with long lines of consumers on payday when the store was beyond slow two days before. Now the consumer can spread purchases with the thinking, “I’d rather not be the one standing in that line on payday. I’m going to go Wednesday [instead of Friday] because I have KindTap credit so I can budget and manage my cash flow throughout the month rather than around my paydays.”
So, we think that the lack of an efficient and effective payment system for cannabis is holding back sales. We all focus on how much the industry is growing. KindTap thinks about how much faster it could be growing if it was supported by a decent payment system.
Aaron Green: What are some other cash-only markets you are looking at?
Corby Iannuzzelli: We are laser-focused on the cannabis ecosystem and bringing a compliant credit and loyalty-based digital payments solution to cannabis merchants and customers and rewarding those stakeholders for accepting/using KindTap. Additionally, we are planning to extend the KindTap Merchant Network so that consumers can use/earn our loyalty points with other goods and services they’re purchasing that are adjacent to cannabis or that are important to the cannabis consumer. That’s the direction we’re going.
Aaron Green: Today people can receive gas points for spending with their credit card. Now with KindTap, you can spend to get cannabis points?
Corby Iannuzzelli: That’s exactly right.
Aaron Green: What in either cannabis or your personal life are you most interested in learning about?
Corby Iannuzzelli: Personally, I am most interested in seeing breakthrough technologies in climate change. We’re going to need to correct this situation and I’m reading about collecting carbon dioxide from the air and burying it in the earth and things like that. I really am optimistic that with so many scientific breakthroughs we’ve had that we’re going to be able to figure this out. Certainly, it’s going to take a lot of smart people and a lot of investment, but I really look forward to watching them do their stuff and hopefully taking us out of this nightmare situation that we’re heading into if we don’t make some changes.
Aaron Green: Thanks Cathy, that concludes the interview.
Practicing Law Institute Press’s Legal Guide to the Business of Marijuana: Cannabis, Hemp and CBD Regulation is a one-of-a-kind deep dive into the many regulations governing the industry. Aimed at attorneys representing clients in this space, the treatise offers guidance on a range of interrelated topics including state regulation of medical and non-medical cannabis; federal law, enforcement and preemption and their implications for employment, taxes and banking; and the various aspects of establishing and managing a cannabis enterprise, from growth to licensing, transport and distribution. We spoke with co-authors James T. O’Reilly, professor of Public Health Policy at the College of Medicine of the University of Cincinnati and author of leading references on food and drug law, and Edgar J. Asebey, a founding partner of Keller Asebey Life Science Law and a life sciences attorney with over twenty years of experience, about the intersection of the cannabis business and the law.
Q: From the legal industry’s perspective, how has this area of the law evolved over the past few years – and what would you advise clients in cannabis to look for when engaging legal assistance for their businesses?
James T. O’Reilly & Edgar J. Asebey: Over the past few years, we have seen a growing acceptance of the idea that lawfully serving the needs of cannabis consumers is a commendable business initiative. This evolution in thinking – tied to the myriad business opportunities cannabis presents – has given large, mainstream corporate law firms the incentive to grow practices and develop specialists in this area, which is a very positive development.
But it is not enough for lawyers to know their way around M&A and the capital markets; they must also have experience with federal regulatory bodies. As regulations continue to evolve, it is essential for practitioners to be familiar with the Food, Drug and Cosmetics Act as well as the Federal Trade Commission Act. The framework for regulating cannabis products already exists, as can be seen in the Warning Letters sent to hemp and CBD companies by both the Federal Trade Commission and Food and Drug Administration (as well as, most recently, the FDA and CDC’s warning about delta-8 THC). If a client places their hemp or CBD product into the stream of commerce, that product will be subject to FDA, FTC and relevant state laws. We strongly recommend seeking out advisors who truly understand these regulations and how they align with the regulatory agencies’ procedures and agendas.
Q: What are the most urgent legal and regulatory topics the industry is watching these days?
O’Reilly & Asebey: Our treatise follows and analyzes the most pressing legal issues facing those in the cannabis and hemp space. In our most recent edition, we add discussion of the Final Rule for the establishment of a domestic hemp production program. We think this is a significant development in that it attempted to address some of the industry’s criticism of some provisions found in the Interim Final Rule, particularly around issues of sampling and testing for THC content. The Final Rule clarified issues around THC percentage testing methodologies, but disappointed many in the industry by leaving in place the low 0.3% dry weight threshold for an acceptable hemp THC level. On the other hand, The Final Rule raises the threshold for a negligent violation from 0.5% to 1.0% total THC and limits the number of violations a grower can receive in one year to one, easing potential penalties for violations.
Of course, the regulation of CBD products is on the minds of many in the industry. Key questions remain about whether cannabinoids such as delta-8 THC can be lawfully sold. Since the FDA has provided no clear guidance with regard to the sale and use of CBD and other hemp-derived cannabinoid-containing products, well-meaning businesses find themselves operating in a regulatory gray area. While some states have raced to place delta-8 THC on their controlled substances lists or otherwise regulate it, at the federal level it remains unclear. Our book provides a legal argument showing that current regulations support the lawful production and sale of delta-8 THC. To date, this and other legal arguments have not been tested in the courts and, without FDA guidance, the delta-8 THC sector will remain gray.
Editor’s Note: The Legal Guide to the Business of Marijuana: Cannabis, Hemp and CBD Regulation is now available for purchase here.
About James T. O’Reilly
James T. O’Reilly of the University of Cincinnati College of Medicine is former chair of the 8,000-member Section of Administrative Law & Regulatory Practice of the American Bar Association and has been active in numerous ABA, Federal Bar Association, and state and local bar activities. He retired as Associate General Counsel of The Procter & Gamble Company to teach full-time, and served as a consultant to three federal agencies and to the Deputy Secretary General of the European Commission. He has authored fifty-six texts and more than 230 articles, and his work was cited numerous times in appellate opinions, including “The experts have written . . . ” in a March 2000 opinion of the U.S. Supreme Court (Food & Drug Administration v. Brown & Williamson Tobacco Corp., 120 S. Ct. 1291). He has received numerous honors and awards for his professional and electoral activities and has been listed in Who’s Who in American Law for twenty-five years. He is a graduate of Boston College and the University of Virginia School of Law.
About Edgar J. Asebey
Edgar J. Asebey, a partner at Asebey Life Sciences Law PLLC, is a regulatory and transactional attorney with over two decades of experience in federal regulation of pharmaceutical, biotechnology, medical device, food, dietary supplement and cosmetics companies. Since 2015, he has been working on cannabis-related matters and transactions, and since 2018, he has provided regulatory compliance, business transactional, venture finance and international trade services to hemp/CBD companies. Mr. Asebey practices before the FDA, the USDA, the CBP, the EPA, and the FTC, representing client companies on regulatory compliance, product approval/registration and FDA enforcement defense matters. He founded and served as president of Andes Pharmaceuticals, Inc., a natural products drug discovery company, from 1994 to 2000, and has served as in-house counsel to two life sciences companies. Mr. Asebey is a member of the American Bar Association (Section on Administrative Law & Regulatory Practice: Food and Drug Committee and International Committee), the Food & Drug Law Institute (FDLI), the Dade County Bar Association, and BioFlorida.
By Justin T. Starling, Michael C. Tackeff No Comments
Cannabis law in the U.S. is currently incoherent. What is illegal under the federal laws on the books bears little relation to what is actually happening in cities, states and counties where cannabis is legal for medical and adult use. Although legislators, lawyers and business interests are focused primarily on whether it is legal to buy, sell or grow the cannabis flower itself, the industry’s emergence is also affecting another manufacturing stalwart: packaging. If you can grow it, you can transport it. And if you can transport it, you need a container to sell it in.
As cannabis growers and retailers begin to recognize that attractive, compelling and moisture-retentive packaging can help market and sell their products to a wider audience, packaging companies are presented with an opportunity to expand into this Wild West industry. Seth Rogen is living proof that there is money to be made here: his cannabis company, Houseplant, trades on antique vibes, limited edition releases, celebrity artist sponsorships and old-school tobacco-adjacent products, splashing its unique and charismatic packaging across its website homepage.
But what do packaging industry executives need to know before venturing into the cannabis industry? Although manufacturing packaging that could be used to contain or transport cannabis products is not entirely risk-free, U.S. courts have generally refused in the past to hold manufacturers liable for making products that can be used later as drug paraphernalia. For packaging executives, two questions are of utmost importance. First, could I be held liable for producing drug paraphernalia? And second, what packaging standards must my company follow? This article will address these questions.
Criminal Status of Cannabis Under Federal & State Law
All cannabis containing more than 0.3% THC remains illegal under federal law and under the laws of many large states, including Texas, Georgia, Tennessee and Iowa. But that’s not the full story. While facilitating cannabis production or trafficking is illegal, the federal government has enforcement priorities and restrictions on its resources. And many state and federal law enforcement officials have little incentive to pursue industries supplying trucks, packaging or lighting to a cannabis retailer in another state, as such products and services are not illegal and can be used for other industrial purposes. No law enforcement official is going to sue Staples for selling paperclips to a cannabis retailer.
Cannabis is still a “Schedule I” substance under the federal Controlled Substances Act, which is defined as substance having a high potential for abuse, no currently accepted medical use in treatment, and no accepted safe use.1 Cannabis was always a poor fit for this definition, given its efficacy in helping oncology patients cope with symptoms like nausea, but its continued classification as a Schedule I substance means that cannabis remains illegal under federal law. Despite this federal illegality, the federal government has little power—legally, practically and politically—to prosecute those engaged in the cannabis industry through activities that are legal under state law.
First, since 2014, Congress has banned the Department of Justice (DOJ) from spending a dime enforcing the federal cannabis law against individuals complying with state medical cannabis law via an appropriations rider.2 Courts have interpreted this language to mean that the DOJ may not prosecute individuals complying with state medical cannabis law,3 although there are still instances where individuals are convicted of violating the federal ban because they were found to have been out of compliance with state law.4 Though the rider only pertains to medical cannabis laws, the federal government has historically treated adult use cannabis regimes by states in a similar way.
Second, from a practical standpoint, no federal agency has the manpower to pursue even a tiny fraction of medical and adult cannabis users who are in compliance with state law, much less the industries providing support, logistics and inventory management. Though the federal ban is still on the books, no one has the power or the money to enforce it. The federal ban is thus becoming a dead letter.
Drug Paraphernalia Laws
Drug paraphernalia laws were written to provide law enforcement with other offenses to charge drug users and producers in addition to simple possession. The idea was to criminalize every aspect of the process of consuming and producing cannabis. While drug paraphernalia laws are written incredibly broadly, courts have been reluctant to apply them to companies producing packaging products.
Most packaging companies would have a defense to a suit alleging they are producing paraphernalia
Federal law explicitly defines drug paraphernalia as “any equipment, product, or material of any kind which is primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing, processing, preparing, injecting, ingesting, inhaling, or otherwise introducing into the human body a controlled substance, possession of which is unlawful under this subchapter.”5 There are 15 categories of items listed as “per se” paraphernalia, including roach clips, electric pipes, and bongs.6 Packaging products do not fit any of the “per se” categories. The statute also specifies that, in determining whether an item constitutes drug paraphernalia, the court must consider “whether the owner, or anyone in control of the item, is a legitimate supplier of like or related items to the community, such as a licensed distributor or dealer of tobacco products[,]” among other factors.7
In addition, federal courts have been reluctant to apply the drug paraphernalia laws to packaging products.8 In addressing the predecessor statute to the current federal paraphernalia law,9 the Second Circuit ordered an indictment dismissed against a producer of glass vials commonly used for crack cocaine: “Since congress in enacting the Paraphernalia Act deliberately omitted ‘packaging’, ‘containing’, and ‘cocaine vials’ from its definition of drug paraphernalia, we conclude that the plastic containers produced by Lin were not ‘drug paraphernalia’ as defined by the act.”10 The law is not uniform, but even if a zealous federal prosecutor wants to crusade against a cannabis supplier, he must contend with the appropriations rider and this adverse case law.
Nevertheless, the federal Controlled Substances Act does allow property used to manufacture narcotics to be seized.11 It is possible that if a company created packaging for cannabis products, and the customer then used that packaging to pack cannabis, the inventory and packaging could be seized by federal law enforcement. But the same obstacles to enforcement discussed above would apply.
Every state has different paraphernalia laws, but most packaging companies would likely have defenses to a suit alleging they are producing or possessing paraphernalia, including lack of intent to use the paraphernalia for illicit purposes and applying federal caselaw as a defense.
Packaging Laws
State law is the primary vehicle for regulatory guidance on cannabis packaging. Any packaging company selling to cannabis retailers will need to consider both state law and federal packaging standards, which are often incorporated by reference into state law.
Federal Packaging Law
Producing a product that complies with all state standards at once might be a challenge, but adhering to individual state rules is doable.
The Poison Prevention Packaging Act is the primary source of child-resistant packaging law.12 This law does not currently apply at all to any sales of cannabis because cannabis is illegal in the eyes of federal law. There is no private right of action under this statute.13 That means that a packaging company cannot be sued by a private individual for violating the statute. At some point, if Congress chooses to loosen restrictions on cannabis, this would be a very easy statute to simply make applicable to sales of cannabis. The law already has a specific provision for liquid nicotine containers.14 But currently, this statute does not apply to cannabis at all.
State Packaging Laws
State laws are a different matter – each state that allows sales of medical or adult use cannabis has enacted different requirements for cannabis packaging. A comprehensive survey of state cannabis packaging law is beyond the scope of this article, but some state cannabis regulatory regimes explicitly incorporate provisions of the federal Poison Prevention Packaging Act.15 California has a similar requirement, as does Washington state.16 Producing a product that complies with all state standards at once (i.e., a “national” standard) might be a challenge. Contracts with buyers could include a representation that the packaging complies only with the laws of state X or Y.
Products Liability Issues
A detailed assessment of products liability is beyond the scope of this article. But in short, as this industry matures, packaging companies undoubtedly will be subject to the usual kinds of products liability issues for cannabis packaging. In other words, in a cannabis-tolerant state, a packaging company could theoretically be sued under a products liability theory if the cannabis is somehow spoiled by a manufacturing defect in the packaging or if the packaging product permits mold to grow and eventually be consumed by a user. Cannabis contract litigation is a complex subject given its unique legal status. One strategy to avoid these issues is to include a very specific dispute resolution procedure (e.g., mediation, arbitration or the like) in any contracts with cannabis companies in the U.S. It is also important to include a waiver of any defenses of the contract being against public policy due to the uncertain legal status of cannabis.
No transaction in the cannabis industry is entirely risk-free, and packaging executives should consult with local counsel in the states in which the packaging is manufactured and in the states in which they intend to sell products to ensure compliance with the law. But this industry is rapidly growing, and opportunity awaits for the packaging companies that are willing to work through the incoherence in the current laws.
United States v. McIntosh, 833 F.3d 1163, 1179 (9th Cir. 2016).
United States v. Trevino, No. 20-1104, 2021 WL 3235751, at *4 (6th Cir. July 30, 2021) (Michigan dispensary owner could never have been in compliance with Michigan’s medical cannabis laws given his prior felony conviction for cocaine possession).
21 U.S.C. § 863(d); see also generallyUnited States v. Assorted Drug Paraphernalia, 90 F. Supp. 3d 1222, 1229 (D.N.M. 2015).
21 U.S.C. § 863(d)(1).
21 U.S.C. § 863(e)(5); see also 21 U.S.C. § 863(f)(2) (specific exemption for items exported or sold through the mail, “and traditionally intended for use with tobacco products, including any pipe, paper, or accessory”).
Posters ‘N’ Things, Ltd. v. United States, 511 U.S. 513, 526 (1994) (“Similarly here, we need not address the possible application of § 857 to a legitimate merchant engaging in the sale of only multiple-use items.”) (head shop case where establishment was devoted substantially to drug paraphernalia).
21 U.S.C. § 863; see also 511 U.S. at 516 n.5.
United States v. Hong-Liang Lin, 962 F.2d 251, 258 (2d Cir. 1992); see also United States v. Big Apple Bag Co., 306 F. Supp. 2d 331, 334 (E.D.N.Y.), on reconsideration in part, 317 F. Supp. 2d 181 (E.D.N.Y. 2004) (“[T]he Second Circuit has determined that trafficking in items that are used merely to package or contain drugs does not violate 21 U.S.C. § 863.”). But see alsoUnited States v. Main St. Distrib. Inc., 700 F. Supp. 655, 659–60 (E.D.N.Y. 1988) (no legitimate market for glass stirrers used in crack pipes, and where customs agent had placed dummy order using common street term for crack pipes; denying company’s motion to suppress).
21 U.S.C. § 881 (a)(3) (“The following shall be subject to forfeiture to the United States and no property right shall exist in them: All property which is used, or intended for use, as a container for property described in paragraph (1), (2), or (9).”).
15 U.S.C. § 1471 et seq.; 16 C.F.R. § 1700.20(a)(2)(iii).
Doane v. Metal Bluing Prod., Inc., 568 F. Supp. 744, 746 (N.D.N.Y. 1983).
15 U.S.C. § 1472a.
See, e.g., Fla. Stat. Ann. § 381.986(8)(e)(11)(e) (“When processing marijuana, a medical marijuana treatment center must: Package the marijuana in compliance with the United States Poison Prevention Packaging Act of 1970, 15 U.S.C. ss. 1471 et seq.”).
Cal. Bus. & Prof. Code § 26120(a) (“Prior to delivery or sale at a retailer, cannabis and cannabis products shall be labeled and placed in a tamper-evident, child-resistant package and shall include a unique identifier for the purposes of identifying and tracking cannabis and cannabis products. If the cannabis or cannabis product contains multiple servings, the package shall also be resealable.”); Cal. Bus. & Prof. Code § 26001(i) (“‘Child resistant’ means designed or constructed to be significantly difficult for children under five years of age to open, and not difficult for normal adults to use properly.”) (identical to federal standard); see also Wash. Admin. Code 314-55-105(2)(b)(i) (all cannabis concentrates must be packaged consistent with the Poison Prevention Packaging Act).
As a fast-growing cannabis company, ensuring your business stays compliant with regulatory agencies of all kinds—planning departments, the U.S. Department of Agriculture (USDA), Occupational Health and Safety Administration (OSHA) and so on—is critical for survival. But is your business also compliant with temporary and part-time employment regulations? Violating these often-overlooked regulations can land your company in hot water at best and force you to shut your doors at worst. Here’s what you need to know about risks, regulations, compliance issues and more.
The 30,000-Foot View: Part-Time and Temporary Employees
Cannabis has proven itself to be a high-turnover industry. But in the ever-shifting, post-COVID landscape, many cannabis employers are seeing the financial and logistical benefits of hiring part-time and temporary workers.
Though the terms “part-time” and “temporary” are sometimes used interchangeably, the fact is, there are legal differences in the definitions of part-time versus temporary work. For starters, temporary employees must work for less than a year at a specific organization, and their work must have a defined end date. Temporary employees, or “temps,” often fill vacant roles in a temporary capacity, such as roles previously occupied by someone on parental leave.
Many full-time employees in the cultivation space are defined as “agricultural workers”
Part-time employees, on the other hand, can work indefinitely for a company—but they must work less than 40 hours per week. And, side note, if a part-time employee works more than 1,000 hours in a calendar year, they could be eligible for retirement benefits—so hiring managers, bear that in mind.
For employers, there are some tangible benefits in hiring part-time or temporary workers. For starters, there are often fewer upfront costs associated with hiring part-time workers (like workers’ compensation and healthcare). Establishing a strong part-time and temp employment strategy also allows for employers to quickly scale up or down based on market tendencies or shifts.
Understanding the Risks of Hiring Part-Time or Temporary Workers
While hiring part-time and temporary workers can help businesses stay agile and responsive to market demands or fill vacancies created by recent resignations, many businesses hire these types of employees without a full understanding of associated regulations. And it can get even trickier: many full-time cannabis industry workers in the cultivation space aren’t considered “employees” at all—they’re defined by the federal government as “agricultural workers.”
It’s essential that businesses classify part-time workers and independent contractors correctly. Attempting to claim a worker is part-time when they’re really a full-time employee (a practice known as “misclassification”) can save a business tax dollars in the short-term but lead to sanctions and hefty penalties down the line. For example, if a worker is misclassified and the Department of Industrial Relations finds out, they can sue the former employer for unpaid wages.
Potential fallout from noncompliance with classification or wage and hour issues includes massive fines, potential litigation and more. Federal agencies are extremely sensitive to cannabis business regulatory violations, it’s vital to adhere to proper staffing regulations and compliance. The wrong kind of attention can tank your business’s reputation and halt your operations altogether. I’ve personally worked with numerous cannabis businesses in their hiring and payroll initiatives, and I’ll say this: It may seem like a headache to cross all the “Ts” and dot all the “Is” in the beginning, but it will make a massive difference down the line.
Understanding the Regulations for Hiring Part-Time or Temporary Workers
All employers must adhere to the regulations set forth by the Fair Labor Standards Act, which mandates that part-time employees must be treated the same as full-time employees. That means they must be paid minimum wage, be paid overtime should they exceed their determined hours, have the opportunity to take job-protected unpaid leave, and so on. I really want to stress how essential it is that employers classify their workers appropriately.
It’s also worth noting that many states have specific regulatory structures for employment, both full- and part-time.
In the heavily regulated cannabis industry, employers must exercise strict due diligence to meet all OSHA standards. Additionally, they must identify all occupational hazards and account for employees’ overtime and double time. Grow operations must also adhere to the Field Sanitation Provisions of the Occupational Safety and Health Act, which includes providing toilets, drinking water, hand sanitation facilities and hygiene information.
Avoiding Compliance Problems with Planning and Diligence
There’s a lot more to hiring workers than businesses realize, especially in cannabis. Most companies don’t intend to be noncompliant with regulations—they simply don’t know the regulations, or they’re overwhelmed by hiring and growing so quickly. To make sure you’re compliant, you might consider building out your HR team, educating yourself as the business leader and reaching out to staffing and HR professionals in the space who can answer your questions. In this rapidly growing industry, which seems to shift and change every day, planting your feet firmly on solid regulatory ground will serve to benefit you in the event of federal legalization, massive business growth or initiatives you may want to undertake in the future.
Vaping is a multi-billion dollar cannabis product category representing more than 20% category share in the US, according to a recent Headset.io report. The 2019 vaping crisis, whereby lung injury and several deaths were caused by the adulteration of vapor pen cartridges with vitamin E acetate, highlighted the importance of safety and emissions testing for vapor pen products. In addition to volatile organic compounds, metals and ceramics contained in the heating elements of cartridges are also a concern. While the FDA has a robust program for emissions testing in nicotine products, they do not currently regulate cannabis. Cannabis vaping is currently regulated at the state level in the United States.
Cannabis vaping is popular among minors owing to its discrete nature. In a recent study published in the Journal of the American Medical Association (JAMA), 14.7% of teens reported vaping cannabis in 2018. In a separate research study, University of Michigan researchers found that teens vaping cannabis were two times more likely to experience respiratory issues than teens who smoked e-cigarettes.
We spoke with Corey Mangold, CEO and founder of PurTec Delivery Systems, to learn more about cannabis vaping safety and their PurGuard technology. Prior to entering the cannabis space, Corey founded a software company in 1998. He also founded the advertising agency Gigasavvy in 2008, which he recently exited from in March 2021.
Aaron Green: How did you get started in the cannabis industry?
Corey Mangold: I got started in the cannabis industry in 2016. My daughter was away at college in San Luis Obispo and got pregnant and was going to have a baby, which obviously I was excited about. I decided to have her come down to Southern California and start a company together, as I’ve done multiple times in my career successfully. I wanted to show her the ropes, and teach her everything from finance to HR, to business development, marketing – everything it takes to be successful – and give her the tools that she would need to be successful for her life.
Green: What kind of things were you into before 2016?
Mangold: I founded my first company in 1998 in the software industry and had that company up until 2005. In 2008 I started another company called Gigasavvy, a nationally recognized advertising agency out of Irvine, California, which I successfully exited in March of 2021.
Corey Mangold, CEO and founder of PurTec Delivery Systems
When deciding to start a company with my daughter, we were interested in the cannabis industry – I think everybody was back in 2016. In 2016, I had started using cannabis again after probably about a 16- or 17-year hiatus. I was using a vape because I had children in the house. I went to literally anywhere I could and bought every type of cartridge on the market. What I found was that their user experience was not like what it was on the nicotine side of vaping. I reached out to associates of mine who had been manufacturing vapes since 2011, starting with the blue e-cigarette, and we engineered a unique device that was proprietary and completely unlike anything on the market. It was incredible, and still to this day, I think it’s probably the best 510 thread cart on the market. We launched that under the Orchid Essentials (CNSX: ORCD, OTC:ORVRF) brand in California and Oregon.
Green: Is that cart something that you sell to other brands as well, or is it purely for the Orchid brand?
Mangold: Yes, purely for the Orchid brand, but it’s what inspired me to start PurTec Delivery Systems. After a few years of struggling in this industry because we didn’t have the access to capital needed – Orchid is a US company traded on the Canadian Stock Exchange (CSE:ORCD, OTC:ORVRF) – and dealing in a substance that’s federally illegal, there was no access to any traditional financing, be it factoring or inventory financing. We were literally creating as much product as we could every month and then selling out almost instantly, and then waiting till the next month to get money in from all our accounts to make more. We had to slug it out. We did get into a little over 500 stores in California and Oregon, but it was just a battle, and I didn’t really want to be touching cannabis.
In 2020, I had a breakthrough in my strategy. I was watching the TV show Gold Rush and I watched one of the guys go and have to buy a new wash plant. He pulls up to this dealer’s yard that sells wash plants and tractors. I saw this dealer had a lot of inventory and clearly a lot of money, and I realized the place to make money was selling the shovels, not really digging for gold. I said to myself if I have the best shovel out there, why am I digging? I should just be innovating new shovels and selling shovels. Hence, I started PurTec Delivery Systems and now for the last year and a half have been 100% focused on developing advanced vaporizer technologies.
Green: Tell me more about PurTec.
Mangold: I founded PurTec with the sole intention of creating safe vaporizers for consumers. We conducted an 18-month safety study in Switzerland with our partners, on vaping devices in the market. I learned a lot of things that I already knew but wanted to see it proven by independent laboratories and by PhDs and MDs, and really see what was so concerning to me. For the last year and a half, we have sought to develop a safe line of vaporizers. I’m very cognizant about what’s going on in my body and want to know what’s going on internally with these products. I don’t think anyone would be using them if they knew what was really going into their lungs.
Green: What are some of the things that consumers should be thinking about when it comes to vape safety?
Mangold: Consumers should be thinking about all the different aspects from inhaling vaporized heavy metals to ceramics. Ceramic particle inhalation is one of my biggest concerns. I think it’s been ignored. I think all the manufacturers know about it and I think it’s been swept under the rug. I think it’s one of the threats that we have. There should be regulatory bodies that are out there protecting consumers like the FDA, hence why I believe federal legalization is so important, because if the FDA was involved not even one of these products would be on the market because the first thing the FDA would do would be very extensive emissions testing to find out what compounds and potential toxins are entering into your body.
Green: There’s clearly a need for safety and regulation in the space, but from where you’re sitting, is there a demand? When consumers go into a store, one of their main focuses is: what’s the THC content? How do you see consumer demand for safety and how do you think about building that awareness?
Mangold: I don’t think there is consumer demand yet. The consumer demand right now is for getting medicated and having fun or getting whatever relief or primary reason you use cannabis. I can point to a direct correlation with the opioid epidemic. No one knew they were as horrible as they are, and doctors were prescribing them left and right, and everyone thought it was okay. People think these cannabis products are okay because they’re on the shelf in every licensed dispensary, and the California Department of Health and the Department of Health in every other state and country has been involved to some degree. So, consumers think that they’re safe. The problem is they’re likely not just like we weren’t with opioids.
I don’t think the consumer demand will be there for quite some time until we start seeing a lot of long-term health impacts where we start seeing people getting lung disease, we start seeing people getting iron lung, different potential brain issues from inhaling adhesives and heavy metals. I think once the health impacts are seen clinically – just like we saw with the opioid crisis – once that was really in the forefront, everybody saw with their own eyes, and then they were aware that there was a problem. So, I think that it’s important to become aware of the potential health impacts, but I think it will take quite some time before that happens.
Green: It sounds to me like you want to get ahead of the industry on this because if it does go federally legal, there will be more stringent requirements. How do you think about that from a product design and development perspective to get ahead of a problem that exists but isn’t reflected in current regulations?
Mangold: The best thing we can do right now in the cannabis vape industry is to look at what the nicotine vape industry is doing. It is controlled by the FDA and there are standards for vaporizers in other parts of the world that are very stringent, like the AFNOR standards, which are in the European Union regulations for vaporizer safety.
What we do is we find the most stringent standards in the world, and we test our products to those standards. If the standards get stricter, we can develop our products and re-engineer them to meet those new requirements. Right now, all our products are emissions tested at AFNOR standards and over-engineered even for those standards. We also are constantly working on reduction of potentially hazardous materials: reductions of heavy metals; only using proven safe and effective materials and FDA approved materials like SAE 316L surgical stainless steel; and using improved ceramics that are not as brittle as the ceramics being used by almost every single manufacturer out there. There’s a lot of things that can be done. It takes supply chain management, understanding the technology and having strong solid teams of scientists and doctors that know this stuff much better than anyone else in the industry does, and leveraging their expertise.
Green: You recently launched a safety feature for minors. Can you tell me more about that?
Mangold: Yes. Two weeks ago, we launched a new software application called PurGuard. PurGuard is a massive innovation and is the first of its kind that we’re aware of. It’s a piece of software that pairs with any device, whether it’s a disposable pod system or a 510 cartridge. You then pair it to your phone and take a picture of your government ID. Then the camera looks at your face, runs quick facial recognition and runs an age check through the largest age-checking platform API in the world. Then based on location and legal age of the user’s location – some states are 18 and different countries have different rules – it validates your ability in your market to be consuming that product. This technology works in 180 different countries.
Once that occurs and the device is ready for you to use, we have another feature that we’ve developed. There is an auto-lock feature that we have where if you’re a parent, like me, and you have kids in the house, you can turn your device to auto-lock right from your phone. When you walk away from your phone and are 10 feet away, your Bluetooth connection will break, and it will automatically lock the device and so your child can’t walk into your bedroom and take your device.
This technology is important to us. Consuming cannabis is horrible for the health of minors. There are serious mental effects on brain growth that occur from using cannabis at a young age because the brain is still developing up until about the age of 23 to 25. So, it’s not safe for them to be using. Of course, I’m sure we all smoked when we were in high school, but the ease of use of vape and the discretion, I think allows minors to use significantly more cannabis than previous generations did 20, 30, 40 years ago. It’s a massive problem right now and I think it’s just a matter of time before the FDA requires such protections. This industry can only survive if we protect minors. So, we’re getting ahead of the curve and setting the standard.
Green: What kind of hardware does PurGuard work with?
Mangold: PurGuard works with every single type of device that we manufacture: 510 thread cartridges, disposables, and pods. If it’s a 510-thread cartridge, the battery has to be a PurTec battery, and the cartridge has to be a PurTec cartridge. They communicate to each other through certain technologies, and it can even recognize what oils are in the cartridge or the pod or the disposable. Moreover, we can tell what strain it is, when it was manufactured, what the potency levels are and more. It records all the usage statistics. We’ve also proven with our hardware, the actual milligram contents being consumed per hit, or draw based on volume, and draw duration. We can track and report to people and say, “Hey, you’re consuming 100 milligrams of THC a day, that’s too high, you need to slow down and maybe go down to 50 milligrams a day.” That will be what is required as it is being required in the nicotine industry under the FDA pre-market tobacco applications (PMTA). When the FDA comes into cannabis, they’re going to want to see the same thing. They’re going to want to know that cannabis products are not promoting people to use more, and they are trying to get people to use less. It doesn’t mean stop using it, but use it in moderation, like everything in life. You shouldn’t be drinking a bottle of whiskey a day. You probably shouldn’t be smoking a pound of weed a day either. Everything in life is moderation and this application not only protects minors but also teaches us about our consumption habits.
Green: A theme here is “skating where the puck is going to be.” What kind of trends are you looking at right now in the industry?
Mangold: The biggest trend I see right now in the industry is disposables. We’ve seen that the trends in cannabis consumption trail behind the nicotine industry by 2-4 years. We see a lot of our customers and potential customers shifting into disposables and are now seeing a very large spike in sales of disposables. I think that’s a big trend, but with that comes another major issue: we now have lithium-ion batteries being thrown away at astonishing rates and going into landfills. PurTec has an answer for that that we’ll be launching here in the next four to six months That will be I think the biggest innovation in regards to eco-friendliness within the vape industry. That’s where I see things going right now.
Green: What are you most interested in learning about?
Mangold: The thing that interests me most, and what I’m most interested in learning about is regulations. Not the regulations themselves, but how regulations are drafted. I’ve sat in several meetings with rules committees for different regulatory bodies throughout the United States and it is laughable. I was recently in a state I’m not going to mention. I asked them what scientists and what doctors they have consulted with and they said none. I just found that dumbfounding. The state regulatory bodies are making decisions without doing due diligence and without bringing in subject matter experts in some cases.
I’m very interested in learning about how we can change our regulatory bodies. Taxpayers pay these salaries and their job at the end of the day is to protect consumers. I think that these cannabis regulatory bodies need to be way more involved with their state’s Department of Health, as well as with the FDA, and National Institute of Health and looking at this as a holistic approach. How do we protect consumers? This is a drug. It’s like anything else out there. If you’re selling tomatoes that were sprayed with a certain pesticide, you must do the research and you have to know what’s in that product before you start putting it in people’s hands. Otherwise, you may have people dying left and right. So, I’m very interested in learning more about regulatory bodies and how they need to evolve and hopefully I can help push them into evolving sooner rather than later.
Green: Great, that concludes the interview, Corey.
On September 14, the FDA published a consumer update on their website, seeking to educate the public and offer a public health warning on delta-8 tetrahydrocannabinol, otherwise known as delta-8 THC.
For the uninitiated, delta-8 THC is a cannabinoid that can be synthesized from cannabidiol (CBD) derived from hemp. It is an isomer of delta-9 THC, the more commonly known psychoactive cannabinoid found in cannabis. Delta-8 THC does produce psychoactive effects, though not quite as much as its better-known cousin, delta-9 THC.
Due to loopholes in federal and state laws, namely the 2018 Farm Bill specifying that hemp must contain less than 0.3% Delta-9 THC, delta-8 THC is technically legal across the country. It grew in popularity across the United States very quickly over the past year, largely due to online sales.
Following the surge in sales, a number of states including Colorado, Alaska, Arizona, Arkansas, Delaware, Idaho, Iowa, Mississippi, Montana, Rhode Island, Utah and Washington have implemented some form of regulation or outright ban on products containing delta-8 THC. Christopher Hudalla, president and chief scientific officer of ProVerde Laboratories, told Chemical & Engineering News that he has a lot of safety concerns about the whole delta-8 THC craze. Hudalla says he’s more concerned about the processing involved to produce it in large quantities. “These are pretty aggressive synthetic conditions that use strong acids,” Hudalla says. “They might be using strong bases to neutralize. They can use metal catalysts. I hear different people doing it different ways.”
The FDA’s consumer update included this picture at the top of the page
The FDA shares similar concerns. Their fourth point in the consumer update mentions that delta-8 THC products “often involve use of potentially harmful chemicals” in its production. They even claim that some manufacturers might be using unsafe household chemicals to synthesize delta-8 THC. “The final delta-8 THC product may have potentially harmful by-products (contaminants) due to the chemicals used in the process, and there is uncertainty with respect to other potential contaminants that may be present or produced depending on the composition of the starting raw material,” reads the FDA report.
In their consumer update, they note that between December 2020 and July 2021, they received 22 adverse event reports. Of the 22 reports, 14 were hospitalized following ingesting a delta-8 THC product. Notably, those reports included reactions consistent with symptoms from overconsumption of delta-9 THC, such as vomiting, hallucinations, trouble standing, and loss of consciousness.
The chemical structure of Delta 8 THC.
The FDA says that national poison control centers received 661 cases of delta-8 THC products, with 41% being unintentional exposure, 39% involved pediatric patients and 18% required hospitalization.
In the consumer update, they tell the public that delta-8 THC products have not been evaluated by the FDA and that they “may be marketed in ways that put the public health at risk.” This includes marketing it as a hemp product, which it is. Still though, many consumers associate hemp products with somewhat innocuous things, like CBD oil, which is mostly harmless.
The FDA also mentions in the update that delta-8 THC does have psychoactive and intoxicating effects. The FDA says they are notifying the public about the delta-8 THC due to an uptick in adverse event reports, marketing that is appealing to children and concerns regarding manufacturing with unsafe chemicals and contaminants.
Few people will disagree that financial compliance isn’t the most exciting topic within the cannabis industry. But compliance is, and always will be, the engine grease to the legal cannabis market. Cannabis operators have the arduous task of dealing with multiple layers of compliance, both operational (maintaining and adhering to regulations enforced by the state licensing board) and financial. These compliance measures include managing everything from seed-to-sale systems for all plant-related activity to on-site requirements like facility access points and alarms systems to name a few.
With complex compliance requirements for the business, the last thing cannabis operators want to think about is financial compliance. We created Confia on this notion. Just as cannabis regulators impose the tracking of plants through the supply chain via a seed-to-sale system, we have developed a storyboard similarly designed to follow the money, which is the equivalent of a transaction-to-deposit system.
Having experience in regulatory technology, artificial intelligence and machine learning, we’ve been fortunate enough to work with some of the world’s largest banks across multiple countries. This experience has afforded us the luxury of working alongside regulators, chief compliance officers and chief risk officers, understanding how risk is perceived by financial institutions and how it ought to be mitigated. It was this access and knowledge that allowed us to effectively reform, enhance and improve the antiquated BSA programs with a technology-enabled process. Leveraging technology is a necessity, almost a requirement, for the cannabis industry as legalization nears and banking access begins to broaden.
Jamming cannabis requirements into an existing BSA program doesn’t scale well. BSA programs are very manual, descriptive and process oriented. So, we’ve taken our prior experience and success in banking to form Confia, distilling the complexities and simplifying the deliverables surrounding cannabis banking compliance. To best articulate cannabis banking requirements, I break it down into three pillars.
Pillar One: KYC-Enhanced Due Diligence
The first pillar is the client-onboarding bucket or KYC – Know Your Customer. In the complex world of cannabis banking, banks must know and understand their clients to great depths. It’s not enough to simply know that the client exists; you also have to understand whether or not that client could be a potential risk to the bank, and one step further, the financial system. Cannabis is a high-risk industry, so the KYC requirement is escalated to a deeper diligence and review, called Enhanced Due Diligence (EDD).
Cannabis is a high-risk industry so extra due diligence is needed
Banks need to know and understand their customers’ story, and all the key parties (officers, directors, and those with key decision-making powers or access to the bank accounts) within that organization. This includes reviewing personal, business, and legal history – not to mention watchlists and negative news presence. An initial onboarding review must then be followed with daily screening and monitoring of all watchlists and adverse media. Typically, banks do KYC refreshes every three years. In cannabis, a full refresh should be done annually with the daily monitoring systems in place.
The high-risk nature of the industry also requires a level of diligence on all parties to a transaction, even if one of the parties, whether a payer or recipient, is not a client of your bank. Unlike traditional banking sectors, reliance on other banks’ KYC programs is far less defensible in the cannabis industry.
Pillar Two: Transactional Monitoring & Detection
Tracking and monitoring the actual financial transactions comprises the second pillar required for cannabis banking. At Confia, we have focused on streamlining processes, so the cannabis operator can seamlessly support the compliance obligation for every transaction. A bank must demonstrate supporting documentation for every cannabis transaction, and gathering such information is a large undertaking in and of itself and can pose future issues if not done properly, see the pitfalls for lack of compliance. Banks are obligated to understand the nature and reason for each transaction, the source of funds, ensure cannabis licenses are in good standing for all parties, and collect evidence such as accounting records and seed-to-sale data.
Core to transaction monitoring in the traditional sense, is the overarching support through anomaly detection. Relying on information is important, but testing those inputs keeps everyone honest. It is important to evaluate transactions from a holistic point of view relative to peers and relative to the general contents of a transaction. This anomaly detection layer is your last line of defense, and as new information is collected, it continues to refine itself.
Pillar Three: Filing and Reporting Requirements
The third component to compliant cannabis banking is regulatory filing and reporting. Once a client is onboarded, the account requires an initial suspicious activity report or SAR-Initial within 30 days of that client being approved by the bank. Then, a report must be filed every 90 days after that for all the transactions of that cannabis operator. Banks must file the SAR-Initial and the Continuing-SAR reports for each cannabis client they have.
The high-risk nature of the industry requires a level of diligence on all parties to a transaction
Solutions like Confia automate the filing process and support the filing with transactional data evidenced on our distributed ledger of record. This provides immutable audibility and simplifies the process for all parties involved.
Compliance Requirements After US Legalization
The anticipation of federal legalization and banking reform bills has many operators hoping for easier banking. Yet, in my opinion, regulatory oversight and audits will likely increase after such reform or legalization. As other financial institutions start to support cannabis, it will inadvertently create greater opportunity and expose the financial system to nefarious or illegitimate transaction activity. This is why cannabis banking will be carefully monitored by regulators, and more so, why banks will be slow and pragmatic in standing up their internal cannabis banking programs. Some banks may forever avoid the cannabis industry due to the known pitfalls of an industry specific program, while others may simply mitigate the possible exposure to reputational risk.
Choose Wisely: Pitfalls for Lack of Compliance
Financial compliance is the responsibility and duty of the banks, but the real losers and result of non-compliance always fall on the cannabis operators. Regulatory action against an institution may result in the bank shutting down its cannabis program or may require them to complete a remediation of all their cannabis transactions for a certain period from its clients. At the end of the day, regardless of action, the cannabis operator is the one being punished. Operators either lose their bank account and have business massively disrupted, or they are asked to provide all the compliance docs for a historic period, which is a huge undertaking and operational distraction, ultimately impacting business and productivity. So, choose your banking partner wisely.
Summarizing Key Banking Requirements
In summary, banking in the cannabis industry will undoubtedly remain a high-risk industry, with or without legalization. Although banking opportunities may expand as US policies change, there will be continued compliance and regulatory requirements for the foreseeable future.
Onboarding and ongoing screening are critical
Evidence for every transaction is a significant portion of compliance and must not be dismissed
Evaluating activity with broader strokes is essential in mitigating against money laundering
Managing the staggered filing timelines and due dates for each client
Compliance is the most crucial factor in cannabis banking at this point. It cannot be overlooked or taken for granted. Cannabis operators must take an active role in evaluating the compliance programs of their financial providers. To open a bank account is one thing, but the consideration and effort that goes into keeping a bank account is the difference that will protect your business in the long run.
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According to a press release, the new subcommittee, at the request of the U.S. Senate, has provided comments on the proposed Cannabis Administration and Opportunity Act (CAOA). The comments including the sharing of ASTM’s work in the cannabis industry, their organization, membership information, defining cannabis terms and their published standards related to facilities, consumer safety and other areas.
Corby Iannuzzelli: Our product is completely digital. The consumer experience starts with integration at the online checkout. When it’s an e-commerce shopping cart and somebody is placing an order, they will see a button called “Pay with KindTap.” The first time they click that button they’re automatically brought to our integrated web app where they do a quick and easy application for our digital revolving line of credit product. If approved, they instantly go back to the checkout screen and their first purchase will just happen immediately, with flexible payment options over time. If the consumer decides they don’t want our KindTap credit and would rather have a pay now-product where we pull the funds from their bank account, then the consumer can do so. So, there is no physical card per se, it’s integrated like PayPal or Affirm at the point of checkout online. For the consumers who use KindTap credit, there is a mobile app where they can see their transactions, view statements, pay their bills, etc.
