Tag Archives: medicine

Cannabis in Texas: A Look Ahead to Legalization and Beyond

By Abraham Finberg, Rachel Wright, Simon Menkes
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A Uniquely Texas Approach to Cannabis

The last few decades have seen the United States move forward state-by-state with the legalization of cannabis. Every state is charting its own unique path, and nowhere is this truer than with the state of Texas.

The Lone Star State has made its way from being staunchly anti-cannabis to expressing its own blend of temperance and careful action, combined with a medical cannabis program that’s expanding.

Any predictions regarding the future of cannabis in Texas must take into consideration both the state’s past and its values. In the end, it’s clear that Texas will embrace cannabis in its own individual way and at its own pace, but with a timeframe that appears to be arriving sooner rather than later.

The Debate Continues

108 years after Texas first banned cannabis and the debate continues. Even though Texas has a medical cannabis program, cannabis is still illegal in the state, with possession of less than two ounces a misdemeanor. Possession of more than four ounces is a felony punishable by a $10,000 fine and from 2-99 years in jail.

Texas’s 2015 Compassionate Use Act created the state’s medicinal cannabis program, which now makes treatment available only in the form of low-THC oil of a maximum strength of 1%, and only to a small list of serious conditions: epilepsy, terminal cancer, autism, multiple sclerosis, amyotrophic lateral sclerosis (ALS), seizure disorders, incurable neurological disorders such as Alzheimer’s, Parkinson’s, Huntington’s Disease and PTSD.

Support for a Stronger Medicinal Cannabis Program Comes from Prominent Politicians

Texas Department of Agriculture Commissioner Sid Miller, a leader in Texas politics and one of the architects of Texas’s burgeoning hemp industry, has encouraged Texas legislators to create a more complete medical cannabis program.

Texas Department of Agriculture Commissioner Sid Miller

“I am for medical use,” Miller said in an August 2023 interview. “We have so much good science now. And we know what diseases it can treat, yet our legislature picks winners [and] losers. If you’ve got this disease, you can get treated, but if you’ve got this disease and cannabis will help you, you can’t get treated. We need to let the doctor-patient relationship make those medical decisions and not some bureaucrat or some politician … I’m not a supporter of recreational marijuana, but if someone has a condition that this chemical will help, they should be able to use it.”

Texas Representative Joe Moody from El Paso has worked for many years to promote adult-use cannabis. He recently co-authored two pro-cannabis bills, HB 1805, which would have expanded covered medical conditions and defined a per-doze THC limit instead of a percentage limit on cannabis products, and HB 218, which would have decriminalized cannabis.

Although both bills passed the House of Representatives, they were stopped in the Senate. The next session of the state legislature, which happens every two years, won’t begin until January 2025, so that is the earliest any change in cannabis statutes could take place.

The Future of Medicinal Cannabis

There are currently only three dispensaries in Texas. They appear to be servicing the state’s 268,000 square miles through a series of weekly drop-offs to satellite “partner locations,” which are open an average of only two days per week. This is not exactly a corner-CVS type of arrangement, and the need for new dispensaries for the state’s 61,000 registered patients is high.

The Texas Department of Public Safety took applications for new medical dispensary licenses between January and April 2023. Tony Gallo, managing partner of Sapphire Risk Advisory Group, which helped twelve licensees prepare their applications during this round, anticipates around ten new dispensaries being approved.

All licensees must be vertically integrated – product must go from seed-to-sale under one license – and each applicant paid $7,356 to apply. If approved, the applicants will owe another $488,520.00 for a two-year period.

Many knowledgeable Texans, including Agriculture Commissioner Sid Miller, predict a fully-functioning medicinal cannabis market is just a few years away. “If you can get it to the floor, probably 70% or 80% of the legislative body will vote in favor of it because we have such good science on it. [Originally] we thought, ‘Well, that’ll lead to recreational use or more drug use,’ but it’s not. It’s a plant derivative. Medical marijuana is not nearly as addictive as some of the prescription drugs we use now.”

The Push is On for Adult-Use

Representative Joe Moody believes that adult-use is not too far away in Texas’s future either, and that the way to speed its arrival is through education. He recently sponsored HB 3652, the Texas Regulation & Taxation of Cannabis Act, in order to start a dialogue on what a retail cannabis market will look like in Texas.

Texas Representative Joe Moody

On April 26, 2023, Moody and his bill received a public hearing in the House Committee for Licensing and Administrative Procedures in which many points about setting up a retail market in Texas were discussed. A 10% cannabis tax was proposed by Moody, to be split evenly between the state and local government. Licenses would be required for those growing, selling, transporting or testing cannabis, although individuals would be allowed to grow or possess it in small amounts for personal use. Legal sale and consumption would be limited to adults 21 years of age and older, like alcohol. And of course, cannabis possession would be decriminalized.

How Strong is the Market Potential for Cannabis?

One indication of how strong even a fully-open medical cannabis market might be in Texas came during Moody’s hearing from the testimony of Estella Castro. Castro owns two medical dispensaries in Oklahoma just across the state line from Texas and suspects most her buyers are from Texas. “They have a Texas plate and they come in and buy $500 to $600 worth of product,” she said. Her two shops generated $158,000 in taxes to Oklahoma, most of which she believes should have gone to Texas.

New Mexico recently legalized adult-use cannabis, and the small towns along the Texas-New Mexico border are seeing a lot of traffic from Texas. In the first week of adult-use sales, the New Mexico did adult-use sales totaling $6 million. Of those sales, $1.5 million came from dispensaries in 5 small border towns.

Florida and California Suggest the Scope of a Mature Cannabis Market in Texas

The potential for a fully developed medical cannabis market can be gleaned by studying the next smaller state, Florida, which has an open, mature, medical cannabis market. Florida, with 20 million people, is about two-thirds the size of Texas, which has 30 million inhabitants. Right now, Florida boasts 700,000 cannabis patients whereas Texas only has 61,000. Simple math suggests a fully open, mature, medical cannabis market in Texas could see over a million patients gain relief.

California is the nation’s most populous state with 39 million inhabitants, and its cannabis revenue gives some perspective as to the size of a Texas adult-use market. 2024 estimates of California’s cannabis revenue suggest the Golden State will see $7.2 billion legal cannabis sales while the illegal market will generate another $6.4 billion for a total of $13.6 billion. With a reduction for Texas’s smaller size, these numbers suggest a fully-mature Texas adult-use cannabis market could generate close to $10 billion in annual revenue.

Large adult-use states like California and New York are notorious for having an illicit market that threatens to derail their legal, tax-paying cannabis license holders. Texas’s strong business-friendly focus should help deter such an illicit marketplace from gaining too significant a foothold.

The Back-Door Cannabis Industry

Meanwhile, an extensive “back door” cannabis industry is in full swing in Texas. CBD shops now sell delta-9 (fully psychoactive) THC/CBD gummies and tinctures made from the hemp plant, which is the low THC-version of the cannabis plant. These THC/CBD products adhere to the 0.3% definition of hemp as required by the federal 2018 Farm Bill and are legal and available for over-the-counter or online purchase in Texas’s CBD stores.

Gummies, tinctures and other products made form them hemp plant

Current estimates are that there are over 5,000 hemp, CBD and cannabinoid retailers, manufacturers and distributors in Texas that employ more than 50,000 workers and generate more than $8 billion in annual revenue. With these numbers, the 1,100+ licensed Texas hemp growers are sitting well where they are and are poised to take advantage of a legal adult-use market if and when Texas decides it is ready to go down that path.

Next Steps for Texas’s Cannabis Market

People familiar with Texas’s cannabis market believe that adult-use is a ways down the road for the Lone Star State, and that the near-term focus needs to be on decriminalization and achieving an unincumbered medical cannabis system. Tony Gallo of Sapphire Risk Advisory Group advises the Texas cannabis community to concentrate on “increasing what conditions are allowed for medicinal use” and “increasing what areas of the state it’s allowed to be sold.”

There is a groundswell of public support for decriminalizing cannabis as well as for allowing adult-use. A December 2022 poll showed 55% of Texans support legalizing at least small amounts of cannabis for recreational purposes, and another 28% said it should be legal for medicinal purposes.

A February 2023 poll by the University of Houston found that 82% of Texans support the Legislature passing a bill that would allow people to use marijuana for a wide range of medical purposes with a prescription. The belief that cannabis is a “gateway drug” that would make people more likely to use other illegal drugs is losing traction as well – 70% said it would make people less likely to do so or would have no impact.

Final Thoughts

The demand for cannabis in the Lone Star State is strong. With the likelihood of a fully-functioning medical cannabis market coming soon, and the possibility of decriminalization not too far behind, it’s clear that the future of cannabis is bright in Texas.

While the legalities around adult-use will take longer to work out, and the place of hallucinogenic hemp in the mix needs to be examined and clarified, one fact is certain. The path forward that Texas cannabis takes will certainly be a unique one, as unique and as individual as the Texan people themselves.

Texas Takes Advantage of the 2018 Farm Bill

By Abraham Finberg, Rachel Wright, Simon Menkes
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When Texas Governor Greg Abbott signed Senate Bill 339, also known as the Texas Compassionate Use Act, into law in 2015, many Texans expressed frustration. The purpose of the act was to allow the THC treatment of illness via prescription, opening up the state’s medicinal cannabis market. However, the act authorized only low-THC cannabis oil (maximum strength 0.5% THC) and only for epilepsy. Many Texans with other medical conditions that would have benefited from cannabis were unable to access it, and the dosage was seen as weak and minimally effective.

In addition, those residents hoping the Lone Star State would take a significant step forward towards legalizing adult-use cannabis experienced a rude awakening. A long road was still left to travel before recreational cannabis sales would be allowed to take place.

The Texas Department of Public Safety, which oversees the Compassionate Use Program, did a study of other state’s compassionate use programs and determined that three licenses were the minimum needed to supply the state’s epilepsy population. They updated Health and Safety Code to require a minimum of three licenses, and only three licenses were issued in 2017. This, for a state with a population of 29 million.

Then, the following year, a quiet revolution began. It started with the passage of the federal 2018 Farm Bill, signed into law by President Donald Trump as the Agriculture Improvement Act of 2018. Among its many provisions were several sections dealing with the production of hemp. Because the hemp plant and the cannabis plant are the same plant, the Farm Bill defined hemp as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol (THC) concentration of not more than 0.3 per-cent.”

The Farm Bill also removed hemp from the Drug Enforcement Administration’s schedule of Controlled Substances and authorized states to submit plans to administer hemp programs, making sure to keep the THC of plants and products under 0.3%.

The Texas Department of Agriculture, led by its enthusiastic three-term commissioner, Sid Miller, was instrumental in promoting the hemp section of the 2018 Farm Bill. Upon the bill’s passage, Miller backed Texas House Bill 1325 which authorized the production, manufacture, retail sale and inspection of industrial hemp crops and products. HB 1325 passed unanimously in June 2019, and the Texas Department of Agriculture opened the online hemp licensing and permit application process on March 16, 2020. The cost to be licensed by the Department of State Health Services is a yearly fee of $258; a licensee either purchases a license to grow, manufacture and sell hemp products wholesale or a license to sell hemp products retail in-store and online.

The hemp is tested before harvesting to make sure the THC level stays below 0.3%; otherwise, it must be destroyed. (The type of THC being measured is delta-9 THC, the same THC used in cannabis flower, gummies and other products being sold in fully legal states.)

That being said, what the hemp farmers realized was that, by keeping the delta-9 THC content of their hemp and hemp oil to 0.3%, they could still make CBD gummies with strong psychoactive properties. A typical 4-gram gummy would support 10mg of THC and a 6-gram gummy would support THC of 15mg, while still maintaining the 0.3% legal hemp concentration. This is a similar number of milligrams of THC found in cannabis gummies sold in cannabis shops in states such as California.

The Texas state list of approved hemp varietals reads like the list of cannabis flower sold in a dispensary: names like Hemp Kush, Bubba Kush and Blu Haze abound. Additionally, because it is still hemp by the 0.3% strength definition, there is no age limit to purchases and products may be purchased online by anyone and mailed anywhere.

There were 1,123 licensed hemp growers in Texas in 2021. “We started out growing hemp for CBD oil,” commented Agriculture Commissioner Miller recently. “Typical farmers saw a lot of profit in doing that.”

A 2023 study revealed that the Texas hemp industry currently employs more than 50,000 workers and generates more the $8 billion in annual revenue. Also, between $19.1 and $22.4 billion in economic activity is generated by the 5,033 hemp, CBD and cannabinoid retailers, manufacturers and distributors in Texas.

“It is vital that Texas continues to support the hemp industry, which has become a key component of the state’s overall economy,” said Cynthia Cabrera, chair of the cannabinoids council of the Hemp Industries Association and chief strategy officer at Austin-based Hometown Hero CBD. “The results of this study demonstrate the positive economic and social impact of hemp in Texas, and that its small businesses and farmers need to be protected to continue to thrive, providing jobs and tax revenue.”

In 2020, smokable hemp, including vapes, was banned in Texas, a ban that was upheld by the Texas Supreme Court. The only allowed consumable hemp products are oil-based products, like tinctures and gummies.

The only allowed consumable hemp products are oil-based products, like tinctures and gummies.

Agriculture Commissioner Miller lobbied against the ban and feels it puts Texas hemp farmers in an uncompetitive position compared to other state’s hemp farmers. “After three years of administering our hemp program, it’s clear the legislature’s effort to ban smokable hemp products has reduced our competitiveness to other states and harmed our farmers,” he said earlier this year. “The ban on smokable hemp products has confused and discouraged licensed growers and forced out processing facilities on which those growers depend.”

Meanwhile, the medicinal cannabis industry has expanded, at least in terms of the conditions for writing a medical prescription and the allowable THC strength. Terminal cancer, autism, multiple sclerosis, amyotrophic lateral sclerosis (ALS), seizure disorders, and incurable neurological disorders such as Alzheimer’s, Parkinson’s, and Huntington’s Disease were approved in 2019, and in 2021, House Bill 1535 raised the THC concentration from 0.5% to 1.0% and added PTSD to the list of approved medical conditions.

From January to April 2023, Texas Department of Public Safety took applications to open more dispensaries at an applicant cost of $7,356 for each application. All licensees must be vertically integrated – product must go from seed-to-sale under one license. If approved, the applicants will owe another $488,520.00 for a two-year period. This will allow them the opportunity to serve almost 61,000 registered patients who are supported by 747 physicians approved by the Regulatory Services Division to prescribe low-THC cannabis through the Compassionate Use Program.

Tony Gallo, managing partner of Sapphire Risk Advisory Group, helped twelve of the recent license applicants prepare their applications. In addition, his firm has been assisting cannabis companies in Texas since 2017. 420CPA reached out to Tony for an “in-the-trenches” view of cannabis in Texas. Gallo believes an adult-use market is a long way away.

“Concerning growth in the Texas cannabis industry,” Gallo says, “two factors come into play — increasing what conditions are allowed for medicinal use, and increasing what areas of the state it’s allowed to be sold.”

420CPA co-founder Abraham Finberg CPA suggests hemp companies position themselves to enter the cannabis market should state legislators and the people of Texas have a change of heart and decriminalize cannabis and authorize an adult-use market. “Hemp entrepreneurs can start with CBD products as they’re doing now and expand their offerings as the laws change,” Finberg says.

Lone Star Cannabis: What’s Holding Texas Back?

By Abraham Finberg, Rachel Wright, Simon Menkes
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Adult-use cannabis has gained steam across the nation as more and more states jump on the legalization train. As of the writing of this article, 23 states have legalized adult-use while another 15 have allowed the sale of cannabis for medicinal purposes, for a total of 38 green states.

Meanwhile, Texas still has stiff penalties for possession. Two ounces or less is a misdemeanor with a maximum fine of $2,000 to $4,000 if one has between two and four ounces. Possession of more than four ounces is a felony punishable by a $10,000 fine and between 2-99 years in jail. And that’s just for possession.

Quasi-medicinal use was approved with the 2015 Texas Compassionate Use Act, and just for epilepsy, to be only treated by low-THC cannabis oil with a maximum strength of 0.5%. Since then, the number of conditions approved for low-THC treatment has been opened up to terminal cancer, autism, multiple sclerosis, amyotrophic lateral sclerosis (ALS), seizure disorders, incurable neurological disorders such as Alzheimer’s, Parkinson’s, Huntington’s Disease and PTSD. At the same time, the allowable strength of cannabis oil has been increased to a still-minimal 1.0%.

So, what’s holding back the Lone Star State? And what can be done to obtain full legalization for both medicinal and adult-use cannabis? The answers lie within the Texan psyche which has a strong streak of self-reliance in it that has made the state go its own way before. Legalize cannabis just because 75% of the other states have already done so? If your friends jumped off a cliff, would you jump off a cliff too?

Texas is the only state to have been its own country. When its leaders declared independence from Mexico in 1836 and General Sam Houston defeated Mexican General Santa Anna later that year, Texas became the Republic of Texas. While many Texans wanted their country to join the United States, the push within the new republic to remain a separate country was strong. It took nine years of heated debates before Texas entered the Union.

Fast forward 178 years to 2023, and many of the heated debates taking place in Texas today revolve around cannabis. Some Texans see the push to legalize adult-use cannabis as a moral issue, and that it is the responsibility of state government to hold the line against what they view as a gateway drug. Others argue cannabis can be beneficial by providing a safe alternative to opioids for pain relief, and that it is already easy to access on the black market.

Several recent cannabis bills: HB 1805, which would have expanded covered medical conditions and defined a per-dose THC limit instead of a percentage limit, and HB 218, which would have decriminalized cannabis, both passed the state House of Representatives in April 2023 but died in the Senate when Lt. Gov. Dan Patrick, who presides over the chamber, refused to refer the bills to a state Senate committee for review.

“We’re always listening on the health issues, but we’re not going to turn this into California,” Patrick said in 2021, “where anybody can get a slip from the doctor and go down to some retail store and say, ‘You know, I got a headache today so I need marijuana,’ because that’s just a veil for legalizing it for recreational use.”

The Texas legislature only meets every two years, and the next session is scheduled to begin in January 2025. Since Texas does not have a statewide ballot initiative process, statewide decriminalization and possible passage of adult-use legislation will only be possible then.

Law enforcement has a stronger voice in public policy in Texas than in many other states, and law enforcement organizations have expressed serious reservations about decriminalizing cannabis in Texas. In a joint statement in 2019, the Texas Police Chiefs Association and the Sheriffs’ Association of Texas expressed concerns that legalization would bring increased crime, entice a dangerous black market and lead to increased use of other, more addictive drugs. They also opposed expanding the state’s restrictive medical program until “validated, peer-reviewed medical research shows a proven medical benefit.”

Despite these setbacks, there is a growing groundswell of public support for decriminalizing cannabis as well as for allowing adult-use. A December 2022 poll showed 55% of Texans support legalizing at least small amounts of cannabis for recreational purposes, and another 28% said it should be legal for medicinal purposes.

A February 2023 poll by the University of Houston found that 82% of Texans support the Legislature passing a bill that would allow people to use cannabis for a wide range of medical purposes with a prescription. The belief that cannabis is a “gateway drug” that would make people more likely to use other illegal drugs is losing traction as well – 70% said it would make people less likely to do so or would have no impact.

Austin, Texas

Voters in some cities passed local ordinances in 2022 decriminalizing cannabis although not all of these ordinances have been implemented by their mayors and city councils. One large city, Austin, passed such a law and is no longer arresting or citing anyone for misdemeanor possession. Other cities, including Dallas, have gone as far as to implement cite-and-release policies, which directs police to ticket someone with less than four ounces of cannabis. Though this policy keeps cannabis possessors from being arrested and detained, they still must appear in court and face the same fines and possible jail time.

These individual city and county efforts to decriminalize cannabis are helping build momentum for eventual statewide decriminalization when the state legislature returns in 2025.

The keys to achieving the goals of state-wide decriminalization and adult-use lie in implementing a multi-pronged approach of changing the public perception of cannabis through education coupled with promoting the economic benefits to the state of increased jobs and tax revenue.

Representative Joe Moody has taken a unique approach to educate lawmakers and Texas citizens. He recently sponsored HB 3652, the Texas Regulation & Taxation of Cannabis Act, in order to start a dialogue on what a retail cannabis market would look like in Texas. Moody received a public hearing in the House Committee for Licensing and Administrative Procedures on April 26, 2023 in which many points about setting up a retail market in Texas were discussed, including a 10% cannabis tax.

Moody didn’t expect the bill to move forward and, in the end, no vote was taken. But that wasn’t his goal. “No cannabis retail market bill has ever gotten a hearing like this in the Texas Legislature,” he told the committee. “The time is coming where this will be the law of the land, and so we might as well get in front of that.”

Many Texans in favor of legalization and the establishment of an adult-use market are optimistic. Recently, 420CPA’s Tara O’Connor attended a meeting of cannabis executives in Dallas. The Texas Cannabis Roundup, billed as “one of the largest gatherings of cannabis business professionals in the South”, was packed with close to 200 people, all there for an evening of good food and drink and to hear speeches on the progress of legalization in the Lone Star State. The mood was upbeat. “People here are really hopeful and energized,” commented Tara afterward. “They really want recreational cannabis to come to Texas.”

In the last analysis, Texans are an independent lot, and they do things their own way. Decriminalization will happen when the people of the Lone Star State are ready to allow it. And whether it’s a fully functioning medicinal cannabis program with an adequate number of dispensaries and a strong enough cannabis product to bring relief to all who need it, or if, in the end, Texas approves adult-use cannabis for its citizens, one thing is for certain: such progress will happen in a time-frame that is right for Texas and in a uniquely Texan way.

HHS Recommends Rescheduling Cannabis, Surprising an Entire Industry

By Joshua Weiss, Osiris Morel
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In the most unexpected development to hit the cannabis industry in years, the U.S. Department of Health and Human Services’ (HHS) Secretary Xavier Becerra shared his agency’s recommendation that, based on data and scientific analysis, cannabis, a Schedule I drug under the Controlled Substances Act, should be reclassified as a Schedule III drug. The announcement was made on Wednesday, August 30.

The Background

HHS’ conclusion was sent by letter to the Drug Enforcement Administration (DEA), the agency with authority to reclassify how various substances are treated under federal drug laws. The HHS recommendation means that the nation’s top health agency no longer considers cannabis a drug that lacks medical value and carries the high potential for abuse.

The announcement comes just under a year after President Biden and his administration made a statement on cannabis reform. In that statement, which he made on Oct. 6, the president requested that the Secretary of HHS and the Attorney General (AG) initiate an administrative process to review how cannabis is scheduled under federal law, in addition to pledging to pardon all prior federal offenses of simple cannabis possession, directing the AG to develop an administrative process for the pardons and urging all governors to follow suit for state and local offenses. In a statement, Secretary Becerra said the agency acted “expeditiously” and completed the rescheduling process in less than 11 months, “reflecting the department’s collaboration and leadership to ensure that a comprehensive scientific evaluation be completed.” Indeed, the agency’s announcement reflects the administration’s desire to quickly resolve the country’s failed approach to cannabis reform, as prior rescheduling efforts have taken years. Few thought the federal government would move quickly on cannabis, let alone under a year.

The White House has chosen not to comment on the HHS recommendation as the “administrative process is an independent process led by HHS and DOJ and guided by the evidence.” During a press conference, White House Press Secretary Karine Jean-Pierre reiterated the administration’s position, saying that the administration is taking a more hands-off approach and allowing the federal agencies to determine cannabis’s classification without political influence.

What Does This Mean for the Cannabis Industry?

Although a historic announcement, many industry members hoped for a report that would completely remove cannabis from the CSA. Rescheduling cannabis as a Schedule III drug could provide a route for the FDA to assume a more hands-on regulatory role, and it could open up opportunities for interstate commerce in cannabis. A Schedule III designation does not amount to federal legalization, which means the industry will continue to lack a comprehensive regulatory framework addressing the conflicts between federal and state cannabis laws. Rescheduling cannabis also does not address long-overdue concerns about decriminalization and the effect the war on drugs has had on incarceration rates and racial disparities among the imprisoned.

With the HHS recommendation out in the open and the ball firmly in the DEA’s court, concerns have shifted to the DEA’s timeline for considering rescheduling. No hard deadline exists for the agency to complete its review, and industry stakeholders already know that the rescheduling process can be grueling and lengthy. The last time the DEA rescheduled a drug, hydrocodone combination products (HCPs) in 2004, the process took nearly a decade. In fact, each time the DEA has previously considered rescheduling cannabis, in 2001 and 2006, the process took over two years and resulted in no changes.

While many stakeholders speculate that a decision will be made ahead of the November 2024 presidential election, others remain skeptical given the strict anti-drug posture hardwired into how the DEA operates. In fact, the HHS recommendation coupled with the DEA’s approach to drug policy has led some to speculate that the DEA may compromise by moving cannabis into Schedule II, a category reserved for medicines with high potential for abuse and dependence, including most common opioids.

Either way, the agency’s recommendation is a momentous moment for an industry that has been reeling from falling sales and rising costs. Rescheduling cannabis could open the floodgates to more and better research into cannabis. The Schedule I designation has severely limited scientists’ access to cannabis for research purposes. A Schedule III designation would also have a significant financial impact on cannabis companies that have been deprived of tax deductions and banking services on which most companies depend.

The DEA has confirmed that it received the HHS letter and recommendation and will initiate its five-factor review, which differs from HHS’s eight-factor criteria. It remains to be seen what the DEA will do or when it will be done, but thousands of cannabis companies across the country will be watching closely.

The CBD Regulatory Environment in Europe: Part 4

By Shelley Stark
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This is the final piece of a four-part series discussing European cannabis regulations. Click here for Part Onehere for Part Two and here for Part Three. Part Four wraps up the series below. 


Where is the future of CBD heading?

A review of these various jurisdictions, the EU, the UK, and the USA, makes it clear that testing of CBD to ensure public safety is paramount to staying in business, and indeed to the survival of the industry. In the UK it is imperative to be active in the Novel Food licensing regime to remain on the market. In the EU, it is imperative for a legitimate market at all.

In the USA, it may very well become an imperative, if not because of the FDA or even Congress, but rather because as the U.S. market matures, lawsuits over product liability are almost inevitable, pointing to the lack of toxicology reporting or to the way a product was manufactured or marketed. Until the FDA plays a more robust role in establishing standards for the safety of CBD in food products, the best means for companies to protect themselves is with a Novel Food inspired testing regime to confirm product safety.

What this means for the CBD industry

Companies want a clear path forward for investments in the CBD sector. Litigation is predictable, especially in a litigious society like the U.S., as companies prepare themselves with toxicology reporting that satisfies the FDA. There will be clear winners and losers in the CBD market place, most likely based on a toxicology report.

The EFSA, FSA, FDA, the various state level hemp associations dotted across America and more intriguingly, businesses who see testing requirements as a legal means of ousting the less-well-financed competition, are all advocating for testing. This makes sense: There is no future in betting on the unknown. Anything short of a clear safety standard is just guessing with people’s health and thus the company’s future.

So, what are we left with?

Clearly, there is a need for a toxicology report prepared on behalf of the CBD sector. And one about CBD as a food supplement, not as a medicine. It is worth noting that Miller also remarked on how Epidiolex contained high doses of CBD. It needs to be made clear that the medical study of Epidiolex is not consistent with a study of non-medical levels of CBD when used as a supplement.

At present, the biggest challenge facing CBD product manufactures, whether in the USA, EU or UK, is the lack of controlled studies and thus the inability to illustrate the necessary toxicology reporting in their portfolio. Even in the US, the FDA has said it can’t conclude that CBD meets the standard of “generally recognized as safe” (GRAS) for use in human or animal food. Thus, the future of CBD lies in a company’s ability to illustrate by means of a study and accompanying toxicology reports that their brand is firmly in line with the required safety and data standards.

Just some fo the many CBD products in the U.S. market out there

Here is where the EU and the UK may have an advantage, through involvement in the Novel Food application and licensing procedures. The needed legal security for the marketing of CBD products can only be achieved by their approval as Novel Foods. Projected costs for an individual company registering CBD isolate and full spectrum distillate under the Novel Food guidelines requires an investment of €3.5 million. As this is prohibitively high for most companies, at the June 2019 General Assembly, the EIHA proposed the creation of a consortium, with the aim of submitting a joint Novel Food application and sharing these costs among the members.

How the “EIHA projects GmbH” Partnership Works

The founding members of the EIHA projects GmbH have a preferential partnership rate. As a partner, I am able to sub-license products or brands in the EU and this license will be valid in the UK when the application is validated and on the Union list, and is equally valid in the USA.

The Atlantic Ocean is getting smaller and it appears that the FDA might very well decide that the US needs the same European safety standards applied to products at home. Sub-licensing is clearly an inexpensive pathway for an American brand to claim toxicology and safety testing PLUS get access to the EU market. It is imperative for businesses going forward to take a serious look at their future business goals and align themselves with an advancing regulatory environment confirming their commitment to approved quality products.

Alternatives to Bankruptcy for Cannabis Companies: Part 3

By Brent Salmons, Yuefan Wang
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Part 1 of this series discussed the lack of bankruptcy protections for cannabis companies, since bankruptcy in the U.S. is an exclusively federal procedure and cannabis remains illegal under federal law and proposed a number of alternative options for businesses struggling in the current environment. Part 2 of this series focused on state law receiverships for several states.

In this the third and final part of this series, we continue to review state law receiverships for several additional states and discuss the final non-bankruptcy option for cannabis companies, an assignment for the benefit of creditors.

Below is an overview of the laws and rules governing receiverships in several additional states which have legalized cannabis.

Massachusetts

In Massachusetts, receiverships are governed by statute, with numerous statutes for receivership in various industries and entity types but, in general, the appointment of a receiver is granted by a court after the filing of a complaint by third party, most frequently a secured creditor.

In keeping with its industry specific approach, the state cannabis regulator has enacted rules detailing the steps for a cannabis receivership. Most notable among these rules is a requirement to provide notice to the state regulator at least five days before filing a petition to appoint a receiver and, similar to the approach of Nevada, establishing minimum requirements for a person to serve as a receiver for a cannabis company (which generally require a person to pass a background check and have a crime-free past). In addition, because of the fairly restrictive local licensing in Massachusetts, coordination with the locality in which a cannabis company has operations is also required.

Michigan

Michigan has a broad receivership statute, in addition to both entity and industry specific statutes. The general receivership statute allows for the appointment of receivers as part of a court’s equitable powers so long as the appointment is permitted by law. In 2020, Michigan law was amended to specifically permit receivers to be appointed over cannabis companies. The state cannabis regulator’s rules require notice to such agency within 10 days following the appointment of a receiver, and Michigan law further provides that receivers may only operate a cannabis facility upon approval by the state regulator.

Anyone may seek the appointment of a receiver in Michigan, even if they have a connection to the property or business to be placed in the receivership. However, an action may not be brought solely to appoint a receiver but must instead be sought after an action for another claim has already been made. If a court determines it has cause to appoint a receiver, such receiver must have “sufficient competence, qualifications, and experience to administer the receivership estate”. Receivers in Michigan appointed under the general commercial receivership statute (including receivers over cannabis companies) are subject to the court’s equitable discretion but have broad powers, including the power to operate, restructure, liquidate, and sell the business.

Missouri

Like Michigan, Missouri has a general receivership statute as well as statutes for specific receivership situations, notably with respect to corporations. However, Missouri has not enacted any particular rules with respect to cannabis companies and as a result receiverships in Missouri have been conducted under the general receivership statute.

Receivers in Missouri are appointed by a court order following the application of a person with an interest in the assets over which the receivership is sought and an appointment may be made prior to any judgement having been rendered. In addition, the appointment of a receiver may be sought as an independent claim and not as an ancillary claim to another primary claim. Receivers may be granted powers as a general receiver (similar to “equity receivers” in other states) with powers over all of the assets of a debtor, or over specific property of a debtor.

Missouri’s cannabis regulations contain very few rules that specifically relate to a receivership, other than a requirement to provide notice to the state cannabis regulator within 5 days of a receivership filing. While some parties have cited a lack of cannabis specific rules as creating a lack of clarity regarding receivership in these states, Missouri courts and the state regulator appear to be applying the general receivership rules to the industry with at least one receivership in the state in the final stages of completion.

Assignments for the Benefit of Creditors  

To conclude this series, we want to revisit another option we discussed in Part 1 for dealing with a financially troubled firm: an assignment for the benefit of creditors (ABC). While voluntary negotiations with creditors is typically taken where the value of the underlying business clearly exceeds the liabilities of the business, and receivership is an avenue for creditors to seek a court to force a restructuring or liquidation of a business, even over the objections of the business itself, an ABC process can be appealing where the creditor and debtor maintain relatively amicable relations, but the value of the business is such that it is clear the equity holders have little to no value remaining in the business. A creditor may view the ABC process, which is generally a lower cost option as compared with a court-supervised receivership, as the superior proposition in these circumstances.

An ABC is a state common law or statutory remedy available to debtors that is roughly analogous to a Chapter 7 bankruptcy or liquidating Chapter 11 bankruptcy. Unlike a receivership, where a creditor applies to a court for the appointment of a receiver and such an appointment can be granted even over the objection of the debtor, an ABC is a step taken by the debtor itself to liquidate its assets in an orderly fashion with the proceeds paid to its creditors. While courts can be involved to resolve specific matters, and ABC process is principally undertaken without court involvement or direct supervision.

Unlike a receivership, an ABC is a step taken by the debtor itself to liquidate its assets in an orderly fashion with the proceeds paid to its creditorsTo initiate an ABC process, the debtor selects the assignee to take ownership of its assets and such assignee holds such assets in the functional equivalent of a trust for the benefit of the creditors of the debtor. As such, the assignee, while selected by the debtor, owes duties (typically fiduciary duties under state law) to the body of creditors.

Once the assignment has occurred, the assignee will engage in a relatively significant diligence effort in order to gain a clear understanding of the assets and liabilities of the debtor, to complete the assignment and to provide notice to third parties and creditors of the fact that the assignment has occurred. The assignee then generally oversees the operation of the business (if it is continuing) while moving to create a sale process for its assets, whether through some sort of public auction or a privately negotiated sale (which, as in bankruptcy proceedings, may include stalking horse bids).

One notable difference between the bankruptcy and receivership process and an ABC is that, in general, assets sold in an ABC are not sold free and clear of all underlying liens, meaning that senior secured creditors must consent to any sale, or their liens will travel with the assets.

While ABCs offer many advantages over receiverships, including a typically lower cost, flexibility in the selection of the assignee, and a generally easier and faster path to liquidation of assets, there are limitations, including the risk that a third party may seek to appoint a receiver after an ABC has been commenced or that the compensation package granted the assignee is disproportionately high, each of which could ultimately result in higher costs for all involved. Furthermore, sales of assets in an ABC are not automatically sold free and clear of all liens.

In the end, regardless of where a cannabis company may be operating, the lack of access to federal bankruptcy courts does not deprive the company or its creditors of viable avenues to restructure or liquidate a business. However, because these options are less familiar to those who typically operate in the bankruptcy-centric restructuring arena in other industries, companies and creditors in the cannabis space are well advised to consult with counsel familiar with the cannabis industry and the restructuring alternatives that remain available to them.

The CBD Regulatory Environment in Europe: Part 3

By Shelley Stark
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This is Part Three of a four-part series discussing European cannabis regulations. Click here for Part One and here for Part Two. Part Three dives into dosage, approvals and more. Stay tuned for the final Part Four, coming next week.


But does CBD harm the liver?

Here, it is important that we compare apples to apples. Supplements are intended in addition to one’s usual diet. Medicines, on the other hand, are meant to alter a condition to solve a problem. Epidiolex is a medicine, not a supplement. According to Epidiolex the recommend dosage of Epidiolex, a highly purified form of CBD, is between 5mg and 25mg per kilo body weight per day. That means that an average 70 kilo adult would need to take between 350mg and 1750mg per day!

At this moment, even the FSA states that a recommended dosage should not exceed 70mg per day and most recommendations are much lower. This is because supplements are not medicines.

Epidiolex-GWThe point is that Epidiolex is an FDA-recognized medicine and should not be compared to a supplement. Supplements may range from vitamins, minerals, herbal products and botanicals, and are offered without a prescription to people who wish to maintain or improve their health. Purchasers of supplements, as the word suggests, are supplementing their diet or lifestyle, they are not seeking a doctor prescribed medicine.

The supplement or additive industry has no desire to confuse the objective of a supplement with one of a medicine. The objective of testing CBD is to confirm its usage as a supplement, so a firm line can be drawn between what is a medicine, formed to make conditional changes to the body, and what is a supplement to a normal diet.

Despite the FDA’s website warning that CBD is not a legal additive to food or drinks, at this point, the Agency seems to limit actions to claims, and not the safety of the product itself.

This position may be about to change.

The FDA has made inquiries with the European authority, EFSA, concerning testing and safety requirements. It is quite possible the FDA prefers the ‘EU approach’ over the current ‘wild west approach’ driving the American CBD industry.

In response to interview questions directed to FDA spokesperson, Courtney Rhodes says:

CBD cannot lawfully be sold as a dietary supplement or as an ingredient in food under the FD&C Act. (Bold italics by the FDA) Food ingredients must be shown to be safe to be lawfully added to food. That means, there must be a reasonable certainty that an ingredient’s intended use won’t cause harm”.

FDAlogoIf this is the case, one may well wonder why the FDA is not enforcing the FD&C Act. The answer might lay in great part to the specifics of the 2018 Farm Bill (formally, the Agriculture Improvement Act), where the only statutory metric for cannabis as a controlled substance is the reference to the 0.3% delta 9 THC level. Many see this poorly written bill as an open door for cannabinoids to hit the markets legally, much to the chagrin of many state lawmakers.

FDA spokeswoman Rhodes says that the 2018 Farm Bill effectively “removed hemp from [DEA] regulation.” By defining hemp as Cannabis sativa L. with a delta-9 concentration of 0.3% or less, “hemp derivatives, [like] CBD, …meet that definition of hemp and [are] not prohibited under the Controlled Substances Act.”

Thus, any enforcement on the part of the FDA is legally hamstrung due to the way the 2018 Farm Bill was written.

But is change in the air?

Research has yet to settle on “how much CBD can be consumed, and for how long, before causing harm,” says FDA Principal Deputy Commissioner Janet Woodcock. The existing regulatory framework for food and supplements are inappropriate for CBD, she says, and the FDA does not, in fact, intend to pursue rulemaking that would allow for the inclusion of CBD in dietary supplements.

So, what does the FDA intend to pursue?

While the FDA has generally focused on unsubstantiated health claims for food and beverage products, it is also on record stating that available data did not show CBD products as meeting the safety standard for a human or animal food supplement. “A new regulatory pathway for CBD is needed,” the Agency says, “that balances individuals’ desire for access to CBD products with the regulatory oversight needed to manage risks.”

What would such “a new regulatory pathway” look like? Most likely, that new testing requirements for CBD could come into effect. This could eventually mean testing requirements much like those in the EU.

Have the studies of Epidiolex, with findings based on extremely high dosage levels tainted the CBD discussion?

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

“The FDA is relying on pharmaceutical studies that show risks at larger doses,” says Jonathan Miller, general counsel for the U.S. Hemp Roundtable, adding that there is a decade of clear and established evidence of the safety of CBD products sold at retail. This is hard to deny: The industry has been selling CBD products for the last 10 years without any significant health issues arising. Thus, says Miller, creating a new regulatory pathway would not be necessary as the dietary supplement and food pathways are already provided for under the FD&C Act.

Authorities and industry leaders alike want regulations that promote business while at the same time protecting consumers. “The FDA’s inaction for the past year has facilitated an unregulated marketplace — which is bad for consumers and bad for business. It’s time for FDA to announce a legal pathway to market for these CBD-containing supplements and to commence meaningful enforcement against products that flout category-wide requirements for dietary supplements,” says Steve Mister, president and CEO of the Council for Responsible Nutrition (CRN), quoted on the crnusa.org website.

It is clear that the FDA does not want CBD in food and beverages and likewise claims there is no clear regulatory pathway, citing scientific data on CBD based on the Epidiolx study, which has little room for claiming CBD could be safely used as a supplement because the study is based on medicine, not a supplement.

Parallel to this, the US Hemp Roundtable and other industry stakeholders are urging the U.S. House Committee on Oversight and Accountability to move forward with an investigation into the lack of regulatory action on CBD products by the U.S. Food and Drug Administration (FDA). Does this mean that hemp lobbyist Jonathan Miller for Hemp Roundtable wants toxicology testing? “Yes,” he definitively answered.

Serious business requires the security that only toxicology reporting can give. Most of the large industry stakeholders have been engaged in toxicology testing for years, as time, not just funds, is a crucial factor. The EIHA projects GmbH began testing in 2020 and is not yet finished.

If congress and the FDA were to require toxicology reporting tomorrow, would your company be ready?

Soapbox

Congress Wants YOU To Make Safe Products.

By David Vaillencourt
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Recently, Congress requested detailed information regarding the regulation of CBD and other cannabinoids. This comes on the heels of frustration around federal inaction with regards to cannabinoid-containing products produced from Cannabis sativa L. plant extracts that can be classified as “hemp” products amidst the clear need for safety standards that goes above and beyond state minimum compliance requirements.

A Historical Deja Vu?

The author will be joined by his colleagues leading the Seed to Sale Safety Workshop on October 16 at the Cannabis Quality Conference. Click here to learn more. Product safety standards predate the birth of our nation (and many others). From the days of the first pharmacopeias which rival the oldest documented use of the cannabis plant, to modern regulations, the quest for safety has been a constant theme. But as the saying goes “Old habits die hard,” but so do safety issues. From peanuts to thalidomide and tobacco, we’ve seen this movie before – and it is time for a new ending.

A Universal Desire for Safety

Whether you are an investor, executive, technician or anywhere in between – nobody in the cannabis industry (and all its end uses, including industrial hemp) wants to knowingly produce unsafe products. The risks of ignoring safety are real and tangible. Whether it is 20+ years in jail for being an executive of a company that knowingly sold adulterated products and was linked to seven deaths or 10,000+ deformed children, many of whom died at birth because of a drug approved for morning sickness – there is no shortage of case studies we can learn from. Even cannabis has been known to cause injury and death in consumers – not because of the d9-THC, but the impurities. As the industry continues to innovate and develop new product form factors – whether it is new delivery methods of d9-THC in soluble beverage forms, or the rise of manufactured cannabinoids in unregulated marketplaces – it’s critical to understand the risks of your entire production process and to mitigate them. No cannabis company is immune from making costly and dangerous mistakes. It’s not just about compliance – it’s about public health and safety.

Safety Can Be a Sticky Subject

Safety is indeed a complex subject, especially when it comes to cannabis products. For instance, acceptable limits for microbial contaminants for the inflorescence of a Cannabis sativa L. plant are quite literally all over the map. What about the route of administration? Take an inhaled product (like a vape pen) vs. an ingested product (e.g. an edible). Many outdoorsy people like myself may enjoy the smell of cooking s’mores over a campfire, but the particles and VOCs can irritate our lungs, especially when exposed over long periods of time. We aren’t inhaling those s’mores – so the production of the marshmallow, chocolate and graham crackers come with different risks we need to evaluate. It’s not just about the product – it’s how it’s consumed.

Safety Standards the Fabric of Our Society

Standards are unsung heroes of our daily lives. Whether it’s to keep planes from falling out of the sky, cribs and dressers from crushing young children, preventing train derailments or ensuring the safety of our food and medical products – standards keep us protected – just like grandma’s quilt. The absence of standards can be expensive, and anyone familiar with the accusations of d9-THC lab-shopping and inflated label claims knows that the cannabis industry is the poster child for this.

Congress has long recognized the importance of standards in protecting everyday consumers, as demonstrated by numerous legislative acts. A few notable and relevant ones to cannabis are below:

  • 1848 Drug Importation Act: First major act that combated the importation of substandard – adulterated drugs imported from overseas into the nation which was having a major impact on soldiers of the Mexican-American War.  This Act included legal requirements for drugs to meet the US Pharmacopeia’s standards for strength, quality, and purity.
  • 1906 Food and Drugs Act: After an increase in adulterated and misbranded foods and drugs – made famous by Upton Sinclair’s The Jungle, the relentless work of Dr. Harvey Wiley, a Chief Chemist with the then US Department of Agriculture and his “poison squad” – led to significant oversight of adulterated food and drugs including legal adherence to the US Pharmacopeia and paved the way for the current FDA.
  • 1938 Food Drug, Cosmetic Act: Shortcomings in the 1906 Food and Drugs Act were catalyzed by over 100 deaths after a wonder drug that was analogous to antifreeze led to an outcry that led to the passage of the FDC&A. From factory inspections, to strict marketing and label requirements, to legally enforceable food standards and tolerances for certain poisonous substances – the FDA was given substantial more oversight to protect the growing United States. It also expressly recognized USP quality standards for medicines with USP standards also binding for any dietary supplement manufacturer that labels their products as being compliant with USP specifications.
  • 1994 Dietary Supplement Health Education Act (DSHEA) defined and regulated dietary supplements which carved out significant exemptions for the dietary and herbal supplement industry from most FDA drug regulations. This act has been met with significant controversy as it greatly limited the FDA’s capacity to ban or restrict supplements until evidence of a major safety or adverse event is tied to the product of concern.
  • 1995 National Technology Transfer Advancement Act (NTTAA) – A lesser known act that is focused on standards and technology that requires participation of federal agencies in voluntary consensus standards bodies. Extending beyond foods and medicines – this act covers a broad array of infrastructure and technology regulations that ensure the fabric of our society operates (largely) without issue.

Over 1,000 ASTM standards are incorporated by reference in the US Code of Federal Regulations across nearly 30 federal agencies (searchable here), a demonstration of the value and impact public voluntary standards have in our society.

At the FDA, ASTM standards are used every day to keep us safe. Whether it is to measure the absorbency of tampons (21 CFR 801.430), enforce safety specifications of synthetic and natural wax coatings that are used to coat much of our produce, gummies and more (21 CFR 178.3770), quantifying the impurities in our bottled water (21 CFR 165.110) and many more.They have long been recognized as the de facto minimum standards that balance the need to protect consumers without imposing undue burdens on innovation by industry.

The process of developing an ASTM standard, which was developed and used to keep our trains from derailing 125 years ago, is now the home of 510+ cannabis industry specific standards. Whether it’s acceptable water activity levels in cannabis flower, a truly universal symbol to alert consumers of intoxicating cannabinoids, medical cannabis flower specifications developed in close guidance of the US Pharmacopeia, or how to apply the principles of HACCP to cannabis products, a lot of the hard work has already been done for the industry. It’s simply a matter of knowing where to look and how to use them!

The path to safe and sustainable cannabis products is clear, and the tools are available. It’s time that we learn from the past, apply the standards of the present and mitigate the risks of the future. Now more than ever before, it’s easy to make safe cannabis products and a credible marketplace not just a goal, but a reality.

Alternatives to Bankruptcy for Cannabis Companies: Part 2

By Brent Salmons, Yuefan Wang
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Part 1 of this series discussed the lack of bankruptcy protections for cannabis companies, since bankruptcy in the U.S. is an exclusively federal procedure and cannabis remains illegal under federal law and proposed a number of alternative options for businesses struggling in the current environment. Part 2 of this series focuses on one of these alternatives: state law receiverships.

Background

A cannabis operation facing financial difficulties may try to avail itself, on the one hand, of the contractual remedies described in Part 1 of this series, but these remedies may be flimsy given their narrow scope and reliance on voluntary negotiation between parties whose relationship is already likely tense; on the other hand, the statutory remedies described in Part 1 of this series may be too rigid and absolute, necessitating the disposition of a business as a collection of assets, instead of its continued operation as a going concern. An alternative is receivership, a flexible but powerful quasi-judicial approach paralleling federal bankruptcy able to be administered by state courts. Compared to federal bankruptcy, state receivership is both over and under-inclusive: while receivership can be used in many more situations than insolvency, such as a financially healthy business that is nonetheless subject to regulatory action, receivership provides less comprehensive protection for an insolvent business.

Receiverships have their roots in English and Welsh courts of equity, which were seen as offering fairer remedies than their contemporary common law courts, bound as they were by ponderous precedent. In contrast, courts of equity had more discretion to apply remedies which could be more tailored and “equitable” to an individual petitioner, even if such remedies were not codified. While this separation of equitable and common law courts does not generally exist in the modern U.S. legal system (except for a few hold-out states, most notably, Delaware), the legacy remains in the type of civil remedy available: while most remedies are awarded as monetary redress for a past wrong suffered by a plaintiff (e.g. liquidated damages for the discloser of confidential information or the “benefit of the bargain” for the seller of a company), equitable remedies often require prospective action (or forbearance of an action) by the defendant (e.g. an injunction on disclosure by a recipient of confidential information or specific performance by a purchaser of a company). To draw the analogy out, bankruptcy is a “legal” process to address insolvency since it is governed by a comprehensive regime of federal statutes and rules in the Bankruptcy Code (which is, ironically, applied by specialized federal courts), while receivership is the “equitable” side of the same coin: a judicially-created remedy to manage or liquidate a business, among other actions, where it would not be equitable (or, most importantly for cannabis businesses, not possible) for a bankruptcy action.

Some states with legalized cannabis have cannabis-specific receivership statutes, usually providing that the receiver either be temporarily or fully licensed similar to any other operator of a cannabis business.As an equitable remedy used by various states and federal entities, generalizations about the receivership process are difficult to make. However, broadly speaking, a typical receivership process begins with a complaint filed against the entity for which receivership is sought in state court. This filing can be made by a variety of parties outside of the standard debtor-creditor relationship (reflecting the equitable nature of receiverships), including by regulators and disputing owners of a business. After this filing, a motion to appoint the receiver (which is usually but not always a third party) is filed with the court; consent of the opposing party is generally not required in appointing a receiver but can often make the process easier. The complainant must then establish standing and the occurrence of certain events, including insolvency, but also mismanagement of a corporation or a foreclosure. The requirements of such events are fact-specific and may often be governed by statute or the contractual relationship between parties. The order appointing the receiver usually sets out the specific powers the receiver has in any given case to oversee the disposition or operation of the assets subject to the receivership (called the “receivership estate”) for the benefit of its’s creditors.

Receivership laws generally fall into two categories: some states provide for a broad general statute, sometimes accompanied by statutes specific to industries which are heavily regulated, entity types, or process, while in other states the power is an extension of the court’s powers, set forth in the state’s rules of civil procedure. States also differ as to whether a receivership is considered an independent remedy, a standalone legal action which can be pursued in and of itself (e.g. a petition by a creditor to appoint a receiver to resolve settle an unpaid debt), or an ancillary remedy, a legal action that supports a primary claim (e.g. a request to appoint a receiver in connection with a dispute over the ownership of a business). Some states provide for general receiverships, which allows receivers to take control of an entire business, while other states also allow limited receiverships, which allows the receiver take control of a portion of a business, while the owner operates the remainder. Some states with legalized cannabis have cannabis-specific receivership statutes, usually providing that the receiver either be temporarily or fully licensed similar to any other operator of a cannabis business.1

Below is an overview of the laws and rules governing receiverships in certain states which have legalized cannabis.

Arizona
In Arizona, receivership is governed by statute, with a general statute and specific statutes for certain industries and type of receivership. Arizona law recognizes that principles of equity apply to all matters relating to receivers, providing the court overseeing the receivership with additional power to decide the remedies available to the receiver. In addition, Arizona has enacted a specific statutory framework for the appointment of receivers for commercial real property and personal property related to or used in operating the real property. Arizona also uses a separate receivership statute to provide for corporate dissolution receiverships, in which a court in a judicial corporate dissolution proceeding may appoint one or more receivers to wind-up, liquidate, or manage the business and affairs of the corporation.

There are no specific statutes governing receiverships of cannabis businesses, so the general receivership statute applies to cannabis businesses, subject to Arizona’s rules governing the operation of a cannabis business. For example, Arizona cannabis regulations that require anyone volunteering or working at a medical or recreational cannabis dispensary to be registered with the cannabis regulator similarly apply to a receiver appointed over a licensed cannabis business.

California

California does not have significant entity-specific or industry-specific statutes for receiverships; rather a California court’s power to appoint a receiver is granted under the state’s rules of civil procedure. Receiverships in California are solely an ancillary remedy; a receivership is commenced once a complaint is filed and any party to the action may seek to appoint a receiver. Circumstances that allow for the appointment of a receiver are fact-specific and at the discretion of a judge, although contractual provisions for the appointment of a receiver are given weight under the rules. Sales of assets in the receivership estate must be submitted to, and approved by, the appointing court.

While the rules of civil procedure provide for the general powers of a receiver, the specific powers a receiver possesses in any given case is granted by the judicial order appointing the receiver; this appointment order is therefore, along with the court itself, the primary authority for the parties in any given receivership. California explicitly disqualifies certain persons, such as parties to the lawsuit, an attorney of a party, a person interested in an action, or any person related to any judge of the court within the third degree, as receivers.

While California’s receivership rules do not explicitly contemplate cannabis businesses, receiverships for cannabis companies have taken place, but in our experience are less common in California than assignments for the benefit of creditors (which we will address in a later article). Like other licensed businesses in California, cannabis companies must provide notice to the state regulatory agency which granted the license. It is up to the agency’s discretion whether the business may be operated under the existing license or whether the receiver must secure a new or temporary license.

Colorado

Like California, no generally applicable receivership statute exists in Colorado; instead, receiverships are governed by the state’s rules of civil procedure. Under these rules, a receiver can be appointed under a court’s general equitable powers. Appointment of a receiver is an independent remedy in Colorado, but is contingent on a lawsuit having commenced and the court having deemed the receivership as necessary and proper. In addition to the court’s general equitable powers to appoint a receiver, and unlike California, Colorado has receivership statutes that are entity and industry specific. The entity-specific statutes permit the appointment of a receiver for the judicial dissolution of for-profit corporations, non-profit corporations, limited liability companies, and cooperatives, and the industry-specific statutes permit the appointment of a receiver for the windup of failed insurance companies and the closure of long-term care facilities.

Similar to California, the court order appointing a receiver governs the entire receivership process and any disposition of the assets of the receivership estate must be submitted to and approved by the court.

As befitting the first state to legalize adult-use cannabis, Colorado’s cannabis regulations specifically address receiverships: the rules create a notice and application requirement for all court appointees, including receiverships, and require receivers to register with the regulator as a “temporary appointee” of the court.

Illinois

Illinois does not have a comprehensive receivership statute; instead, the state has industry-specific statutes, including for regulated industries such as nursing home facilities and telecommunication carriers. Illinois also provides for “equity receiverships”, which are used as an ancillary remedy in business disputes in order to stabilize a business that is adversely affected by fraud, neglect, waste, dissipation, or other misconduct during the pendency of the underlying proceeding. If the underlying matter is within the general or statutory jurisdiction of the court, then such court has jurisdiction over the receivership.

There are no specific statutes governing receiverships of cannabis businesses, but the governing statute does contemplate operation of a cannabis business by a receiver, so regulations promulgated thereunder should apply to receivers as well, including with respect to licensing.

Maryland

Adult-use cannabis sales only began in Maryland July 1, 2023. Maryland has a general receivership statute.

Receivers in Maryland are generally appointed by the person seeking appointment, including the court, and must meet certain qualifications, such as not having any material financial interest in the outcome of the receivership, and not having any debtor-creditor relationship with or equity interest in any party to the receivership. While the general receivership statute provides for broad powers of the receiver, including general management of receivership property, hiring professionals, and issuing subpoenas, the court may modify or expand the powers of the receiver via the appointment order.

While there is no cannabis-specific receivership statute, Maryland’s medical cannabis rules contemplate and authorize the transfer of licenses to a receivership; similar rules have been proposed for adult-use cannabis licenses as well.

Nevada

Nevada has a broad receivership statute, in addition to both entity and industry specific statutes. Case law is not well-developed and mostly predates the current statutory scheme, but there is support for a receiver being appointed outside of a statutory context, specifically when the situation is governed by contractual agreement.

The general receivership statute provides that a receiver may be appointed in a variety of situations, such as fraudulent property purchases, foreclosure of mortgages, or the dissolution or insolvency of a corporation.

Nevada has a statutory regime for receiverships for cannabis companies. Unlike the general statute, there are significant requirements for who can be a receiver for a cannabis business. A receiver must first secure a cannabis establishment agent registration card for a cannabis receiver issued by Nevada’s cannabis regulator. In addition, the receiver must submit an application to the regulator accompanied by, among other requirements, a statement saying the receiver has not previously had an agent registration card revoked. The receiver must also provide proof that she has (1) experience or knowledge of the cannabis industry, (2) experience as a receiver appointed by a court, (3) knowledge and skills necessary to make reasonable financial decisions, and (4) adequate financial capacity to fulfill the duties of a receiver. If the regulator is satisfied with the receiver’s application, it will issue the receiver an agent registration card which must be renewed two years after issuance. It is worth noting that Nevada’s statute governing the non-transferability of certain agent registration cards for cannabis allows the regulator to adopt regulations that give priority in the processing of transfers of licenses for transferors subject to receivership. To date, however, no such regulations allowing priority for receivership processing have been adopted.

Washington

Washington has a general receivership statute, but not any entity or industry-specific receivership statutes. Washington’s receivership structure with overhauled in 2004 with the passage of a new law, so it is not completely settled whether receivership is now an independent or ancillary remedy; however, the language of the statute language suggests that it is an independent remedy.

To be appointed a receiver in Washington, the individual must meet certain requirements, including not being a party to, or be closely controlled by a party to, the underlying action and not having materially adverse interest to the person against whom receivership is sought. The general statute specifically outlines the powers of the receiver. Certain actions by the receiver require court approval before being finalized, including the assumption or rejection of executory contracts, and sales of property outside the ordinary course of business.

Washington law specifically provides for receiverships for cannabis companies. To be a receiver, the person must satisfy the requirements of Washington’s receivership law, and either be preapproved by the cannabis regulator or else be approved post-application. In order to qualify for the regulator’s preapproved receiver list, or be approved post-application, the putative receiver must (1) submit an application, (2) have been a Washington resident for at least six months prior to submission, (3) submit to and pass a criminal background check, (4) provide financial disclosures as requested by the regulator, and (5) disclose any interests in the cannabis licensees. Once a person is appointed as receiver for a cannabis licensee, she shall not have a financial interest in, or simultaneously serve as receiver for, another licensed cannabis retailer. The receiver may not also serve as a receiver for, or be a party of interest in, more than five cannabis retail licensees or more than three cannabis producer and/or processor licensees at the same time. Finally, any person who files a receivership action involving a cannabis licensee must provide notice to the regulator.

Part 3 of this series on Alternatives to Bankruptcy for Cannabis Companies continue our review of receivership in various states and other bankruptcy alternatives, including assignments for the benefit of creditors.


Reference

  1.  As cannabis legalization continues to spread, more robust industry-specific receivership rules may be promising given the heavily regulated and specialized nature of the business, similar to how a number of states have industry-specific rules for other heavily regulated industries.

HHS Recommends DEA Reschedule Cannabis to Schedule III

By Cannabis Industry Journal Staff
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Massively promising news for the cannabis industry today that many are calling historic: the Department of Health and Human Services (HHS) has sent a letter to the Drug Enforcement Administration (DEA), recommending that cannabis be rescheduled from Schedule I to Schedule III. The news was originally reported by Bloomberg, but further expanded on (and without a paywall we’ll add) by Marijuana Moment with comments from the DEA, HHS and the White House.

Many cannabis stocks across the market saw significant spikes in trading prices following the news of the recommendation. Industry stakeholders and trade organizations seem to share a similar sentiment across the board: Not quite exuberance and celebration, but cautious optimism. The move doesn’t mean the federal government is legalizing cannabis, but they are showing their willingness to work with the industry.

The current Schedule I status of cannabis means the DEA and the federal government see no medical value in it and a high potential for abuse, grouping it with heroin and cocaine. Moving it to Schedule III would mean the opposite, that they recognize cannabis does have medical value and does not have a high potential for abuse, which would put cannabis in the same classification as ketamine, testosterone and Tylenol with codeine.

Importantly, the move would remove the dreaded 280E tax burden that has plagued the cannabis industry with huge tax penalties. It would also lift many barriers to study cannabis that have hindered research for decades.

Last year, President Biden asked HHS to review the scheduling of cannabis, and this recommendation letter to the DEA appears to be the culmination of their review. It is only a recommendation and nothing happens instantly. The DEA still has to decide if they choose to reschedule cannabis.

Out of all the quotes and statements flooding the cannabis media today, Rep. Earl Blumenauer (D-OR) best summarized the feelings shared by many folks in the industry: “This is a step in the right direction but it is not sufficient. I hope it is followed by more significant reforms. This is long overdue.”