Tag Archives: schedule

South Africa Reschedules CBD and THC

By Marguerite Arnold
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The South African government has taken a leap into the future (ahead also of the expected World Health Organization (WHO) decision on cannabis this December). Namely, it has begun to regulate hemp (more in line with Europe intriguingly, than the U.S.) and attempted to remove the THC part of the equation from a domestic list of plants and drugs with no medical use.

The notice was signed by South African Minister of Health Zweli Mkhize and published a week after a domestic moratorium on CBD expired. The moratorium permitted the sale of some kinds of CBD products.

This is an intriguing new development, although it will also undoubtedly cause headaches for the burgeoning industry in the region.

On The CBD Front…

South Africa’s new hemp guidelines – namely for the amount of THC allowed in legit hemp crops that are also regulated – are that plants contain no more than 0.2% THC. This makes the guidelines absolutely in line with what is generally developing across the EU. And even more intriguingly, below federal guidelines for most U.S. domestic hemp crops (which are 0.3% at a federal level and only differ in a few state cases where the amount is lower by state law).

However, there is also a unique twist to all of this: The South African government has now created a two-pronged regulatory schemata just for CBD. The default approach to the cannabinoid is that it is in fact medication, scheduled under South African internal and global drug guidelines as a “Schedule 4” drug.

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

The other designation is reserved for CBD packaged in sizes of 600mg or less (and limited by instructions to no more than 20mg a day). This kind of CBD (despite the dubious understanding of cannabinoid science) will henceforth be labelled a “supplement” and on “Schedule 0”.

However, do not be fooled: This is not “descheduling.” This actually means that all CBD has been classified as a medical substance except in packets that are under a certain size, with portion suggestions on the outside of the wrapper or package.

That is hardly scientific. However, what is more burdensome is that any CBD cultivator in South Africa must also be GMP- (or internationally medically) certified (even if bound for the supplement market). By definition, in other words, it will make the cost of production for the supplement (commercial, food and cosmetic) part of the equation as expensive as pharmaceutical production. While from a purist’s point of view, having ultra clean cannabis in any product (at the level of pharmaceutical standards) is a wonderful idea, but this gets ridiculous when it comes to reality, and will ultimately never stand.

This development is also undeniably inconvenient (at minimum) for any who had envisioned outdoor hempires, which most of the cannabis grown in South Africa is. The only people who have the money to build indoor grows, starting with GMP certified greenhouses, are, for the most part, white people, foreigners or those who own property and have access to external, international equity.

The sins of Apartheid, in other words, are being writ large on the entire cannabis industry at present in South Africa. And CBD is contained right in the middle of the mix.

On The THC Front…

There are several interesting aspects to this.

The first is that THC has been removed from the South African “Schedule 7” which is roughly equivalent to the international “Schedule I” that cannabis also resides in until the WHO re- or deschedules the same.

However, this also means that all CBD as well as THC must be produced by those with pharmaceutical-grade facilities – and this of course includes more than just indoor, temperature-controlled greenhouses. It also includes a complex supply chain that is European and Western centric, starting with the requirement to access a rather large amount of capital to construct the same.

Global Re-Alignment Or Stopgap Measure?

This new regulation, in other words, specifically leaves the vast majority of what has already been seeded, or what is most likely to be, in the hands of a few Canadian and other companies who have been moving in this direction for the last several years.

It also implies, intriguingly, that the intra-African cannabis market is low priority at present for those writing the (health) rules. And that also means that eyes are being set more on creating an export market than for treating South African citizens.

It is not an unusual move, rather tragically so far. And almost certainly one that will be challenged, and in several directions, both by events, but also by firms caught up in the mix.

Why? For starters, the South African cannabis market also effectively controls the Lesotho cannabis regulatory scheme (namely all exports from Lesotho, which has seen quite a lot of cannabis investment over the last several years). All such crops must be labelled per South African guidelines if they, literally, can hit a port to be exported.

The vast majority of those grows, even with relatively decent foreign backing, are also outside – and of course as a result ineligible for GMP certification.

Of course given the fact that the UN is likely to clarify both the status of THC and CBD by the end of the year, this current situation in South Africa is also fairly clearly intended to be a stop-gap regulatory measure to last up until at least this time.

Where it may go after that is anyone’s guess. This measure, however, is also clearly being made to protect those who have invested in GMP-grade facilities as opposed to those who have been clearly angling for reform on the CBD front, starting with the beer market. Stay tuned. Interesting developments clearly ahead.

Cannabis Contracting: The Potential Invalidity Defense Created By Federal Prohibition

By Brett Schuman, Barzin Pakandam, Jennifer Fisher, Nicholas Costanza
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The overwhelming majority of Americans now live in a state where cannabis is legal at the state level for at least some purposes.1 However, cannabis (excluding hemp) remains criminal under federal law for all purposes. This conflict between state and federal law presents challenges for participants in the state legal cannabis industry, including enforcing their contractual agreements. This is because a number of federal court rulings have called into question whether contracts involving cannabis are enforceable in federal court.

In this article, we explore how federal courts and state legislatures have addressed the enforceability of contracts relating to cannabis and provide some practical tips for cannabis companies to protect their contractual rights.

The “Illegality Defense” in Federal Courts

“No principle of law is better settled than that a party to an illegal contract cannot come into a court of law and ask to have his illegal objects carried out . . . .” Mann v. Gullickson, 2016 WL 6473215 at *6 (N.D. Cal. Nov. 2, 2016) (quoting Wong v. Tenneco, Inc., 39 Cal. 3d 126, 135 (1985)).

Bart St. III v. ACC EnterprisesApplying this principle, a number of federal courts have refused to enforce contracts relating to state-legal cannabis. For instance, in Bart St. III v. ACC Enterprises, LLC, No. 217CV00083GMNVCF, 2020 WL 1638329 (D. Nev. Apr. 1, 2020), the parties entered into a loan agreement wherein the plaintiff-lender, Bart Street III, loaned the defendant cannabis cultivators in Nevada approximately $4.7 million to fund operating costs, pay down debts and purchase land for a cannabis cultivation facility in Nevada. Id. at *1-2. The loan agreement specified that it was governed by Nevada law. The cannabis cultivators defaulted on the loan, and Bart Street III sued for breach of contract and unjust enrichment. The cannabis cultivators argued that they could not be liable for breach of a contract that is illegal under the Controlled Substances Act of 1970, as amended (the CSA). Id. A federal judge in Nevada ruled that certain provisions of the loan agreement (i.e., a right of first refusal provision and another provision concerning disbursement of operating costs) were illegal under federal law and could not be enforced. The judge was unable to decide on summary judgment whether the illegal provisions could be severed from the other parts of the agreement, so on that basis the cannabis cultivators’ summary judgment motion was denied as to the breach of contract claim. However, the judge granted the cannabis cultivators’ motion as to the unjust enrichment claim based on the following reasoning: “Plaintiff cannot prevail for unjust enrichment because the parties’ contract involves moral turpitude. If the Contract is unenforceable, it is because Plaintiff invested in Defendants’ marijuana cultivation business primarily to obtain a pathway to an equity investment therein . . . . Providing funds in exchange for equity violates the CSA because it would allow the investor to profit from the cultivation, possession, and sale of marijuana . . . . Conspiracy to cultivate marijuana is a crime of moral turpitude.”

Polk v. GontmakherThe illegality defense was also raised in Polk v. Gontmakher, No. 2:18-CV-01434-RAJ, 2020 WL 2572536 (W.D. Wash. May 21, 2020), which involved two business partners—Polk and Gontmakher— who owned a licensed cannabis processing facility and retail store through an entity called NWCS. When Polk decided to leave the business, Gontmakher refused to acknowledge Polk’s ownership interest because Polk had a prior criminal record, which violated ownership requirements for cannabis businesses under Washington cannabis regulations. Polk sued Gontmakher for breach of a verbal partnership agreement and sought to recover past and future profits of the cannabis business. Gontmakher moved to dismiss, and the district judge granted the motion: “Mr. Polk’s claim that his requested relief would not require a violation of the CSA defies logic. He is demanding the future profits of a business that produces and processes marijuana in violation of federal law. How does Mr. Polk anticipate NWCS will generate these future profits? The Court cannot fathom how ordering [Gontmakher] to turn over the future profits of a marijuana business would not require them to violate the CSA. And as this Court has previously explained to Mr. Polk, it cannot award him an equitable interest in NWCS because to do so would directly contravene federal law.” Polk, WL 2572536 at *2.

J. Lilly, LLC v. Clearspan Fabric Structures Int’l, Inc.Certain federal district court judges have addressed the illegality defense directly, even when it has not been asserted by the parties. In J. Lilly, LLC v. Clearspan Fabric Structures Int’l, Inc., No. 3:18-CV-01104-HZ, 2020 WL 1855190 (D. Or. Apr. 13, 2020), a licensed cannabis cultivator in Oregon contracted with Clearspan, a lessor of commercial greenhouse equipment located in Connecticut, to lease greenhouse equipment for the facility and also have the facility constructed. After construction began, the cultivator notified Clearspan (and the sub-contractor) of numerous defects in the facility that were impeding cultivation efforts, and after Clearspan allegedly fixed only one defect, the cultivator sued for breach of the agreements and claimed lost profits due to the inability to cultivate cannabis, in the amount of $5.4 million. While Clearspan moved to dismiss the claims on the basis that the cultivator waived any contractual right to consequential damages, the District Court raised the issue of the illegality of the contracts under federal law sua sponte at oral argument. After supplemental briefing on the issue, the Court held that “awarding Plaintiff damages for lost profits [for the sale of cannabis] would require the Court to compel Defendants to violate the [CSA…and] provides an independent basis to dismiss Plaintiff’s lost profits claim in addition to” the issue of waiver, and other merits issues.  Id. at *11-12.

And in Ricatto v. M3 Innovations Unlimited, Inc., No. 18 CIV. 8404 (KPF), 2019 WL 6681558 (S.D.N.Y. Dec. 6, 2019), Ricato (an investor) and M3 (the intended cannabis operator and licensee) entered into an agreement to purchase a plot of land in California for M3 to develop as a cannabis processing facility. The investor sued to enforce the investment instrument, and M3 moved to dismiss. The court granted M3’s motion to dismiss on other grounds but noted that “it is not readily apparent to the Court that it could [even] enforce such a contract [as] ‘[m]arijuana remains illegal under federal law, even in those states in which medical marijuana has been legalized,’” such as California. Id. at *5, n.4.

Ricatto v. M3 Innovations Unlimited, Inc.However, under some circumstances a federal court may enforce a cannabis contract. In Mann v. Gullickson, Mann loaned Gullickson money to be used in a cannabis-related business. The agreement was governed by California law. When Gullickson defaulted on the promissory note, Mann sued for breach of contract. Gullickson asserted that the contract was illegal under federal law and moved for summary judgment. In an order denying Gullickson’s motion, the court said that “even where contracts concern illegal objects, where it is possible for a court to enforce a contract in a way that does not require illegal conduct, the court is not barred from according such relief.” 2016 WL 6473215, at *7.

Federal courts are wary of parties seeking the enforcement of cannabis contracts. If there is any possibility that the issuance of a court order enforcing the contract would result in a party violating the CSA, federal courts are likely to deny relief.

State Laws Protecting the Enforceability of Cannabis Contracts

At the state level, legislatures in some states that have legalized cannabis for adult use have enacted laws to protect the enforceability of cannabis contracts. These statutes specifically exempt commercial cannabis activities from general laws voiding contracts that are in furtherance of illegal activities. Examples of these state laws include:

Massachusetts: In December 2016, Massachusetts enacted a statute providing that “[c]ontracts pertaining to marijuana enforceable” and providing that contracts entered into by cannabis licensees or their agents, or by landlords of cannabis licensees, “shall not be unenforceable or void exclusively because the actions or conduct permitted pursuant to the license is prohibited by federal law.” (Mass. Gen. Laws ch. 94G, § 10)

California: In January 2019, California enacted a statute providing that “commercial activity relating to medicinal cannabis or adult-use cannabis conducted in compliance with California law and any applicable local standards, requirements, and regulations” shall be deemed the lawful object of a contract and not contrary to law or against public policy, notwithstanding any law that requires all contracts have a “lawful object” under state or federal law. (Cal. Civil Code § 1550.5)

Nevada: In 2016, a ballot initiative was passed in Nevada, which was then codified under state law, declaring “[i]t is the public policy of the People of the State of Nevada that contracts related to the operation of marijuana establishments under this chapter should be enforceable,” and that such contracts “shall not be deemed unenforceable on the basis that the actions or conduct permitted pursuant to the license are prohibited by federal law.” (N.R.S. § 678B.610).

Similar statutes have been enacted in other states, including in Oregon (January 2018), Michigan (December 2018), Illinois (June 2019) and Colorado (January 2020). See Or. Rev. Stat. § 475B.535 (In Oregon, “[a] contract is not unenforceable on the basis that” commercial cannabis activity legal in Oregon is illegal under federal law); Colo. Rev. Stat. § 13-22-601 (similar to Oregon); Mich. Comp. Laws § 333.27960 (Public policy in Michigan is that “…contracts related to the operation of marihuana establishments [are] enforceable.”); 410 Ill. Comp. Stat. § 705/55-75 (similar to Michigan).

However, many states that have legalized cannabis do not have statutes exempting contracts relating to cannabis activities from the illegality defense.

Contracting Tips for Cannabis Companies

Notwithstanding the uncertainty and inherent risks caused by the conflict between federal and state law, there are certain steps parties entering into commercial cannabis agreements can take to protect their contractual rights, including:

  1. Always include a forum selection clause specifying resolution of disputes in state court and waiving any right to remove the dispute to federal court.
  2. If entering into an agreement in a state that has enacted a statutory provision exempting cannabis contracts from the illegality defense, consider selecting that state’s law (as opposed to New York or Delaware law, which are often the jurisdictions of choice for transactional lawyers who don’t know better) in a choice of law provision.
  3. If neither the parties nor the performance of the agreement have any nexus to a state that has enacted a statutory provision protecting the enforceability of cannabis contracts, consider incorporating the contracting entity in one of those states. In the same way that Delaware is the jurisdiction of choice for incorporating most companies, a state like California may on balance be the better choice for cannabis industry participants due to the legal recognition of commercial cannabis activity.
  4. Consider using an arbitration clause in commercial cannabis agreements. These clauses require parties to arbitrate disputes that may arise in connection with the agreement. As a general rule, arbitration is both more efficient and less expensive than litigation, and arbitrators are less likely than federal judges to refuse to enforce an agreement because it relates to federally illegal cannabis activity.

Conclusion

Notwithstanding expanding legalization at the state level, and general federal tolerance of the state-legal cannabis industry, federal courts remain a dangerous place for cannabis companies. If possible, cannabis companies should specify state court (or arbitration) for resolution of disputes in their contracts, and they should choose a state law that expressly excludes cannabis contracts from the illegality doctrine.


References

  1. Cannabis is legal for medical purposes in 33 states plus the District of Columbia; cannabis is legal for adults over 21 in 11 states plus the District of Columbia. Approximately 76.5% of the population of the United States lives in a state with some form of legal cannabis. See https://www.census.gov/data/tables/time-series/demo/popest/2010s-state-total.html#par_textimage_1574439295. This figure excludes Texas, which has a limited medical cannabis program as of this writing. However, if Texas is included, then over 85% of the population lives in a state with some form of legal cannabis.

Some CBD Companies Are Getting Millions in Federal Aid

By Aaron G. Biros
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As we’ve covered previously, the coronavirus pandemic has impacted the cannabis industry in the United States in a number of ways. Many states with legal medical and recreational cannabis markets have deemed those cannabis businesses essential, allowing them to remain open during statewide stay-at-home orders. Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to help small businesses through the economic downturn, directing trillions of dollars to the Small Business Administration (SBA) to administer emergency loans, paycheck protection programs and other financial assistance to small businesses affected by the coronavirus pandemic.

CV Sciences received $2.9 million in federal aid from the SBA

However, pretty much all state-legal medical and recreational cannabis businesses are ineligible to receive money from the SBA because cannabis is designated as a Schedule 1 controlled substance. While Rep. Earl Blumenauer (D-OR) and Rep. Ed Perlmutter (D-CO) introduced legislation recently that would allow cannabis businesses to become eligible for federal assistance, it is unclear if that bill will become law. Furthermore, even if it does pass, cannabis businesses will likely receive little or no help at all, as a vast majority of the funds administered by the SBA have already been spoken for.

Enter the hemp and CBD products market. Thanks to the 2018 Farm Bill, which removed cannabis containing less than 0.3% THC from the list of controlled substances, hemp and CBD companies are not exempt from the SBA’s relief efforts.

According to VICE News, The Trump Administration has handed out millions of dollars to companies that sell CBD products. When VICE News looked into some SEC filings, they found more than $4 million in federal loans that have been granted to CBD products companies.

They found three CBD companies that scored big with federal assistance:

Despite state-legal medical and recreational cannabis businesses being left to fend for themselves, these large online CBD products retailers have received more than $4 million in federal aid money.

Bill Introduced to Make Cannabis Businesses Eligible for COVID-19 Relief Funds

By Aaron G. Biros
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Rep. Earl Blumenauer (D-OR) and Rep. Ed Perlmutter (D-CO) introduced legislation this week that would allow cannabis businesses to become eligible for federal assistance in the wake of the coronavirus pandemic. The bill, called the Emergency Cannabis Small Business Health and Safety Act, would allow cannabis businesses, as well as business that provide services to cannabis businesses, to qualify for federal government relief funding through the Small Business Administration (SBA).

As of now, cannabis businesses and some companies that provide services to cannabis businesses are completely ineligible to receive any SBA funding, largely due to the Schedule I status of cannabis (excluding hemp). The SBA currently does not provide any financial assistance to small businesses “engaged in federally illegal activity,” which includes both the Paycheck Protection Program as well as the SBA’s Economic Injury Disaster Loan Program.

Last week, Rep. Blumenauer and more than 30 of his colleagues sent a letter to Speaker Nancy Pelosi and Minority Leader Kevin McCarthy, insisting that cannabis companies become eligible for federal funding. According to an NCIA press release, Senators Jacky Rosen (D-NV) and Ron Wyden (D-OR) sent a similar letter to Senate leadership earlier this week.

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Confront Poor Medicinal Cannabis Policies to Save Lives

By Dr. Jordan Zager
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For me, the opioid epidemic was never a theoretical crisis. The mounting lives lost to overdoses weren’t just numbers in news reports to me, but names. A high school lab partner, little league teammates, a cook at my first restaurant job and others in my hometown were lost to the epidemic. By the time I graduated high school, seven people in my life died due to complications arising from opioid use.

What’s not lost on me now, after earning my PhD in plant biochemistry and founding a startup focused on bringing consistency and scientific credibility to the cannabis industry, is how a stigma around medicinal cannabis seems like such a contributing factor in their deaths.

Cannabis, although fully illegal in only eight U.S. states, still qualifies as a Schedule 1 drug on the federal level, legally equivalent to LSD or heroin. Crystal methamphetamine and cocaine as Schedule 2 drugs have lower penalties and even have federally approved medical applications. This is where we’ve failed as a broader scientific community.

The reason is this: Medicinal cannabis produced from the same genetic replicates, but grown in separate locations, or even different seasons, will possess different bioactive compounds. In short, their effect on patients will be different depending on the various bioactive compounds produced by the plant. Prescription medications do not come with that major caveat.

Dr. Jordan Zager, CEO and co-founder of Dewey Scientific

There’s a quality assurance problem, compounded by a lack of science that’s been shackled by the criminalization of cannabis since 1937.

We do know that the primary benefits of cannabis are three-fold: First, there’s pain management, as 28 well conducted randomized clinical trials (RCTs) have documented that cannabinoid agents are effective analgesics for chronic pain. Second, while potentially psychologically addictive, so people may desire the “high” produced by cannabis, THC is not chemically addictive and does not create a biological desire for the drug, much like the craving induced by the absence of, say, cocaine or heroin has on regular users. And finally, patients cannot overdose.

As a scientific community, there are three things we need to start doing today to change the narrative around medicinal cannabis and help bring this safer alternative therapy to more people. We need to provide a larger body of evidence about the benefits. We need to drive increased consistency in cannabis products themselves. And we need to confront stigmas rooted in misinformation. The sooner we can succeed here, the sooner we can hope for a day when we see fewer devastating opioid overdoses and deaths.

I am driven by a vision for a future when people can have access to safe, trusted and consistent cannabis for their medical and recreational uses, and we as a society are able to fully realize the therapeutic benefits of this amazing plant. As scientists, my colleagues and I are committed to doing our part to bring the credibility and advancements that will help this vision become a reality.

Using tools rooted in science–including functional genomics and secondary metabolite pathway expression profiling–cultivators can learn to fully “know” the plants they grow and hone in on producing the same bioactive compounds and in the same ratios that show medicinal promise. Cultivators can learn the genetic effect that their facility has on their genetics and why those genetics lead to a different chemical profile when grown elsewhere. Together, we can identify the driving factors of what makes a variety help with whatever ailment you are trying to treat.

I’m buoyed by data that shows states that have legalized and provided access to recreational cannabis have between 20% and 35% fewer reported opioid deaths, and lower rates of opioid prescriptions. But more needs to be done. I plan to become a more vocal voice, advocate for sound science, consistency in medical cannabis and better access to natural plant-based medicines without the stigma of yesteryear.

The time has come for our policy makers to step up. We cannot afford to just be observers when the cost of remaining on the sideline is measured in lives.

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

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

CARES Act – Paycheck Protection Program 

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

What Does This Mean for Cannabis Businesses?

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

Cannabis Businesses Are Also Precluded from “Disaster” Assistance

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

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

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

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

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

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

Resolving the Issue

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

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

Soapbox

Where Does the FDA Stand on CBD?

By Nathan Libbey
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CBD Intro

Cannabidiol, or CBD, is one of over 1000 cannabinoids found in the Cannabis plant. CBD was identified as an isolate from Minnesota Hemp in the 1930s (Gururajan, 2016). Unlike many other cannabinoids and compounds found in cannabis flower, CBD is not adversely psychoactive. CBD, upon its discovery entered the field of vision for US regulators. There are two routes of regulation for the FDA under the 1938 Food, Drug, and Cosmetic Act – as a drug and as a food (Oconnor, 2018). The FDA has jurisdiction over drugs in a broad sense from border to border, intra and interstate. Their jurisdiction over food, however, only extends to food that crosses interstate lines. CBD therefore, because of potential food uses and medicinal uses, darkens what is already a muddy regulatory landscape.

CBD as a drug

FDAUnder the FD&C Act, a drug is defined as “any product, including a cannabis product (hemp or otherwise), that is marketed with a claim of therapeutic benefit, or with any other disease claim (Mayol, 2019). In 1995, Cannabidiol was identified as a possible solution to help combat epilepsy. Since 1995, studies have been performed to evaluate the effectiveness of CBD to treat epilepsy and lessen the frequency and severity of seizures. In 2018, the FDA approved the first cannabidiol drug, brand named Epidiolex (White, 2019). Drug approvals under the FDA jurisdiction require specific approval before they can be launched into market. That is, while Epidiolex has a specific approval, this approval does not lead to implicit approval of similar CBD drugs that treat other illnesses.

Bottom line: CBD is a recognized drug for use to treat epilepsy. Future use as a drug needs to be approved by the FDA.

CBD as an ingredient

What is seemingly the easiest route to market for CBD derived products is increasingly complicated. For ingredients, the easiest road to allowance in food is to be identified as Generally Recognized as Safe (GRAS). GRAS status is granted to ingredients that have been studied and deemed safe for human consumption by FDA-recognized experts. CBD, to date, is not GRAS. Without GRAS status, the FDA has similar mandates to CBD as a drug above. Ingredients must gain premarket approval prior to being offered for sale in interstate commerce.

Bottom line: CBD is not a recognized ingredient in food – it is neither premarket approved by the FDA nor accepted as generally safe for human consumption.

FDA Action

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

CBD product offerings continue to rise, ranging from CBD infused pillows to suppositories. While products containing CBD have increased in popularity, the FDA has stood at a distance until recently. The result of this lack of enforced policy has led to a scenario where upwards of 70% of all CBD products available online are mislabeled (Caroon, 2018).

This lack of enforcement and flexing of authority seems to be a thing of the past, however. In late November, the FDA sent a warning letter to 15 facilities that had engaged in interstate commerce with a CBD product. These warnings stemmed largely from non-compliant claims of health benefits, CBD use as a dietary supplement, and CBD used in food products offered for sale across state lines.

Until CBD is either identified as GRAS or a specific product gets preapproval, the current issues with CBD in food will remain. In the meantime, manufacturers must be aware of their ingredients, their claims, and the ramifications these may have on the FDA jurisdiction over their products.


References

Cohen, P., & Sharfstein, J. (2019). The opportunity of CBD — reforming the law. The New England Journal of Medicine, 381(4), 297-299.

Corroon, J., & Kight, R. (2018). Regulatory status of cannabidiol in the united states: A perspective. Cannabis and Cannabinoid Research, 3(1), 190-194. doi:http://dx.doi.org.ezproxy.neu.edu/10.1089/can.2018.0030

Gururajan, A., & Malone, D. (2016). Does cannabidiol have a role in the treatment of schizophrenia? Schizophrenia Research, 176(2-3), 281-290.

O’Connor, S. and Lietzan, E. (2018). The surprising reach of FDA regulation of cannabis, even after descheduling. American University Law Review 68, 823.

Mayal, S. and Throckmorton, D. (2019).  FDA Role in Regulation of Cannabis Products.  Retrieved from https://www.fda.gov/media/128156/download

White, C. (2019). A Review of Human Studies Assessing Cannabidiol’s (CBD) Therapeutic Actions and Potential. Journal of Clinical Pharmacology, 59(7), 923-934.

MORE Act Passes House Judiciary Committee

By Aaron G. Biros
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According to a press release published by the National Cannabis Industry Association (NCIA), the House Judiciary Committee approved the Marijuana Opportunity Reinvestment and Expungement (MORE) Act by a 24-10 vote. House Judiciary Committee Chairman Jerrold Nadler (D-NY) introduced The MORE Act (HR 2884), which now has 55 cosponsors. This marks the first time in history that a congressional committee approved a bill to legalize cannabis.

House Judiciary Committee Chairman Jerrold Nadler (Image credit: Ralph Alswang)

“Today’s vote marks a turning point for federal cannabis policy, and is truly a sign that prohibition’s days are numbered,” says Aaron Smith, executive director of NCIA. “Thanks to the diligent efforts of advocates and lawmakers from across the political spectrum, we’ve seen more progress in this Congress than ever before.”

A little bit of background on the bill: The MORE Act, if passed, would decriminalize cannabis completely on a federal level. It would remove it from the Controlled Substances Act, not reschedule it. If the bill were to pass, it would expunge all prior federal cannabis convictions. The bill provides for the establishment of the “Cannabis Justice Office,” which would develop a. program for reinvesting resources in those communities most affected by the war on drugs. That program would be funded by a 5% tax on cannabis commerce in states that have legal regulatory frameworks.

The bill also would allow the Small Business Administration to provide loans, grants and other support to cannabis-related businesses, as well as support state equity licensing programs. Through the bill, physicians in the Veteran Affairs system would be given permission to recommend medical cannabis to patients as well.

Aaron Smith, executive director of NCIA

“Supermajority public support for legalization, increasing recognition of the devastating impacts of prohibition on marginalized communities and people of color, and the undeniable success of state cannabis programs throughout the country are all helping to build momentum for comprehensive change in the foreseeable future,” says Smith.

According to NCIA, there was a recent amendment to the MORE Act that includes language from the Realizing Equitable & Sustainable Participation in Emerging Cannabis Trades (RESPECT) Resolution introduced by Rep. Barbara Lee (D-CA). That resolution is based on the white paper that NCIA’s Policy Council published back in March of 2019.

“There is still much work to be done, including the establishment of sound federal regulations for cannabis products,” says Smith. “This vote brings us one step closer to ending the disaster that is prohibition and repairing the harms it has caused while we continue the discussion in Congress about how to best regulate cannabis at the federal level. We urge lawmakers to move forward with this necessary bill without delay.”

NCIA Releases Guidelines for Federal Cannabis Regulation

By Aaron G. Biros
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On Tuesday, October 1, the National Cannabis Industry Association (NCIA) announced the release of their whitepaper, which provides guidance to the federal government on how cannabis could be regulated at the federal level. “The paper highlights the need to have a clearly defined regulatory approach and structure prepared as the nation moves closer to making cannabis legal for adults, and identifies the existing agencies best suited to regulate the wide variety of cannabis products available in state-regulated legal cannabis markets,” according to a press release.

To view the full white paper and see how the NCIA Policy Council envisions a federal regulatory framework, click here.

The whitepaper was released on October 1. On October 2, Andrew Kline, director of public policy at NCIA, delivered the keynote presentation at the Cannabis Quality Conference in Illinois. His keynote delved into a number of issues related to the progress that cannabis legalization has made on Capitol Hill.

Andrew Kline, at the Cannabis Quality Conference, discussing the NCIA white paper.

Importantly, Kline also discussed the white paper and its four-lane approach to regulating cannabis at the federal level. “We believe rescheduling is bad public policy,” Kline mentioned during his keynote. Their stance is that cannabis should be rescheduled and regulated in a couple of different approaches. “We believe cannabis should be a public health issue and the FDA and the Department of Treasury should regulate cannabis much like they do alcohol.” Kline went into great depth later in the talk, discussing the four-lane plan for regulation, a state of affairs for cannabis bills in Congress and how members of the cannabis industry can get involved. “Right now, there is an unsustainable federalism clash, with cannabis as an illegal schedule I narcotic, while 33 states have legalized it, which leaves a lot of confusion in the marketplace and little protections for consumers; and we need to fix it.”

Lane 1 refers to pharmaceutical drugs, such as Epidiolex, where cannabis drugs can go through the new drug approval process, giving the FDA ultimate regulatory authority in this area. Lane 2 applies to ingested, inhaled or topically applied products with THC. This generally applies to all products containing THC. This lane gives regulatory authority to the Alcohol, Tobacco, Tax and Trade Bureau (TTB), essentially regulating cannabis like alcohol or cigarettes. Lane 3 is for ingested and inhaled products with less than 0.3% THC. These would be regulated like dietary supplements and food ingredients, giving the FDA regulatory oversight here as well. Lane 4 applies only to topical products with less than 0.3% THC, regulating them much like the FDA does with cosmetic products.

The above summary is not thorough or detailed. We highly encourage our readers to read the full whitepaper to understand how cannabis could be regulated at the federal level and how the NCIA thinks the government should do so.

“As a country, we are starting to move past whether we should end cannabis prohibition, and need to put serious consideration into how we do that and what a post-legalization world looks like in terms of federal regulatory policy,” says Aaron Smith, executive director at NCIA, in a press release. “The recommendations outlined in this report build on successful methodologies by assigning regulatory duties to existing agencies, while avoiding restrictions that would not be appropriate for cannabis as well as some of the missteps that have occurred with other products. We look forward to working with Congress to overturn our outdated federal marijuana laws and begin implementing this structure to help ensure public safety and displace the illicit cannabis market.”

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Medical Cannabis in Georgia: Federal Policy Effects on State Industries

By Reggie Snyder
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Under the U.S. Drug Enforcement Administration’s (DEA) Controlled Substance Act (CSA), drugs are classified into five distinct schedules depending upon their acceptable medical use and their overall potential for abuse or dependency. The DEA currently lists cannabis as a Schedule I drug, which the CSA defines as drugs having no currently accepted medical use and a high potential for abuse. It appears, however, that the DEA may soon reconsider its current Schedule I classification of cannabis.

This article considers how the DEA’s potential reclassification of cannabis potentially could affect Georgia’s medical cannabis industry. Specifically, the article discusses: (1) how Georgia medical cannabis distributors would operate within this new regulatory framework; (2) how this change would affect registered Georgia patients who are either currently purchasing medical cannabis or are planning to do so; and (3) whether this reclassification would cause big pharmaceutical companies to enter Georgia’s medical cannabis market, and if so, how.

The DEA’s Reclassification of Cannabis Would Likely Affect the Regulatory Framework of Georgia’s Medical Cannabis Industry

On April 2, 2019, Georgia became the 34th U.S. state to legalize cannabis for medicinal use when the Georgia Legislature passed House Bill 324 (“HB 324”), which recently took effect on Monday, July 1, 2019. In Georgia, medical cannabis is defined as a “low-THC oil” that contains 5% or less of tetrahydrocannabinol (THC)—the psychoactive chemical in cannabis that causes a “high.”

Georgia State Flag

If the DEA reclassifies cannabis, the regulatory framework of Georgia’s medical cannabis industry under HB 324 would likely be affected. For instance, depending on how the DEA elects to reclassify cannabis, low-THC oil products manufactured and sold in Georgia could become subject to the U.S. Food and Drug Administration’s (FDA) costly, complicated and time-consuming drug approval process. Then, any low THC oil products that the FDA approves will be subject to federally mandated quality, efficacy and potency standards for FDA-approved drugs. Also, any federal standards that stem from the DEA’s reclassification of cannabis will trump any conflicting provisions in HB 324 or any other conflicting rules, regulations or procedures established by the Georgia Access to Medical Cannabis Commission (GAMCC), the seven member state agency responsible for promulgating and implementing the state-based rules, regulations and procedures necessary to produce and distribute low-THC oil in Georgia, and the Georgia State Board of Pharmacy (Pharmacy Board). However, even if the DEA reclassifies cannabis, the following state regulatory framework established by HB 324 will remain unaffected:

  • The GAMCC will likely continue to oversee the state’s medical cannabis industry.
  • The following two different types of dispensary licenses issued under the legislation will still likely remain: retail outlets (issued by the GAMCC) and pharmacies (issued by the Pharmacy Board).
  • Licensed dispensaries will still likely not be located within a 1,000-foot radius of a school or church, and licensed production facilities will still not be located within a 3,000-foot radius of a school or church.
  • Pharmacists who dispense low-THC oil will still likely have to review each registered patient’s information on the state’s Prescription Drug Monitoring Program (PDMP) database to confirm that they have been diagnosed with one or more of the 17 approved conditions and diseases. The legislation does not require retail outlet dispensaries to review patient information on the PDMP database or employ a pharmacist to dispense the drug.
  • Registered patients will still likely be prohibited from vaping low-THC oil or inhaling it by any other electronic means. The legislation does not expressly prohibit the use of other, non-electronic delivery methods of low THC oil such as pills or nasal spray.
  • All licensed dispensaries (and all licensed production companies) will still likely be subject to an “on-demand” inspection when requested by the Georgia Bureau of Investigation (GBI), the GAMCC, the four-member Medical Cannabis Commission Oversight Committee (MCCOC), or local law enforcement. The GAMCC and the Georgia Drugs and Narcotics Agency (GDNA) will also still likely be able to conduct one, annual inspection of dispensary locations. And, upon request, licensed dispensaries will still likely be required to immediately provide a sample of their low-THC oil for laboratory testing to the GBI, GAMCC, MCCOC, GDNA or local law enforcement.
  • All licensed dispensaries (and all licensed production facilities) will still likely be required to utilize a GAMCC-approved seed-to-sale tracking software.
  • All licensed dispensaries (and all licensed production companies) will still likely be prohibited from advertising or marketing their low-THC oil products to registered patients or the public. However, they will still likely be allowed to provide information about their products directly to physicians, and upon request, physicians will still likely be allowed to furnish the names of licensed dispensaries (and licensed production companies) to registered patients or their caregivers.

The DEA’s Reclassification of Cannabis Would Likely Affect the Availability of Low THC Oil

To date, approximately 9,500 Georgians are registered with the state’s Low-THC Registry, which allows them to purchase low-THC oil from licensed dispensaries. Since the legislation’s passage, the number of registered patients has increased significantly and continues to steadily rise. If the DEA reclassifies marijuana, this patient number will likely increase at an even faster rate because the public will likely perceive reclassification as an acknowledgement by the federal government that marijuana possesses health and medicinal benefits. If that occurs, statewide demand for low THC oil could quickly outstrip the supply.

Georgia Gov. Brian Kemp
Image: Georgia National Guard, Flickr

Under HB 324, the GAMCC is tasked with ensuring that the state has a sufficient number of retail outlet dispensaries across the state to meet patient demand but is limited to issuing only six production licenses. As the number of registered patients continues to grow, the GAMCC may be forced to recommend amendments to the statute allowing it to issue additional production licenses to increase the state’s supply of low THC oil, and depending on how many additional patients are added to the state’s Low-THC Registry, the GAMCC may also have to issue additional dispensary licenses to keep up with patient demand by relaxing the geographic limitations on locating dispensaries.

Thus, the DEA’s reclassification of cannabis likely would affect the amount of low THC oil available to registered patients in Georgia.

The DEA’s Reclassification of Cannabis Would Likely Cause Large Pharmaceutical Companies to Enter Georgia’s Medical Cannabis Market

Large pharmaceutical companies typically manufacture, market, sell and ship their products on a national and international scale. Given cannabis’ current status as a Schedule I drug under the CSA, these companies have largely steered clear of the burgeoning medical marijuana industry because of the inherent risk of violating federal law. If the DEA reclassifies cannabis, that risk will be diminished greatly, and the companies therefore will likely decide to enter the market by acquiring existing medical marijuana companies with established national or state-level medical cannabis brands.

If the DEA reclassifies cannabis, Georgia’s medical cannabis market will likely be affected in multiple ways.Depending on how the DEA reclassifies cannabis, low-THC oil in Georgia could be subject to stringent federal standards, including the FDA’s complex and expensive drug approval process. Georgia medical cannabis companies will likely not be accustomed to complying with such federal regulations. Large pharmaceutical companies, on the other hand, are very accustomed to dealing with the federal government, including FDA drug approval. So, if the DEA reclassifies marijuana, pharmaceutical companies will likely view reclassification as a tremendous opportunity to enter the Georgia market by leveraging their experience and institutional knowledge dealing with federal law to acquire or partner with a licensed Georgia cannabis company that has an established brand of low -HC oil.

Entering Georgia’s medical cannabis market won’t be easy, however, because HB 324 prohibits licensees from transferring their licenses for five years and requires that the original licensee be a Georgia business. But, HB 324 does not prohibit them from selling their businesses, which necessarily includes any licenses the business owns. Purchasing a licensed Georgia medical cannabis company requires payment of a production license business transfer fee. The fee for the first sale of a business with a Class 1 production license is $100,000 and the fee for a Class 2 license is $12,500. The fee for the second sale is $150,000 for a Class 1 production license, and $62,500 for a Class 2 license. The fee for the third and fourth sales is $200,000 for a Class 1 production license, and $112,500 for a Class 2 license.

Conclusion

If the DEA reclassifies cannabis, Georgia’s medical cannabis market will likely be affected in multiple ways. Specifically, depending on how the drug is reclassified, the regulatory framework for medical cannabis companies likely will change to include both state and federal requirements, potentially including the FDA’s complex drug approval process. Also, the amount of low-THC oil available for registered patients to purchase likely will be diminished precipitating the need for the GAMCC to modify the statute to allow for issuing additional production licenses and relaxing the geographic limitations on locating dispensaries. Finally, large pharmaceutical companies likely will attempt to enter Georgia’s medical cannabis market by purchasing existing, licensed Georgia companies that have established low-THC oil brands.