Part 5: Hemp & CBD

See Hemp & CBD Panel here.

With the cannabis space continuing its significant pace of growth, the industry has witnessed new players enter the arena: hemp and cannabidiol (“CBD”). The demand for hemp and CBD has skyrocketed in recreational, industrial, and retail spaces, however, the Food and Drug Administration (“FDA”) has not kept up with this influx despite its prohibition of the sale of CBD. Attendees of the Third Annual State of the Cannabis Industry Conference had the opportunity to learn from the experts during our Hemp and CBD panel. Among other things, our panelists discussed future FDA enforcement actions and what possibility there is, if any, of regulations loosening.

Moderated by Scott Moskol, co-chair of Burns & Levinson’s Cannabis Business Advisory Practice, the panel opened with a brief discussion of the lack of standardization in the CBD industry despite the ubiquity of CBD products. Kevin Pilarski, the Chief Commercial Officer of Revolution Enterprises, underscored the need for independent third-party testing of CBD. With respect to compliance, Mr. Pilarski explained that until the industry standardizes a testing requirement it is difficult for hemp purchasers to know what they are getting. Such uncertainty threatens the overall stability of the CBD market.

Our panel then continued on to the fundamental yet complex question: What is the legality of CBD? John Serio, the chair of Burns & Levinson’s Food & Drug Law practice, explained that the FDA’s position is that CBD is a drug. In other words, CBD is legal but highly regulated. Mr. Serio continued to expand on this view, explaining that the FDA’s position is clear through its warning letters to various CBD retailers.[1] Moreover, Mr. Serio also mentioned that CBD businesses should be aware of the greater regulatory oversight from federal and state agencies. As previously noted, in recent months the Federal Trade Commission (“FTC”) has released several warning letters to businesses selling CBD products. These letters concern the FTC’s review of potential violations of the Federal Trade Commission Act of 1914, §§ 41-58, as amended, (the “FTC Act”) made on websites and other marketing materials of CBD-related businesses. In the warning letters, the FTC expressed concerns with companies “making false or unsubstantiated advertising claims about the health benefits of products containing cannabidiol (CBD).” The FTC notes that these advertising claims cited by the FTC potentially violate Section 5(a) of the FTC Act, which prohibits unfair or deceptive advertising.[2]

The panel also had the opportunity to discuss how the current state of hemp and CBD regulation has impacted ancillary industries; namely, the banking and financial services sector. Katrina Skinner, the President of Safe Harbor Services, elaborated on the difficulty of providing banking services to hemp operators. Safe Harbor Services is a credit union service organization wholly owned by Partner Colorado Credit Union. Partner Colorado Credit Union, through its Safe Harbor Private Banking division, created the Safe Harbor program to provide traditional financial services cannabis-related businesses.

Nonetheless, Ms. Skinner explained that the lack of regulatory guidance and industry standards have presented a significant challenge for lenders. From a lender’s perspective, it is difficult to ascertain whether hemp has been properly sourced and tested. Moreover, lenders are bound by anti-money laundering statutes that prohibit banking institutions from accepting proceeds derived from illicit operations. With publication, the USDA’s[3] of the final interim rule on hemp production, banking institutions, and other lenders may now develop guidance regarding deposits derived from hemp operations. Without these regulations, many in the financial services industry were unwilling to take the risk of accepting deposits or lending money to hemp businesses.

The regulatory framework surrounding hemp and CBD can be, and indeed is, particularly confusing. Not only did our panelists do a wonderful job of deconstructing the regulatory landscape, but they also presented new questions and areas of discussion to our audience – whether you are a potential investor to industry insiders their expertise is indispensable.

[1] http://www.cannabusinessadvisory.com/2019/08/01/fda-warning-letter-to-curaleaf-inc/

[2] http://www.cannabusinessadvisory.com/2019/10/09/got-reliable-and-scientific-evidence-on-cbd-a-close-look-into-the-ftcs-stance-on-cbd-related-health-claims-and-response-from-industry-participants/

[3] https://www.federalregister.gov/documents/2019/10/31/2019-23749/establishment-of-a-domestic-hemp-production-program