If You Believe the Proposed Rules, Regulators Want to Know EVERYTHING About YouOr: A Few Words on Disclosure Requirements

For those who are still scouring the proposed adult use rules, take a look at  the sheer volume of information required to be disclosed to the Department of Administrative and Financial Services (DAFS) by anyone seeking a license, and the Department’s claim to unlimited power to keep digging and digging and digging until “satisfied.”

Section 2.4 seems to be designed to require the disclosure of every contract and relationship and, the Department may argue, could even require you to disclose not only your contractors, but your contractors’ contractors. Remember the broad definition of “party of control” (discussed here), and add to that similarly broad definitions of “true party of interest” and “other interested parties.” An applicant must not only disclose all three categories of “parties” (which could be read to encompass everyone remotely involved with or interested in the business), but must provide “all requested information concerning financial and management associations and interests of other persons, parties of control, other interested parties or true parties of interest in the marijuana establishment” (Rule 2.4.2(B)(2)). 

These regulations take us at least two layers deep, but if the Department wants to keep digging even further, it can. Rule 2.5.1 allows the Department to “require additional information to verify that business structures, loans, franchise agreements, and other legal arrangements or anything else regarding true parties of interest, parties of control or other interested parties are not being used to circumvent ownership requirements.”

If these exacting disclosure requirements, combined with broad powers of investigation, remain in the final rules, this will cause headaches on both sides of the process. Applicants will need to be comfortable providing all sorts of sensitive information to regulators, but will also need to be sure their investors, contractors, etc., are comfortable also providing this information to regulators. This is probably something that businesses will want to address, if possible, at the time they enter into their business arrangements to make sure these issues don’t arise in the thick of the application process.

I expect that regulators, too, will find these regulations a bit too much when put into practice. They will need to sift through vast troves of contractual arrangements and other partnerships, many of which will require a particular expertise to decipher. Applicants who want to air on the side of compliance will be almost required to dump their entire filing cabinet on the Office of Marijuana Policy (OMP) just by virtue of the vague nature of the regulations. We’ll see if this language stays in the final rules, and we’ll see if it is relaxed over time through the practice of the Department.

The TSA Warms up to CBD in Words, but What About Deeds?

So the TSA claims to have changed its policy over the weekend to permit travelers to carry hemp-derived CBD products with them in flight. The TSA website has been updated to state that “products/medications that contain hemp-derived CBD or are approved by the FDA are legal as long as it is produced within the regulations defined by the law under the Agricultural Improvement Act of 2018.” 

At first read, this seems like oils, gummies, topicals, edibles – they’re all a go! Prepare for take off! But then we get down to enforcement and implementation, and I’m left scratching my head. The Agricultural Improvement Act of 2018 (or the 2018 Farm Bill, as it’s better known) does legalize hemp and hemp products, but only when grown under certain requirements, with state and/or federal approval. How on earth is a TSA agent going to know whether your CBD is derived from hemp that was legally grown in Kentucky or illegally grown in Texas? (Texas may be a bad example since hemp/CBD is about to be legalized there too, but you get the point.)

I for one doubt that TSA agents will be specially trained in the legality of CBD and hemp. The more likely scenario is that this change in TSA regulation is intended to accommodate FDA-approved Epidiliox, the first federally approved drug containing CBD. If any other form, it’s hard to know how TSA agents will treat CBD for the foreseeable future.

The Public Hearing on Proposed Adult Use Cannabis Rules Is Over, But the Public Comment Period Continues

The public hearing on the proposed adult use cannabis rules took place this morning at the Holiday Inn in Portland. The room was packed with a pretty diverse group of industry folks – banks, towns, and marijuana establishments large and small were all well-represented today. Comments were limited to three minutes per person, and the hearing took barely more than two hours total. Some of the reoccurring issues throughout the morning included: 

• Concerns that testing labs will be a serious bottleneck and drag on the adult use industry
• A number of smaller operators are worried that the rules are too comprehensive and "onerous" and will drive the industry underground
• Concerns that the rules will limit out-of-state investment and make it difficult to work with experts and consultants from other states
• Questions about confidentiality provisions in the rules and the degree that applicant info will be publicly available

The panel of regulators from Department of Administrative and Financial Services (DAFS) and the Office of Marijuana Policy (OMP) seemed to be diligently taking notes this morning, and we’ll have to wait and see how amenable they are to changing the rules as a result of this process. It’s a safe bet that written comments (due June 2) will be more impactful than today’s three-minute spiels, but how impactful, we don’t know. The OMP says that they plan to provisionally adopt final rules and send those rules to the legislature for approval in June. If approved by the legislature, then the rules would likely be scheduled to take effect 90 days later.

Adult Use Residency Rules Are Bad Business

If you saw our previous post on the residency requirements in the proposed adult use rules, you know that they severely restrict the ability of non-Maine residents to own equity, operate, or exert “more than minimal influence” over a Maine cannabis business. Putting aside the legality of the rules (and the legality of the residency requirement in the statute, which may also be questionable), these residency rules are bad business and will harm Maine’s burgeoning cannabis industry.

Maine cannabis companies do not qualify for bank loans or other traditional sources of financing. The typical way cannabis companies raise capital is through equity investment and, for many companies, at least some of their equity investors live out of state. It is also customary in the industry to have management or consulting agreements in place with companies from other states who have expertise in an area of processing, cultivation, or product development that your company does not have, with royalties paid to consultants in return for their time and expertise. In addition, many cannabis companies are beholden to private lenders for equipment loans or leases. The expansive residency rules go far beyond the statute’s mandate to have 51% of owners be Maine residents, and would arguably prohibit or severely restrict Maine cannabis companies from having or entering into any of the foregoing arrangements. And existing caregiver and dispensary operations may be required to rethink their ownership structures and contractual relationships before entering into the adult use market, as DHHS has historically allowed consulting and management agreements with out-of-state vendors.

The legislature created residency requirements focusing on ownership, rather than control, because this allows outside investment to come into Maine in certain forms so long as it does not upset the 51% residency requirement. This balance is necessary to the growth of Maine’s cannabis industry. Other states have taken restrictive approaches to outside investment when they launched their adult use cannabis markets, only to loosen these restrictions down the road. Oregon initially required 51% of a cannabis business to be owned by two-year residents but repealed the requirements in 2016. According to the Cannabis Association Executive Director, Amy Margolis, the residency requirement was a failure because it stifled investment and hurt Oregon business owners. Margolis said: “[f]or every five people who came into my office, three or four of them were looking for capital, and they couldn’t find it here in Oregon. It became clear that unless people could reach outside the state for investment money, we weren’t going to have a very successful market.” Colorado similarly loosened its residency requirements to allow for out-of-state investment. We shouldn’t disregard the hard lessons learned by other states.

Prohibiting out-of-state investments for cannabis companies will only result in reduced investment into the Maine economy and will result in Maine having an industry that’s less competitive than states with more lenient or no residency requirements. A less healthy industry means fewer jobs for Maine people, fewer choices for Maine consumers, and an industry susceptible to falling behind other states. This is why the legislature struck a balance and did not effectively prohibit outside investments in Maine cannabis businesses. The Office of Marijuana Policy Department of Administrative and Financial Services should not substitute its judgment for that of the legislature and slow the growth of Maine’s adult use marijuana industry before it even starts.

Federal Efforts to Relax, Just a Little Bit, About Marij(h)uana

Former Attorney General Jeff Sessions was famous for (among other things) his heavy opposition to marijuana legalization. His approach flew in the face of the dozens of states that have legalized medical and/or adult use marijuana, and seemed like it was leading toward a Wild West-style showdown. But Jeff Sessions is gone now, that excitement has dwindled for the time being, and Congress is even trying to take a baby step toward aligning federal law with legalization at the state level. 

The STATES (Strengthening the Tenth Amendment Through Entrusting States) Act is old news at this point, but it could be important and this is a new blog, so I’m going to briefly write about it anyway. This bill, currently before Congress, states that enforcement of the federal prohibition on marijuana “shall not apply to any person acting in compliance with State law relating to manufacture, production, possession, distribution, dispensation, administration, or delivery of marihuana.” (Side note: What’s up with the feds spelling "marijuana" with an "h"? If you know, please tell us!) 

The STATES Act is bipartisan, with co-sponsors including Senator Cory Gardner (R – Colorado) and Senator Elizabeth Warren (D – Massachusetts). And, in perhaps the most controversial moment of his short tenure as Attorney General, Bill Barr has offered at least tepid support for the legislation. So stay tuned.

What Is Going on in the World of Hemp?

Anyone involved in the hemp and CBD industry in Maine has been on a roller coaster ride this year. On December 20, 2018, hemp became (kind of) legal federally. But then the U.S. Food and Drug Administration said that non-approved food products containing CBD remained illegal. Then Maine regulators started telling retailers that they weren’t allowed to sell food products containing CBD, only to walk that position back. In response, the State Legislature passed LD 630, which legalizes the sale of food products containing CBD. Meanwhile, at the federal level, the FDA appears to be taking the position that virtually any CBD product meant for human consumption is illegal. 

Where does this leave us? Folks in Maine appear to be safe from enforcement for the time being, with the notable exception of those who make explicit claims that CBD has therapeutic benefits. If you’re growing, processing, or selling hemp and CBD, though, it’s unlikely that the feds are going to knock down your door tomorrow, and LD 630 is keeping the State at bay for now. But watch out, because rulemaking is coming, and we’re sure to see rules that aim to limit the import (and perhaps the export?) of CBD products, create strict labeling and testing standards, and limit the use of CBD in animal food. There will be more details on a lot of the specifics here in future posts, but the situation is certainly fluid. 

Bottom line: Legalities aside, it seems to be full speed ahead in Maine, with a few notable restrictions. Avoid making public claims of therapeutic benefits (like "CBD cures cancer"). Make sure that your product is clean, free of mold and pesticides, etc. and has a THC content below 0.3 percent. Do what you can to ensure your product is accurately labeled. (Check out this study, which concludes that 70 percent of CBD products are inaccurately labeled in terms of CBD content.) And be aware of quickly changing laws and rules at the state and federal level that could impact your business.

SAFE Banking Act Would Open the Door (Wider) to Cannabis Banking

The Secure and Fair Enforcement (SAFE) Banking Act of 2019 has garnered bipartisan support and may even have a shot at passage. It would not remove cannabis from Schedule I of the CSA, but it would prohibit federal bank regulators from penalizing financial institutions that provide services to state-legal cannabis businesses. Under current federal law, all proceeds of cannabis businesses are unlawful even if the company is operating in full compliance with state law. Federally chartered and insured financial institutions therefore risk sanctions, loss of access to payment systems, cancellation of deposit insurance, and even loss of charters for serving the cannabis industry.

Notably, the SAFE Banking Act would prohibit forfeiture of collateral taken as security for loans to cannabis companies and would prevent regulators from cancelling deposit insurance or otherwise sanctioning banks for providing products and services to state-law compliant cannabusinesses. Maine’s Bureau of Financial Institutions is apparently following the issue. On April 15, 2019, it, along with state banking supervisors from many other states, sent a letter to the leaders of the House and Senate urging the passage of legislation that would create a safe harbor for financial institutions to serve legal cannabis businesses. A group of 33 state attorneys general, including Maine Attorney General Aaron M. Frey, sent a letter on May 8, 2019, urging Congress to enact a federal banking safe harbor to help get cash off the streets and into banks where it belongs. The American Bankers Association also submitted a letter to the Senate in support of the SAFE Banking Act. 

Many people believe this law could be the final push that federally chartered banks need to feel comfortable providing services to the growing industry. If adopted, it would open access more broadly to checking accounts, credit cards, payment systems, payroll services, and loans, and may even help provide some relief to the access to capital issue that so many burgeoning cannabis businesses are presently struggling with.

What’s up with the Residency Requirements in the Proposed Adult Use Rules?

If you’ve looked at the proposed adult use rules, you’ve probably noticed some pretty expansive language limiting the ability of non-Mainers to play really any role in a Maine marijuana business. The Marijuana Legalization Act already requires that every officer, director, manager, and general partner of a marijuana business must be a Maine resident, and requires that “a majority of shares” or “other equity ownership interests” must be held by Maine residents (See 28-B MRS § 202(2)). Now the proposed rules go way beyond these restrictions in statute. 

The statute allows 49% of a business to be owned by non-Maine residents, for example. The rules, though, prohibit any out-of-state person or entity from exerting “more than minimal influence, through direct or indirect financial interest, over decisions regarding the operation of a marijuana establishment.” Whoa. To spin this out a bit: If I’m from Delaware and I own 20 percent of a Maine marijuana business, I’m 100 percent in compliance with the law. But wouldn’t a 20 percent owner necessarily exert “more than minimal influence” over decisions of the business? These rules seem to prohibit what the law allows, which makes the legality of the rules questionable. (More on this in forthcoming blog posts.)

Finally, I’ll just note that the proposed rules give the Office of Marijuana Policy Department of Administrative and Financial Services broad authority to dig, deeply, into the corporate structure and dealings of any applicant or licensed business. Check out rule 2.5.1, which allows the Department to “require additional information to verify that business structures, loans, franchise agreements, royalty agreements and other legal arrangements or anything else regarding true parties of interest, parties of control or other interested parties are not being used to circumvent ownership requirements.” Depending on the Department’s motivation, it can keep digging and digging and withhold a license until its satisfied that residency requirements, etc., are met.

(I am trying not to bury too many legal citations in this blog, to make it digestible, but to spell out the residency requirements explained above, check out section 2.3.1(B)(2) on page 15 of the proposed rules, which states that “no person or entity shall create a party of control to a marijuana establishment license consisting of less than a majority of residents.” Now, check out the definition of "party of control" on page 9 of the rules. This definition is frighteningly broad, as quoted above.)

Adult-use Rulemaking Is Underway in Maine – This Is Your Chance to Comment

After releasing pre-draft proposed rules for unofficial comment to gauge the initial reaction of the public, Maine's Office of Marijuana Policy (OMP) has now released the official no-longer-in-draft-form proposed rules for real comment. In other words, rulemaking has begun. With a public hearing scheduled for May 23 in Portland, and all public comment due by 5:00 pm on Sunday, June 2, perhaps we can expect rulemaking to be complete and these major substantive rules to be back in front of the Maine Legislature for approval sometime in June, during this session?

The OMP has conveniently posted all of the unofficial comments received in response to the draft rules, and their responses, online here. This provides some interesting insights, and some very predictable ones, into what the different stakeholders care about, and how the State plans to deal with these concerns. Also, kudos to the OMP for using Google Docs – very practical and mainstream for government!

Welcome to Our Blog (and, What We’re All About)

Welcome to the Cannabis Law and Policy Update! You can expect updates and commentary on a potpourri of marijuana and hemp happenings at the state and federal level. We will be primarily focused on the law (since we’re lawyers), but in the broadest sense. Think everything from court decisions to legislation to regulation to enforcement, with our reactions and some practical advice sprinkled throughout.

At the moment, every week seems to bring some significant development in the world of cannabis law and policy. Maine’s rulemaking process for adult use marijuana is heating up, which means that a (legal) adult use industry is just around the corner; the legality of hemp and CBD is a complete rollercoaster ride; the Legislature is continuing to fix and tinker with Maine’s medical and adult use marijuana laws; and the feds remain curmudgeons all around. We’ll be hitting on specific angles in this arena all the time, so check back frequently and subscribe.