The Conundrum of Encouraging the Growth of Hemp and Marijuana, While Avoiding Cross-Contamination

Mjbizdaily.com reported earlier this week that the State of Washington has eliminated a law requiring a 4-mile buffer between outdoor marijuana and hemp farms. This requirement was a substantial barrier to the state’s hemp industry, and its elimination will open significant tracts to potential hemp farming in Washington. But the whole point of this buffer, originally, was to prevent cross-pollination. Imagine that your outdoor marijuana grow is suddenly pollinated by hemp seeds from next door. This causes logistical issues and legal issues, and could also significantly devalue your crop. 

This controversy highlights the balancing act that every state is dealing with. Too much marijuana grow can lead to oversupply, which can cause the price per pound to fall precipitously. Cross-pollination with hemp farms can also decrease the value of a marijuana crop. And cross-pollination in the other direction can result in inadvertent illegal grows. But a lot of states (including Maine) also see potential in the hemp industry, and don’t want to discourage it. The State of Maine even seems to be taking steps to prop up our hemp industry by requiring that Maine hemp be used to create CBD for foods. So where’s the balance between preventing cross-pollination while encouraging hemp growers? 

As may be too often the case, I’m gonna stop with that question for now. Definitely send me a note though if you have any thoughts on this dilemma.

Maine Takes Another Step Toward Becoming a Marijuana Tourism Destination—But Are We Moving Fast Enough?

Maine’s cannabis tourism program might be hitting its stride. The Office of Marijuana Policy has reached “instant reciprocity” arrangements with 23 states which allow medical cannabis patients from those states to also use their patient cards in Maine. Here’s the announcement from the OMP. Consistent with state law, the visiting qualifying patient can purchase up to 2.5 oz of medical marijuana and marijuana products every 15 days while visiting Maine. 

Adult use tourism will obviously be of a different cloth, since the hope is that it will attract consumers who can’t legally purchase marijuana products in their home state. There is some evidence that Massachusetts’ rec program is attracting New Yorkers, and the hope is that Maine’s program will bring folks from New Hampshire and New York, etc. Of course, in an industry where there’s a massive "first mover" advantage, it’s not clear that Maine will really open the floodgates to adult use marijuana in time to reap many of the benefits that earlier states are seeing.

Is This the Beginning of Another Maine Crackdown on CBD?

Maine regulators are going after CBD food products again, it appears. Inspectors from the Department of Agriculture, Conservation and Forestry have been handing out the letter pasted below to retailers and others in Maine over the past week. According to these "guidelines," the State is interpreting LD 630 to require that any CBD edibles contain CBD derived from Maine-grown hemp. Given the language in LD 630, this approach seems like it could cause more problems than it prevents, and could be putting the state on the fast track to litigation. Especially since the State is promising to begin enforcing this new policy on August 1, less than three weeks from now.

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.

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.

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!