Do the Proposed USDA Hemp Rules Threaten Our CBD Industry?

We’re hearing concerns from some farmers and CBD manufacturers that the proposed USDA hemp rules, released earlier this week, could make it much more difficult to provide high-quality CBD products in the U.S. The concern, as I can best articulate it since I’m not a farmer, is that full-spectrum CBD is largely available in plants that have a longer growth cycle, but these plants may also have THC levels above 0.3 percent by virtue of being in the ground for longer. Under current regulations, some farmers and producers have found ways to reduce the THC content following harvest, which allows them to sell full-spectrum CBD products with compliant THC levels. The new USDA regulations, though, require that the crop be tested for THC content 15 days prior to harvest. Any crops with an excess of THC will need to be discarded. This eliminates the possibility of growing for longer and eliminating excess THC after the fact.

I can’t speak personally to whether this perceived threat is real or overblown, but its one interesting example of the many consequences (intended or otherwise) the new federal regime will have on the industry.

One other, related, strain: Though hemp must have THC levels below 0.3 percent, these new rules create a couple of safe harbors. First, they recognize that testing labs have margins of error, and so if your crop tests at 0.34 percent THC, but the lab results have a 0.05 percent margin of error, then the crop is legal and you’re good to go. Second, if your crop is above 0.3 percent but below 0.5 percent THC, you can’t sell it, but you also won’t be prosecuted. These rules basically recognize the inherent uncertainty involved with growing hemp.

House Passes the SAFE Banking Act

On September 25, 2019, the Democrat-controlled U.S. House of Representatives passed the SAFE Banking Act by a vote of 321 in favor and 103 opposed. As we’ve previously posted, the Act would prohibit federal bank regulators from penalizing financial institutions that provide services to state-legal cannabis businesses and will result in greater access to financial services for the cannabis industry. Given the 91 Republicans who voted in favor, it appears that cannabis banking reform may be poised to become a bipartisan issue, although only time will tell.

The Act will now move on to the Republican-controlled Senate, where commentators agree that passage is far less certain. Historically, Senate Majority Leader Mitch McConnell has publicly opposed cannabis even while supporting the legalization of hemp. In any event, even if ultimately adopted, the protections granted to financial institutions under the SAFE Banking Act will only apply to state-law compliant cannabis customers, so it will continue to be vitally important for financial institutions to adopt robust marijuana-related business compliance policies and procedures and engage in continuous monitoring of cannabis customer compliance with relevant state laws.

The Non-Maine CBD Crackdown: What’s Become of It?

As we’ve previously discussed, Maine is claiming that, until September 19, food products sold in Maine cannot contain CBD grown elsewhere. So how is this policy working out in practice?

We’ve heard from several folks in the industry that the "crackdown" isn’t really materializing. Inspectors from Maine’s Department of Agriculture have been talking about this issue with some retailers in the state, but, in the instances we’ve heard about, inspectors have either told retailers that they’re not interested in checking to determine whether edibles for sale are in compliance, or the inspectors have provided a "verbal warning" to those selling non-Maine CBD products, without any explanation for what this actually means. 

I’d love to hear from anyone who has had any different experiences so far this month, but, so far, at least anecdotally, the State may be taking a conservative approach to enforcement.

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.

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.