An Open Letter to Industrial Hemp and CBD Businesses

The US industrial hemp industry continues to gain momentum. I have personally witnessed a significant increase in business development, government action, and public awareness, particularly with respect to three categories of hemp products: (1) raw and pelletized hemp, (2) processed hemp extract, and (3) cannabidiol (CBD). A number of states have enacted industrial hemp legislation, the most recent of which is Indiana. It passed an industrial hemp bill earlier this month. Notably, the bill specifically addresses CBD. This is a telling development given that the Indiana Attorney General issued a flawed statement on CBD four months ago.

In this letter I will address briefly the three sectors above and conclude with a short message about the importance of complying with general business laws and formalities.

First, raw and pelletized industrial hemp will be a huge industry this year. In particular, I foresee growing demand for industrial hemp to be sold both interstate and into the world market. The legal status of raw industrial hemp is clear: it is lawful throughout the country at the federal level and at the state level in approximately two-thirds (⅔) of the states. It is also legal in many countries. Although the US currently imports more hemp than it exports, I expect that to change within the next several years.

In order to ensure that your hemp sale is lawful and not inadvertently an illegal interstate (or international) marijuana sale you’ll need to make sure that it is handled properly. There are several considerations. Arguably the most important one is ensuring that you have the proper “chain of title” (or “chain of custody”) proving that your hemp is lawful. In other words, you should have documentary evidence of the hemp’s provenance showing that it was cultivated pursuant to a state’s pilot program and that it passed the “THC test” by not having delta-9 THC concentrations exceeding 0.3%. Each state has different forms, certifications, licenses, and procedures so it is important for the chain of title to follow the guidelines of the state in which the hemp was grown.

Second, the “full spectrum” hemp extract market is exploding. In many respects, selling hemp extracts to other states and countries is similar to selling raw hemp. The primary difference is that extracts are often processed and packaged for use by end-user consumers. For this reason, topical and consumable hemp extract products require even more legal diligence than the sale of raw hemp. Some states, such as Colorado and Oregon, are forging ahead and creating revised regulations designed specifically to regulate hemp extracts intended for the consumer market. These new laws and regulations go beyond the basic industrial hemp cultivation laws currently in place in most states and will likely be copied by other states in the coming years.

While I’m speaking about the “next wave” of state laws and regulations it is worth mentioning that you may now sell your industrial hemp consumer products into the Oregon adult-use marijuana market provided that you comply with its specific regulations. I fully expect other marijuana state programs to follow suit. This is a positive development, but one that will require more diligence. This new wave of coming regulations will certainly weed out hemp extract businesses that do not take the time to stay compliant with evolving state laws.

Third, CBD has received a lot of attention this year, both positive and negative. It is likely to receive much more. Unlike raw hemp or even hemp extracts, CBD is a specific chemical compound. Although it can be derived from hemp, it is different in many respects from both raw hemp and “full spectrum” hemp extracts and is thus subject to more scrutiny. As with raw hemp and hemp extracts, CBD derived from hemp is lawful if its source (such as hemp) is legal and illegal if its source (such as marijuana) is illegal. This is called the “Source Rule”: CBD’s legal status depends on its source. An in-depth discussion of CBD’s legal status is beyond the scope of this letter, but the source of CBD is the threshold issue for any inquiry.

The DEA has been less than helpful with respect to CBD. State law enforcement officers, and even hemp agriculture commissioners, generally have a very poor understanding of its legal status. You may be aware of a recent raid in Tennessee called “Operation Candy Crush”, in which over 20 C-stores carrying CBD products were raided, shut down, and their owners charged with felonies. Fortunately, the stores were reopened by the Court and all charges eventually dropped when prosecutors could not prove that the CBD contained in the seized products was derived from unlawful marijuana, rather than lawful hemp. This was a good development, but it underscored the fact that CBD is widely misunderstood. The Tennessee Sheriff even stated at a press conference that people bought CBD “to get high”. Had he only read the World Health Organization’s preliminary report on CBD, released last Fall, before making his arrests he would have known that this isn’t true.

Along a similar vein, I have seen confusion in the market with respect to natural, safe, and legal CBD products and products containing synthetic, harmful, illegal cannabinoids such as Spice and K2. This is part of what is going on with a recent bust in my home state of North Carolina. I encourage you to do everything you can to separate yourself from these products and to educate the public about them. Any association with them will harm you and the hemp industry as a whole.

The FDA regulates CBD that is intended to be ingested or applied topically and is actively watching this market. It may enact new regulations and/or make some pronouncements this year if the NDA for Epidiolex, a CBD-based medication by GW Pharmaceuticals, is approved. Although most people tend to focus on the DEA, which does not regulate industrial hemp or other non-scheduled substances, it is more important to stay aware of developments with the FDA.

Finally, and as a short addendum to all three of these topics, I want to stress the importance of staying on top of all customary business law matters, including utilizing the proper legal entity (such as an INC or LLC), filing tax returns, paying applicable state sales and use taxes, abiding by tax and other laws regarding employees, not violating trademarks, and otherwise doing business “by the book” such as using formal legal contracts over handshake deals. The hemp and CBD industry is legitimate and should be treated as such, both for your specific business and the industry as a whole.

This article was originally published in a slightly different form in the Cannabis Law Report. Thanks to Sean Hocking, John Taylor, and the entire CLR group for their excellent journalism about the cannabis industry.

Rod Kight is a lawyer based in Asheville, NC. He is licensed in North Carolina and Oregon and represents legal cannabis businesses. You can contact him by clicking here.