USDA Hemp Regulations Analysis- Licensing Requirements
[Editor’s note: This article is the first in a series of articles on the Interim Rule issued by the USDA on October 29, 2019 regarding hemp production. This article, written by Kight Law attorney Philip Snow, addresses licensing requirements and issues. Philip brings his deep experience preparing competitive applications in Colorado to bear on the USDA’s new hemp licensing requirements. Click here to read our summary of the Rule’s key provisions and click here to read about whether certain provisions will provoke a crisis or create opportunities.-Rod Kight]
USDA Hemp Regulations Analysis- Licensing Requirements
On October 29, 2019, the United States Department of Agriculture (USDA) issued its Interim Final Rule (Rule) governing the Establishment of a Domestic Hemp Production Program. This rule outlines provisions for the USDA to approve plans submitted by States and Indian Tribes for the domestic production of hemp, and it also establishes a Federal plan for producers in States or territories of Indian Tribes that do not have their own USDA-approved plan. The Rule contains provisions related to testing level requirements, disposing of plants not meeting necessary requirements, licensing requirements, and ensuring compliance with the requirements of 7 CFR Part 990 (Part).
The 2018 Farm Bill removed the stipulation from the 2014 Farm Bill that it was necessary for industrial hemp producers to conduct their hemp related activities, including cultivation, pursuant to a Pilot Program. Being part of a Pilot Program, which involved being partnered with an institution of higher learning for purposes of conducting research, often imposed significant barriers to entry for parties interested in cultivating hemp. In some instances, and often as the result of the lack of political connections, these parties were unable to find universities willing to partner with them and were thus forced out of cultivating industrial hemp.
In light of the 2018 Farm Bill, the Rule abolishes the need for hemp producers to partner with an institution of higher learning. Instead, it offers those seeking to cultivate hemp the ability to apply for and receive a license from either the USDA or their relevant State or Tribal licensing authority. Interested parties must file an application with the USDA no sooner than thirty (30) days after the approval of the Rule because it is the intent of the USDA to allow States and Indian Tribes to submit their plans during this thirty (30) day window.
Finally, it is crucial to bear in mind that this analysis was conducted only reviewing the Rule set forth by the USDA today,October 29, 2019. This analysis does not include any review of a particular State or Indian Tribe’s hemp production plan. Each State or Indian Tribe, if it so desires, is required to submit their own version of this same plan, which can be more restrictive than the requirements set forth in the Rule.
Applications can be submitted at any time during the first year, however after the first year, applications will only be accepted between August 1 and October 31st. The term of the license is three (3) years, and each license expires on December 31st of the third year after it was granted. This licensing period allows hemp producers the ability to renew their licenses prior its expiration without experiencing a gap in licensing.
In order to satisfy the application requirements for a hemp producers license, the applicant must submit basic information including: name, address, telephone number, and email address. In the event the applicant represents a business entity, and that entity will be a producer, the application will require the full name of the business, address of the principal business location, full name and title of “key participants” on behalf of the business entity, email addresses, and the business’ EIN number.
Included in the application must be completed criminal history reports. If the application is for a business entity, a completed criminal history report must be provided for each “key participant.” For purposes of the USDA Hemp Producer application, “key participants” are defined as: a person or persons who have a direct or indirect financial interest in the entity producing hemp, such as an owner or partner in a partnership. “Key participants” also include persons in a corporate entity at the executive level, including the CEO, COO, and CFO. The reasoning behind this requirement is that “key participants” are likely to exercise some form of control over the hemp production, and the USDA considers those individuals responsible for ensuring compliance with regulatory requirements and thereby active participants in the Domestic Hemp Production Program.
“Key participants” must provide a criminal history report indicating they have not been convicted of a State or Federal felony related to a controlled substance for the ten (10) years prior to the date of when the report was completed.
The requirement that “key participants” be subject to a criminal history report is nothing new in the cannabis industry. For years, individuals exercising ownership or control in medical and adult-use marijuana markets have been subject to similar requirements. Regulators in those markets used this as a way to ensure the members of the industry were responsible and had not demonstrated a proclivity for criminal behavior, particularly as it related to controlled substances, in the recent past.
What is important to note about this requirement is that it no longer pertains solely to individuals seeking to produce hemp. This requirement touches and concerns various members of the hemp producing enterprise, not just the cultivators. For this reason, it is imperative that any business seeking to be licensed either as a USDA Hemp Producer or under a State or Tribal hemp production plan ensure all key participants can satisfy the requirements related to recent convictions regarding controlled substances felonies.
POST-LICENSURE AND COMPLIANCE
After satisfying the application requirements, and once they receive a license, hemp producers must be able to demonstrate ongoing compliance with standard cannabis industry requirements such as sampling and testing for delta-9 THC (THC). All sampling and testing must demonstrate compliance in that they test at or below the acceptable hemp THC levels. Testing shall be conducted using post-decarboxylation or other similarly reliable methods where total THC concentration level measured includes the potential to convert delta-9 tetrahydrocannabinolic acid (THCA) into THC. All testing for THC levels must be done in DEA registered laboratories.
Hemp producers must also demonstrate the ability to dispose of non-compliant product in the event any test concludes the THC levels exceed the acceptable hemp THC level. If a licensed producer is notified that they have produced cannabis exceeding the acceptable THC hemp level, the cannabis must be disposed of in accordance with the Controlled Substances Act (CSA) and DEA regulations as such product is marijuana and not hemp. In order to do this, the material must be collected for destruction by a person authorized under the CSA to handle marijuana, such as a DEA-registered reverse distributor, or a duly authorized Federal, State, or local law enforcement officer.
Ongoing compliance audits will take place with all licensed hemp producers. This allows the USDA to monitor the production of hemp in the United States, and it also allows the USDA the ability to issue corrective action plans for negligent violations. Negligent violations by a producer can lead to suspension or revocation of a producer’s license. In some instances, these audits will take the form of a ‘desk audit’ where the USDA requests records from a producer’s facility, or the audit may be a physical visit to the licensee’s facility.
The USDA mentions three types of negligent violations that would be discovered through its audits. They are: 1) failure to provide a legal description of the land on which the hemp is produced; 2) not obtaining a license before engaging in production; and 3) producing plants exceeding the acceptable hemp THC level. In the event the USDA determines a negligent violation has occurred, it will issue a Notice of Violation along with a Corrective Action Plan. The Corrective Action plan will prescribe a date by which the producer will correct the violation(s) and require the producer to periodically report to the USDA on its compliance with the plan for a period of not less than the next two calendar years. If a producer has negligently violated this Part three times in a five-year period, it will be ineligible to produce hemp for a period of five years from the date of its third violation.
Many cannabis businesses employ at least one person to be responsible for ensuring the operation is compliant with all relevant local, state, and Federal regulations. As the ability to operate hinges on remaining compliant, many companies hire people with extensive regulatory experience to run their compliance departments. These “compliance officers” attend to day-to-day operations while ensuring compliance with all monthly and annual reporting and recordkeeping requirements for the business. As many hemp regulations are borrowing or even evolving from marijuana regulations it is important to recognize that a business needs to dedicate personnel to maintaining compliance.
As it relates to compliance, the USDA mentions its ability to suspend a licensed issued pursuant to its hemp production plan. The USDA states that a license may be suspended if the USDA or its representative receives credible information that a licensee has either: 1) engaged in conduct violating a provision of this Part; or 2) failed to comply with a written order from the Agricultural Management Service related to a negligent violation. Any producer whose license has been suspended shall not produce hemp during the period of suspension and a suspended license may be restored after a waiting period of one year.
Finally, the USDA reserves the right to immediately revoke a license if the licensee: 1) pleads guilty to, or is convicted of, any felony related to a controlled substance; or 2) made any materially false statement with regard to this Rule to the USDA or its representatives with a culpable mental state greater than negligence; or 3) was found to be growing cannabis exceeding the acceptable hemp THC level with a culpable mental state greater than negligence or negligently violated the provision of this Rule three times in five years.
By promulgating its Rule, the USDA is creating a minimal licensing framework for hemp producers across the country. As mentioned above, the requirements in the Rule only pertain to States or Indian Tribes that do not want to have primary regulatory authority over the production of hemp in that State or territory of that Indian Tribe. This Rule serves as a baseline and it contains provisions that must be included in any plan submitted by a State or Indian Tribe intending on having primary regulatory authority over hemp production. Whether it is pursuant to a State or Indian Tribe plan or the USDA’s plan, there are certain requirements all hemp producers must meet. This analysis includes licensing requirements, compliance requirements, procedures for disposing of non-compliant plants, and procedures for handling violations, but it is not an exhaustive list.
For additional information regarding the USDA’s Rule, or for help in understanding the rules and regulations governing hemp production in your State, please feel free to contact the hemp attorneys at Kight Law Office.
October 29, 2019
This post was written by Kight on Cannabis attorney Philip Snow. Kight on Cannabis is a law firm founded by attorney Rod Kight that represents legal cannabis businesses. You can contact us by clicking here.