By Bethany Ace and Stephanie Marshall
Many people in or interested in the hemp industry were excited with the news that, on December 20, 2018, the Agricultural Improvement Act of 2018 (the “2018 Farm Bill”) was signed into law. But many questions remain as to how the new law will affect business and legal needs.
We noted in a previous blog post that hemp has been removed as a regulated drug from the Controlled Substances Act (CSA), legalizing the plant at the federal level. But decriminalization is not the end of the analysis. Farmers, businesses and investors should consider the following and consult with legal counsel and tax advisors accordingly:
- Tax Implications: Because hemp is completely out of the CSA schedules, it is no longer subject to Internal Revenue Code 280E. This could have drastic impacts on the taxation of hemp-related companies. Hemp-related companies may wish to reevaluate their business structure and tax elections, which may be have been chosen largely to address 280E tax and risk management concerns
- Potential New Investors/Securities Laws: Now that hemp is decriminalized, wary investors may view hemp as a safer investment and look to invest in hemp companies. This could be a great opportunity, but these investments will need to comply with federal securities laws and state blue sky laws and regulations, or exceptions to these laws and regulations.
- State Laws and Regulations Still Apply: Notwithstanding legalization at the federal law, hemp businesses still must comply with state laws and regulations. States that have adopted regulations governing hemp production, manufacturing, and sales remain in effect. Those looking to enter the hemp industry need to understand their state’s laws and regulations and obtain all necessary approvals and permits.
- New Federal Regulations on the Horizon: Under the 2018 Farm Bill, the United States Department of Agriculture (USDA) was instructed to come up with national hemp regulations “as expeditiously as practicable.” There is no specific time given and with the current federal shutdown, the timetable for those regulations is even more uncertain. But regulations will come and compliance will be mandatory (unless the USDA approves a state regulatory plan and you operate within that state). Those who monitor the progress of these regulations and plan ahead for compliance will likely mitigate downtime and losses from having to change their practices when the new regulations take effect.
Keep in mind that THC limits will be a critical part of compliance in the federal regulatory system and federally approved state regulatory systems (see below). Plants exceeding THC levels will still need to be disposed of and grows who repeatedly exceed THC levels could lose the right to grow and under certain circumstances could get reported to state law enforcement for criminal penalties.
- New State Regulations Could be Enacted: States may submit hemp-growing regulatory plans to the USDA for federal approval. These regulations should cover and include THC-level testing, recordkeeping of approved grow sites, and plans for “effective disposal” of plants exceeding THC levels. Again, there’s no deadline for states to file their new regulations with the federal government. For those states that already have an industrial hemp program, each will have to reevaluate its program and determine whether to submit it to the USDA for approval. This means that the current regulations in a state may change and hemp participants should monitor their state’s regulatory program for announcements of upcoming changes.
- Intellectual Property: There is arguably a huge potential for federal protection of intellectual property in the hemp industry. Trademarks cannot be obtained on goods and services that are not legal in interstate commerce, largely making goods and services illegal under the CSA ineligible for trademark protection (though trademarks can be obtained for marks not directly related to CSA-prohibited activities, such as retail merchandise). Now that hemp is off the CSA, federal trademarks should be available for hemp and a broader spectrum of hemp-related goods and services.
- CBD: Adding CBD into a product for human consumption or use (food, drugs, and cosmetics) will fall under the jurisdiction of the Food and Drug Administration (FDA). The FDA has recently confirmed that CBD is still not allowed in food but is planning to look at its rules again. See article here. FDA regulations could mirror existing regulations for the type of products without CBD (i.e., cosmetic regulations), so those regulations could be used as a guide to begin preparing for FDA regulation of CBD products.
- Additional Risk Management: Although it was a huge step forward, the 2018 Farm Bill was not a comprehensive legislative act and does not clearly outline what the federal government will require for all aspects of the industry. For example, the Farm Bill offers no guidance on regulating hemp manufacturing or processing. Interstate commerce is guaranteed for hemp plants and “hemp products” but does not resolve how the interstate commerce protection affects FDA’s jurisdiction (and right to limit) CBD use in foods, drugs, and cosmetics.
In short, the legalization of hemp at the federal level is but a starting place for those in the industry. Review and potential revision of corporate structures in light of tax implications, attraction of investors in compliance with securities laws, consideration of federal trademark opportunities and monitoring of a host of new federal and state regulations that will likely be developed and implemented in the coming months are all pieces of a successful business plan that involves hemp, CBD and/or other hemp-related products. We will continue to track these developments in future blog posts. Don’t miss the latest news! Subscribe to our newsletter.
Note that this article is for general informational purposes only and is not intended for legal advice. Reading of this article does not create an attorney-client relationship. We cannot and do not offer any warranties or guarantees about anything said in this article. It contains a basic summary of a detailed and nuanced legal position that we hold and was arrived at for our own purposes with our lawyer. If you have any questions or concerns you should consult with an attorney.