CBDs May Not Be As Legal As You Think

UPDATE: Since the passage of the 2018 Farm Bill, industrial hemp is now legal to cultivate, provided it is cultivated in compliance with a state or tribal regulatory program. Hemp has also been removed from the Controlled Substances Act and from the definition of marijuana. That being said, the status of CBDs derived from hemp is still in doubt. And to be specific, as stated below, it is illegal to sell consumable products that contain CBDs (for example, seltzer water, beer, wine, food) or make health claims about products containing CBDs. In addition, due to the uncertain status of CBDs, companies that sell CBD products may have difficulty finding banking services.

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There may be regulations on how CBDs can be sold. For example, Indiana has a very strict product labelling law. CBD products must bear a QR code, which when scanned directs the consumer to detailed information, including the product’s batch number, expiration date, ingredients, and independent lab analysis. CBD products sourced from another state with a Farm Bill program may not be packaged properly for sale in Indiana. Retailers who fail to comply face fines of up to $10,000, and could lose their retail license.

Another state-specific wrinkle is California. While medical and adult-use marijuana are now legal in California, the state Department of Public Health has ruled that CBDs, even if sourced from industrial hemp, cannot be added to any food or beverage product, whether for human or pet consumption. So forget about that CBD beer, or chewing gum.

Note, also, that the federal Food and Drug Administration (FDA) has taken the position that it is illegal to “introduce or deliver for introduction into interstate commerce any food (including any animal food or feed) to which THC or CBD has been added.” Consequently, while the DEA may not pursue sellers of food/beverage products containing CBDs, the FDA is another matter. The FDA also has sent cease and desist letters to CBD manufacturers and sellers that have made medical claims about CBD products.

If you’re confused, don’t feel bad. It’s very confusing. The bottom line is, if you are going to be involved in this industry, whether legal cannabis or CBDs, make sure you do your homework.

Legal Cannabis and Immigration

This is my very first repost of another lawyer’s material. I’m sharing a blog posting by Christopher Pogue, an immigration attorney, on the intersection of legal cannabis and immigration law, particular with respect to immigration from Canada:

U.S. Customs and Border Protection (CBP) enforces the laws of the United States and U.S. laws will not change following Canada’s legalization of marijuana. Requirements for international travelers wishing to enter the United States are governed by and conducted in accordance with U.S. Federal Law, which supersedes state laws.

Although medical and recreational marijuana may be legal in some U.S. States and Canada, the sale, possession, production and distribution of marijuana or the facilitation of the aforementioned remain illegal under U.S. Federal Law.

Consequently, crossing the border or arriving at a U.S. port of entry in violation of this law may result in denied admission, seizure, fines, and apprehension.

Generally, any arriving alien who is determined to be a drug abuser or addict, or who is convicted of, admits having committed, or admits committing, acts which constitute the essential elements of a violation of (or an attempt or conspiracy to violate) any law or regulation of a State, the United States, or a foreign country relating to a controlled substance, is inadmissible to the United States.

A Canadian citizen working in or facilitating the proliferation of the legal marijuana industry in Canada, coming to the U.S. for reasons unrelated to the marijuana industry will generally be admissible to the U.S.

HOWEVER, if a traveler is found to be coming to the U.S. for reason related to the marijuana industry, they may be deemed inadmissible.

Reposted with permission from Christopher Pogue

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One of the points Attorney Pogue stressed to me today is this – if someone involved in the legal cannabis industry has an immediate family member (parent, spouse, child) or member of the household who is not a US citizen, their immigration status could be in jeopardy. When applying for residency in the US, the non-citizen is at serious risk because even if cannabis is legal under certain states’ laws, it remains illegal at the federal level. Consequently, if you are a stockholder, director, officer, manager, or employee in a legal cannabis business, or are contemplating being involved, and you have an immediate family member or household member that is not a US citizen, it is recommended that you raise this issue with an attorney.

Trump Makes Commitment to Protect State-Legal Cannabis Programs

Senator Cory Gardner (R-Colorado) released a statement on April 13 that he has obtained a commitment from President Trump that Department of Justice will not target Colorado’s (and presumably other states’) legal recreational marijuana industry. As you may recall, Attorney General Jeff Sessions issued a memorandum in January that effectively rescinded the Cole Memorandum, and gave individual US Attorneys the discretion to pursue state-legalized recreational marijuana businesses. Pursuant to the Rohrabacher-Blumenauer Amendment, the federal government is already restricted from devoting resources to prosecute medical marijuana businesses that are in compliance with state law. In response, Senator Gardner put a senatorial hold on approximately 20 of Trump’s Justice Department nominees, freezing the approval process for these nominees.

According to Senator Gardner, in a phone call last week President Trump assured Gardner that the Colorado recreational marijuana industry would not be targeted. Based on this assurance, Senator Gardner is allowing the DOJ nominees to move forward. Also, Senator Gardner stated that “President Trump has assured me that he will support a federalism-based legislative solution to fix this states’ rights issue once and for all.” Senator Gardner indicated that he is working with colleagues on a bipartisan legislative solution to embody this notion of federal non-interference with states that have legalized marijuana.

Whether Trump will follow through with his assurances remains to be seen, as he has a pattern for reversing positions and commitments. Also, this commitment may be nothing more than Trump expressing his continuing displeasure with Attorney General Sessions.

New Cannabis Business Law Practice

We are pleased to announce that we have added a new Cannabis Business Law Practice to our firm. Now that Ohio has legalized the sale of medical cannabis, and California has legalized adult-use and medical cannabis, we have extended our service offerings to this fast-growing segment. Companies and entrepreneurs operating in the cannabis market need legal counsel with the right kind of experience in the business and corporate law issues they face. We already have been representing cannabis companies at various levels of the value chain for several months, including cultivators, manufacturers, processors, and retailers. This hands-on experience gives us the industry-specific insights and knowledge that cannabis companies need.

Our focus on transactional business and corporate law work for startups and small businesses translates closely to this new area of law. Here are some of the areas in which we can help your cannabis business:

  • Entity formation, including choice of entity (LLC vs. corporation)
  • Business financing through private placements
  • Contracts with vendors, suppliers, downstream customers, etc.
  • Commercial lease negotiation for industrial and retail space

If you would like to discuss your cannabis industry business, please contact Paul H. Spitz at phs@spitzbusinesslaw.com.

Please note that the cultivation, distribution, and possession of cannabis for any purpose is still illegal under federal law. We can only advise you with respect to compliance with Ohio’s medical cannabis program, and California’s medical and adult-use cannabis programs.

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Disclosing Risks to Investors In Your Cannabis Business

Medical marijuana is now legal in Ohio, and both adult-use and medical marijuana are now legal in California. Many companies that have received or are seeking licenses for cultivation, processing, and retailing of cannabis products, are also trying to raise funding from various sources. Because cannabis is still a Schedule I substance under the federal Controlled Substances Act (the “CSA”), it is highly unlikely that banks will lend money to finance these operations. SBA loans are certainly off the table. In addition, a public offering of stock, which would have to go through the SEC, is off the table. That leaves entrepreneurs in the cannabis arena to seek out private funding. There is already a fairly large group of angel and venture capital investors that focus specifically on the cannabis industry, and that have developed expertise through investments in Colorado, California, Washington, and other states.

Whether you are dealing with experienced cannabis-industry investors or first-timers, it is crucial to clearly disclose the unique risk factors that apply to the cannabis industry. By making such disclosures, companies can protect themselves against potential liability to investors when trouble strikes. The following is an overview of some major risk factors that should be disclosed to potential investors in a cannabis company.

Cannabis Is Still Illegal Under Federal Law. Under the CSA, cannabis is considered a Schedule I substance, and therefore the cultivation, manufacture, processing, possession, and distribution of cannabis products is illegal under federal law. Regardless of how obvious this point may be, any company investment documents must disclose this fact. Company officers, directors, and investors are still potentially exposed to criminal liability under federal law, regardless of whether medical and/or adult-use cannabis is legal under state law. This criminal liability includes the CSA, money laundering statutes, as well as RICO — the Racketeer-Influenced and Corrupt Organizations Act.

Prior to this year, the Justice Department, following the “Cole Memorandum” guidance, took a hands-off approach so long as cannabis companies were in compliance with state laws. However, Attorney General Jeff Sessions rescinded the Cole Memorandum in January 2018, along with various other policies relating to state-legal cannabis (more on this below). As a result, the individual US Attorneys across the country are free to enforce or not enforce the CSA against cannabis companies, as they see fit. Given that there are 94 US Attorneys in various districts, there is a vast potential for widely different treatments.

Difficulty Obtaining Banking Services. Cannabis companies in states where medical and/or adult-use cannabis is legal have had great difficulty in finding banking and credit card services. A company will open a bank account, only to have that account shut down shortly afterward when the bank realizes the money being deposited is from a cannabis company. Some companies aren’t making it easy for themselves, by having cute but obvious names. Even for more discreet companies, deposits of cash have the distinctive reek of marijuana. Cannabis companies also have great difficulty obtaining credit-card processing services, forcing them to rely on cash transactions. Because of this, cannabis companies must take cash payments from customers, and must pay their suppliers and employees in cash. The security risks are enormous, as well as the compliance risks associated with having to properly account for so much cash. There are a handful of banks that are attempting to do business with cannabis companies, but when Attorney General Sessions rescinded the Cole Memorandum, he put in jeopardy the “FinCEN” guidance that gave these banks some cover. While the FinCEN guidance is still in place, the landscape has become even more uncertain than before.

Customary Business Expenses Are Not Deductible. Another risk factor that must be disclosed is the effect of Section 280E of the Internal Revenue Code. This provision disallows most normal business expenses incurred by cannabis companies when calculating income tax liability. Cost of goods sold is deductible, but most other expenses, such as employee wages, are not. Consequently, cannabis companies will be at an extreme disadvantage when it comes to profitability, compared to conventional companies.

These are just a few of the risk factors that a cannabis company must disclose to potential investors when raising capital. There are a host of other risks, as well, relating to intellectual property protection, availability of bankruptcy, local regulations, enforceability of contracts, etc. It’s important for companies operating in the legal cannabis industry to work with attorneys that understand the unique risks, and have not just relevant corporate law experience, but also cannabis industry experience.

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