As the calendar turns to 2019, it feels as though everyone is in the mood to talk hemp, or its well-known derivative, cannabidiol, more commonly known as “CBD.” The uptick in hemp talk is no coincidence. Several recent updates to federal and North Carolina statutes and regulations have opened up the possibility of a vast new market in this area. Comments that refer to the legalization of hemp are likely too simplistic to be useful to entrepreneurs, small businesses, or investors looking to get into the industry, as there are still important regulations that control the cultivation and distribution of the plant, with more clarification and regulation certain to follow from Washington, D.C. and Raleigh.

Background

Federal Law

In December 2018, Congress passed, and President Trump signed into law, the Agriculture Improvement Act of 2018 (the “2018 Farm Bill”), which, among other things, legalized the cultivation of hemp and removed hemp from its former classification as a Schedule I controlled substance. Several definitions in the law are instructive as well. Namely, hemp is defined federally as any part or derivative of the Cannabis sativa L. plant containing less than 0.3% tetrahydrocannabinol (“THC”) by weight. Cannabis that does not fall into this category, therefore, remains a controlled substance under federal law.

The 2018 Farm Bill is important in that it represents the broadest federal legalization of hemp to date. No longer is the cultivation and distribution of hemp subject to the enforcement regime of the Drug Enforcement Administration. This is not to say that there is an absence of regulations at the federal level. Hemp remains subject to the regulation of the Department of Agriculture (“USDA”), and all cannabis products, whether hemp or not, remain within the jurisdiction of the Food and Drug Administration (“FDA”) if they are marketed with a claim of therapeutic benefit. The FDA has also resisted the addition of cannabidiol (“CBD”) into food products as illegal dietary supplements.

North Carolina Law

The cultivation of hemp is legal in North Carolina under an industrial hemp program, passed in 2015, and codified in Chapter 106 of the North Carolina General Statutes. The North Carolina Department of Agriculture issues licenses to industrial growers of hemp within the state under this program. Industrial hemp at the North Carolina level is defined at the same concentration level of THC as is hemp at the federal level (0.3%). The license application requires that an applicant list one or more specified research purposes for the proposed growth of hemp. In practice, this does not present much of a hurdle, as there are eleven qualifying purposes, which cover a broad base, and include carveouts for scientific, economic, investment-related, or environmental research. The industrial hemp program also provides for a civil penalty of up to $2,500 for a violation of the statutory program or any condition associated with the license, and criminal penalties associated with disguising marijuana due to its proximity to hemp. While marijuana has been legalized for recreational usage in other states, it remains illegal in North Carolina, and thus it will remain important for growers and distributors to stay within the allowable statutory concentration of THC in their hemp production.

Analysis and Considerations

The passage of the 2018 Farm Bill promises to increase applications for North Carolina hemp licenses, as the former federal prohibition will no longer serve as a barrier to entry for businesses. Still, North Carolina hemp growers and distributors with an eye toward expansion or market analysis will want to keep an eye on other state laws to ensure compliance throughout their commercial involvement. Since the introduction of the 2018 Farm Bill, Ohio has already weighed in and upheld its prohibition of the sale of hemp, CBD oil, and related products. Though this prohibition is likely preempted by the 2018 Farm Bill, the states may push back against the loosened federal laws with regulations of their own that fall short of prohibition. There are early attempts at collaboration among various state departments of agriculture to set forth uniform standards for licensing, regulation, and testing, however, these initiatives may take some time in the wake of the passage of the 2018 Farm Bill.

Where the North Carolina hemp pilot program provided a spark to the hemp and CBD industry, the 2018 Farm Bill has ignited a flame. There is great market potential for interested North Carolina growers and sellers, and there may be advantages to being a first mover to acquire key assets, including real estate and intellectual property. Despite this, strategic planning is still in order, including an evaluation of the application process for a North Carolina license, an analysis of relevant laws in other states to the extent that those states are distribution targets, and a review of the business model, to ensure there are no USDA, FDA, or other federal regulatory issues. An engaged entrepreneur, as well as its associates and legal counsel, will have to remain flexible to adapt to the shifting winds of regulation in the months and years to come.

February 21, 2019/by Business