By: Irina Dashevsky, Esq. and David Standa, Esq.
The intoxicating hemp industry is going to change. That is just a fact. But the “how” remains an open question, and industry participants undoubtedly have lots of others.
Let’s start with what exactly happened and how we got here. This development should not come as much of a surprise to those who have been following this issue. As we wrote earlier this summer, “The Hourglass Could be Turning on Intoxicating Consumable Hemp Products,” Sen. Mitch McConnell was an active proponent of closing what has commonly been referred to as the “hemp loophole,” which resulted from the 2018 Farm Bill’s definition of hemp. Last night, with the signing of the new appropriations bill, President Trump started a 365-day clock on the ban of intoxicating hemp products in the United States. That deadline is 364 days from today and will undoubtedly have ramifications on the current $28 billion-plus hemp industry. There are also implications for consumers of these products and the state-legal cannabis industry.
The legislative ban on intoxicating hemp products is contained within the new spending package that brought an end to the record-long government shutdown, but it was not always there. In what must be acknowledged as some impressive procedural maneuvering, Sen. Mitch McConnell outflanked his Kentucky senatorial brethren, Sen. Rand Paul, and successfully attached the hemp provision to the now successful appropriations bill. As the shutdown dragged on, various contingencies recognized an opportunity to close the “loophole” that created an explosion of the consumable hemp industry, and they rallied to McConnel’s cause. Sen. Paul appeared to do everything he could to remove McConnell’s provision, but in the end could not muster the votes. The legislation “closes the hemp loophole that has resulted in the spread of unregulated intoxicating hemp-derived products that are being sold online and in gas stations and corner stores across the country,” said Rep. Andy Harris of Maryland, the chief sponsor of the ban language in the House. Opponents of intoxicating hemp products couched these products as a public health and safety risk. Notably, this appropriations legislation does not provide an additional budget for enforcement, which is a relevant chess piece on the board to consider as this development takes effect. It should also be noted that ever since the publication and rescission of the Cole Memo, the federal government has had very little appetite for enforcement efforts focused on intrastate cannabis activity.
But what exactly does “closes the loophole” mean? Essentially, this legislation changes the definition of hemp, which under the 2018 Farm Bill was defined as no more than 0.3% delta-9-tetrahydrocannabinol (THC) on a dry weight basis. The new legislation essentially makes the sale or distribution of any product containing greater than 0.4mg of total THC per container illegal under federal law because those products are now deemed to be cannabis, which is a Schedule I narcotic under the Controlled Substances Act. The impact and interplay of this new definition with various states’ definitions of hemp will need to be analyzed on a state-by-state basis. The one certainty is that the sale of intoxicating hemp products across state lines will now be prohibited, but how things play out in intrastate transactions is a bit murky.
All of this creates swirling questions for cannabis and hemp operators, and we are here to try to help answer them. We will be holding a Quick Hits webinar on Tuesday, November 18, at 3 p.m. EST to discuss the implications of this development more thoroughly, as well as what comes next, and what we just do not know. Our discussion will cover:
- Should state-regulated intoxicating hemp markets be allowed to continue under those states’ regulatory schemes?
- Are hemp operators at risk of losing banking relationships or other credit relationships?
- Are there default provisions in existing loan documents that may be triggered by federal illegality?
- Will certain investors need to pull back due to federal illegality, and how could that impact capital deployment?
- What are the tax implications?
- What is the likelihood of some modification or legislative revision in the next year?
- What could enforcement look like?
