Encouraged by CBD Business Opportunities; Five Regulatory Cautions
It has become increasingly difficult to ignore the increasing amount of media and press coverage of the growing cannabis (CBD) business opportunities in the market today. 1
CBD, a nonintoxicating compound found in cannabis, is everywhere we look. Coffee shops across the country offer “calming” CBD infusions for your morning cappuccino. Boutique makeup brands are churning out CBD moisturizers, claiming the compound’s anti-inflammatory properties. As of October 2018, 46 states have passed some kind of CBD legalization. 2
In June the Food and Drug Administration approved Epidiolex (cannabidiol)—aka CBD—for the treatment of seizures associated with two rare forms of epilepsy. It’s the first FDA-approved drug to come from the cannabis plant. 3
CBD or Cannabidiol Products are Becoming More Common
With more states moving to legalize recreational cannabis, increased momentum is expected for legalization in the coming years. Estimates for the U.S. recreational cannabis market will expand by 33% in 2019 alone.
However, we remain cautious of the popularity of recreational cannabis, but at the same time, we are encouraged by the many “legal” CBD industry business opportunities.
CBD or Cannabidiol, the primary component of the marijuana plant can be derived from the Hemp plant as well. CBDs have a non-psychoactive effect on users and have been shown to have numerous health and wellness benefits. As more of us discover CBD and its many uses, it is important to understand the evolving habits and consumption of CBD-only and CBD-blended products. 4
… we remain cautious of the popularity of recreational cannabis, but at the same time, we are encouraged by the many “legal” CBD industry business opportunities
- All recreational cannabis product segments are estimated to grow at least 113% through 2023, some segments as much as 225%.
- While markets in Oregon and Arizona mature, states like Florida, Massachusetts and North Dakota are among the fastest growing.
- As the hemp-derived CBD market explodes and showcases scalable business opportunities, many cannabis companies have pushed into the CBD space as a precursor to THC legalization.
- License caps and numerous acquisitions have dramatically increased the value of larger cannabis businesses, pushing out smaller firms. 5
CBD Market Could Reach $20 Billion By 2024
This current CBD industry is on the rise and may present unique investment opportunities for some of our customers who are positioned to appropriately evaluate risks associated with these businesses. Forbes recently reported that the collective U.S. CBD sales market is estimated to surpass $20 billion by 2024. Before diving into this industry, we caution investors to carefully weigh the risks these businesses present. 6
Below are five important regulatory and legal issues we encourage investors to consider when evaluating CBD investment opportunities.
- DEA Regulation of CBD Varies Depending on the Concentration of THC
Under Drug Enforcement Administration (DEA) regulations, marijuana is a Schedule 1 drug not approved as a medication in the United States; however, hemp has been distinguished from marijuana under the definition revised in 2018. Hemp is defined as the plant Cannabis sativa L. and any part of that plant — including the seeds and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not — with a THC concentration of not more than 0.3 percent on a dry weight basis.
Hemp’s metamorphosis began when a 2014 bill permitted growing industrial hemp on a limited basis for research purposes. Then, the 2018 Farm Bill removed hemp from the definition of marijuana entirely. This allowed approved growers to produce hemp on an industrial scale (including for the purposes of deriving CBD concentrates) without fear of being prosecuted for producing an illegal substance. Assuming a retailer is buying CBD oil or hemp from an approved and licensed grower using plants with less than 0.3 percent THC, legal risk is more limited relative to the procurement, transportation, and sale of hemp and its pure derivatives (extracted CBD in the form of oil or resin).
- U.S. Food and Drug Administration ( FDA) Regulations Do Not Permit CBD as a Food Additive or Dietary Supplement
Analysis of the potential for regulatory impact on any type of CBD product is fact-specific and requires close evaluation of several factors, including the type of product (e.g., food, dietary supplement, or cosmetic), product’s labeling, and the existing compliance structure of the product developer or manufacturer. The FDA regulates CBD if it is used as a food additive, a dietary supplement or in cosmetic products, or if it is advertised as a drug.
– CBD-Infused Foods: FDA maintains a list of foods or food additives that are generally recognized as safe (GRAS) for human consumption, which does not currently include CBD.
– Dietary Supplements: FDA does not permit CBD to be used or advertised as a dietary supplement, as FDA has concluded (and recently stated in published FAQs) that CBD products are excluded from the definition of dietary supplements under the Food, Drug & Cosmetic Act. Claiming that CBD is a dietary supplement, encouraging consumers to add the product to food or drink, or listing nutrition facts are actions that have triggered the FDA to issue warning letters threatening enforcement actions. To date, FDA has issued three warning letters related to products containing CBD.
– Cosmetics: While cosmetics do not require FDA approval, FDA has regulatory authority over certain cosmetic ingredients, such as color additives. Companies that manufacture or market cosmetics must ensure the safety of their products and FDA can take action against a company if it has reliable information that a cosmetic is adulterated with the addition of CBD, misbranded, or unsafe for consumers.
- Rapidly Changing State Laws May Impose Further Restrictions on CBD Products
Where CBD products are sold or manufactured, it is important to review applicable state law to determine any further restrictions on CBD. For instance, the North Carolina Department of Agriculture and Consumer Services recently announced it would send letters to businesses notifying them that the sale of CBD in food, drinks, and animal food violates state and federal law. Further, in February 2019, Maine and New York announced that restaurants and other retailers may not sell products containing CBD and that the states would begin enforcing these restrictions. These state restrictions may significantly impact overall sales of CBD products as the regulatory landscape continues to evolve.
- Avoid Certain Advertising and Labeling Claims for CBD Products
Marketing claims about the therapeutic benefits of CBD may inadvertently subject CBD product manufacturers to FDA’s drug regulations. Claims that CBD can treat or mitigate a disease or condition, for instance, may run afoul of FDA’s position on CBD product marketing.
- Federal Regulation of CBD Will Continue to Evolve
The FDA’s position on CBD is not static, and potential investors should continue to monitor the evolving federal landscape. The FDA recently held a public hearing to obtain scientific data and information about the safety, manufacturing, product quality, marketing, labeling and sale of products containing cannabis or cannabis-derived compounds. The FDA also announced that it is forming a high-level internal agency working group to explore potential pathways for dietary supplements and/or conventional foods containing CBD to be lawfully marketed. The group will consider what statutory or regulatory changes might be needed and the likely impact of such marketing on public health. As stakeholders weigh in on this issue, FDA’s position on this topic likely will continue to evolve. 7
Where Do We Go From Here?
From beauty and skin care to food and drinks – and even pet care – CBD is everywhere.
Cannabidiol, or CBD, is promoted by producers and fans as a natural product that treats ailments ranging from anxiety to arthritis and from seizures to cancer. It’s often sold as an oil or added to food, health and beauty products. And it’s become widely available at a time when interest in plant-based alternatives has soared.
And, with the passing of the 2018 U.S. Farm Bill (now law), hemp growers and CBD-product manufacturers are more at ease, Forbes reports, shifting hemp from an illegal substance overseen by the Department of Justice to a crop managed by the Department of Agriculture. Hemp and CBD-products will no longer be equated under drug laws with its psychotropic cousin, marijuana. 8
This change means, that banks and credit card companies can work with hemp businesses, that investment and where capital infusion is allowed in the industry, and that interstate commerce of hemp products is permitted, and more.
As CBD business opportunities evolve into the mainstream, more players are certain to join the fray. With hemp legalization, many of the barriers to entry have been eliminated, but as this article makes clear, the landscape is not without risk. Let us help you navigate the risks to make sure you emerge both safe, and profitable, in this new exploding market segment. We can help!
Steven Geller provides and integrates high-level tax planning, compliance, and consulting solutions. He also leads the firm’s practice areas surrounding real estate including pre/post development structuring, tax-deferred exchanges, property management advisory services, and multi-generational transfers.
If you would like Steven to speak to you or your Professional Group and bring clarity about the new developments in your Professional arena, please contact us.
Morris+D’Angelo is the industry leader for many High-Wealth Customers and Organizations.
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Additional Resources for this article:
- Strong Growth Drivers Indicate $22.7 Billion U.S. Cannabis Market
- Investing in a CBD Business: Five Regulatory Concerns
- Not Everybody Must Get Stoned: Pot’s Nonintoxicating Future
- Effectiveness of CBD as an Alternative to Prescriptions
- Strong Growth Drivers Indicate $22.7 Billion U.S. Cannabis Market
- CBD Market Could Reach $20 Billion By 2024, Says New Study
- US Farm Bill Will Make CBD Production Legal And Cheaper