Update: The National Credit Union Administration (NCUA), the federal agency that insures deposits at federally insured credit unions, recently issued a letter providing additional guidance to credit unions servicing hemp-related businesses. For further details, please see our July 28, 2020, alert.
Cannabidiol (CBD) products increasingly are showing up in the mainstream
market and taking many forms, including CBD-infused beverages, chocolates,
and even beauty products. CBD, a plant-based compound naturally occurring
in the cannabis plant, is closely related to tetrahydrocannabinol (THC).
Unlike THC, however, CBD is not known to have psychoactive properties.
Manufacturers have begun using CBD in various products touting a myriad of
health benefits, and making them available in dispensaries, through online
retailers, in cafes, and in some grocery stores.
This trendy industry is on the rise and may present unique investment
opportunities for investors positioned to appropriately evaluate risks
associated with these businesses. Forbes recently
that the collective U.S. CBD sales market is estimated to surpass $20
billion by 2024. Before diving into this industry, however, investors
should carefully weigh the risks such businesses present.
Below are five important regulatory and legal issues investors should
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
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
permitted growing industrial hemp on a limited basis for research purposes.
Then, the 2018
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
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. Because CBD is not GRAS, CBD used as a food
additive is subject to premarket review and approval by FDA.
Accordingly, FDA has
that it is a prohibited act to introduce or deliver for introduction
into interstate commerce any food (including any animal food or feed)
to which CBD has been added.
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 supplement
under the Food, Drug & Cosmetic Act. In fact, 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
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
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. To date, the FDA has
approved only one drug directly using CBD - Epidiolex - which treats two
rare forms of childhood epilepsy. The FDA has not determined that CBD is
safe or effective for treating any other particular disease or condition.
Accordingly, companies should avoid making claims that CBD will aid in the
treatment of any particular disease or condition or provide any particular
health benefits. FDA
clarified that it will continue to aggressively pursue companies marketing
CBD products with “egregious and unfounded claims that are aimed at
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 thisissue,
FDA’s position on this topic likely will continue to evolve.
For further information about the legalities of the newly emerging CBD industry, see McGuireWoods’ May 31 alert, “Five Things to Know About CBD — Food, Drugs and the In-Between.”
To discuss legal issues raised by potential
investments in CBD products, please consult the authors or another member
McGuireWoods life sciences team.