Investing in a CBD Business: Five Regulatory Concerns

June 17, 2019

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 reported 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.

1. 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).

2. 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. Because CBD is not GRAS, CBD used as a food additive is subject to premarket review and approval by FDA. Accordingly, FDA has concluded 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 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.

3. 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.

4. 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 further clarified that it will continue to aggressively pursue companies marketing CBD products with “egregious and unfounded claims that are aimed at vulnerable populations.”

5. 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 of the McGuireWoods life sciences team.