The U.S. cannabis industry is still in its infancy, even though states began engaging with legalization in one form or another in the late 1990s. Today, many opportunities exist for individuals and businesses that want to engage in the industry. Join international cannabis and securities business attorney Jonathan Bench as he provides some pitfalls and best practices for companies & individuals looking to engage with the U.S. cannabis marketplace.
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Where the Money Grows: Learning the Industry Trends in Medical Cannabis, Recreational Marijuana, Hemp, and Beyond
1.
2.
3.
4. Cannabis
Marijuana
Exempt Plant
Material
(Industrial) Hemp
Marijuana
Extract Hemp Seed Oil
Hemp-Derived
CBD
• Illegal under federal
law unless CBD
extract is FDA
approved
• Possibly legal under
state law
• Possession limited
• No inter-state
transfer
• Legal in all 50 states
and to import and
export
• Clients should
prepare to prove
product came from
stalks and seeds
• Probably won’t
contain CBD
• Legal to distribute in
some states
• Can include
flowering portions of
plant
• License required to
cultivate
5. • Rather than statute, we must rely on FDA guidance
• The FDA excludes THC and CBD from the ”dietary supplement”
definition of the Food Drug and Cosmetic Act (FDCA)
• The FDCA states that if a substance is an active ingredient in a
drug product that has been approved pursuant to the FDCA, or
has been authorized for investigation as a new drug for which
substantial clinical investigations have been instituted and for
which the existence of such investigations has been made public,
then products containing that substance are outside the
definition of a dietary supplement
• FDA-approved drugs:
• Epidiolex (contains a purified drug substance cannabidiol –
CBD)
• Marinol and Syndros (include active ingredient dronabinol, a
synthetic delta-9-tetrahydrocannabinol – THC)
• Cesamet (contains nabilone, which has a chemical structure
similar to THC and is synthetically derived)
• In summary, the FDA’s position is that THC and CBD cannot be
included in dietary supplements.
WHAT ABOUT CBD
IN DIETARY
SUPPLEMENTS?
6. WHAT ABOUT CBD
IN FOOD?
• Under section 301(II) of the FDCA, it is prohibited to
introduce or deliver for introduction into interstate
commerce any food (including any animal food or feed) to
which has been added a substance which is an active
ingredient in a drug product that has been approved under 21
U.S.C. § 355) or a drug for which substantial clinical
investigations have been instituted and for which the
existence of such investigations has been made public
• It is therefore a prohibited act to introduce any food
(including animal food or feed) to which THC or CBD has been
added
• NOTE that nothing in the 2018 Farm Bill amended or limited
the FDCA
7. COSMETICS AND CBD
VAPOR PRODUCTS
• Cosmetics are not subject to premarket approval
• Cosmetics can be deemed drugs, depending on how
they are marketed
• FDA regulates tobacco products, which include
e-liquid containing tobacco or nicotine that would be
used in an electronic cigarette of vaping device
• Unclear whether the FDA has jurisdiction over CBD
e-liquid that does not contain tobacco or nicotine
• FDA’s focus has been on preventing CBD from use in
drugs, food and dietary supplements
• Cosmetics and CBD e-liquids appear to present less
risk of FDA enforcement, though that could change
10. TRUE PARTIES OF INTEREST
• All owners
• All executives
• All entities
• All revenue/profit recipients*
• All controllers*
• All spouses
• WA residency required
11. NOT
TRUE PARTIES OF
INTEREST
• Landlords*
• Commission-based sales agents*
• Business brokers
• Real estate brokers
• Consultants*
• Option holders*
• Service companies
• Financial institutions
12. FINANCIERS
• Ongoing disclosure requirement
• Source of funds
• Excluding financial institutions
• Provides money as a gift
• Provides money as a grant
• Provides money as a loan
• And expects to be paid back
• Revenue-based = TPOI
• No WA residency requirement
• US residency requirement
• **No foreign funds allowed
13. WASHINGTON
HEMP
PROGRAM
• Producers – license required
• Processors – new* license required
• Retailers – no (special?) license required
• Consumables
• Smokables
• Cosmetics
17. CONTRACTS
• Good, compliant contracts
• Governing law
• Dispute resolution
• Mandatory arbitration?
• Federal court exclusion?
18. INTELLECTUAL
PROPERTY
▪ Copyright
▪ The exclusive legal right to reproduce, publish, sell,
or distribute the matter and form of something (i.e.
a literary, musical, or artistic work.
▪ Patent
▪ The right to exclude others, generally for a term of
20 years, from making, using, offering for sale, or
selling an invention in the U.S. There are three types
(Utility, Design, Plant).
▪ Trade Secret
▪ Any confidential business information which
provides an enterprise a competitive advantage.
▪ Trademark
▪ A word, phrase, symbol, and/or design that
identifies and distinguishes the source of the goods
of one party from those of others.
19. CANNABIS
TRADEMARK
PROTECTION
AND THE USPTO
▪ Federal protection not generally
available where an applicant cannot
show “lawful use in commerce.”
▪ Are your cannabis company’s goods
or services lawful under federal law?
▪ The federal CSA?
▪ The 2018 Farm Bill (effective
December 20, 2018)?
▪ The federal Food Drug and
Cosmetic Act (FDCA)?
▪ The FDA still has regulatory
authority over food, drug, and
cosmetic products, and
non-compliant goods are not
eligible for federal trademark
20. CANNABIS TRADEMARK STRATEGIES
• Evaluate products that comply with the CSA and the FDCA, and file to protect them;
• File to protect other ancillary goods and services (smokers’ articles, online content, etc.);
• File for state trademark protection where possible (keeping in mind state law and
regulations as well).
21. IP LICENSING
▪ Various kinds of licenses and
“white label” agreements
▪ Recent changes to WA state law explicitly
allow these types of agreements, even with
a royalty.
▪ Royalty cannot exceed 10% of licensee’s
gross sales of the licensed products.
▪ Agreements must be disclosed.
▪ Will not trigger True Party of Interest
disclosure.
▪ Methods of compensation vary
from state to state
▪ Cross-state deals are complex
22. INTERNATIONAL?
CANNABIS GENERALLY PROHIBITED
▪ Importation or exportation of
cannabis or cannabis products (over
0.3% THC) is prohibited.
▪ Includes importation and
exportation of drug paraphernalia.
▪ Includes any products with THC
content over 0.3%, e.g., oils.
▪ Importation and exportation include
driving across the border.
23. IMPORT/EXPORT ISSUES:
IS IT DRUG PARAPHERNALIA?
• Instructions and descriptive
materials
• Advertising and displays
• Owner’s connection to legitimate
products, e.g., tobacco
• Community usage
• “All other logically relevant factors”
24. HEMP
•No issues if ≤ 0.3% THC, but watch out
for:
o Hemp going “hot”
o Discrepancies between lab test results
o Similarity between products
o Residual hostility within law enforcement
o Regulation over plant and seeds (USDA)
and consumer products (FDA)
25. POSSESSION
• Importation and exportation include
taking products across the border
on foot or by car
• Beware the “legal on both sides”
trap (Washington/Canada;
California/Mexico)
26. INADMISSIBILITIES
• Prior convictions
o Even if conduct is now legal
o Even if a foreign pardon or
amnesty applies
• Prior conduct that amounts to the
elements of a crime
o Especially, cannabis use in
Canada pre-legalization
• Participation in cannabis business
o Including investment
27. REQUESTING ADMISSION
• Waivers available
• For participants in the cannabis
industry, difference between
personal and business travel
• Special considerations for U.S.
residents
• NEVER LIE – usually no waiver for
that lifetime ineligibility
28. MACRO
INDUSTRY TRENDS
• Medical to Recreational Marijuana
• Hemp vs. marijuana
• Industry Consolidation
• Disputes
• Owners
• Financiers/investors
• Contracting parties
• Insurance companies
• Intellectual property
• Federal legalization