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December 20, 2018 saw President Trump sign into law the historic 2018 Farm Bill (a.k.a. the Agricultural Improvements Act of 2018), making hemp, a subtype of Cannabis, legal to grow, cultivate, process and sell on the Federal level for the first time in many decades, subject to certain, as yet to be determined, regulations. The passage of the Farm Bill could usher in rapid growth in financings, joint ventures and mergers & acquisitions in the Cannabis industry.

The Farm Bill is an $867 billion agricultural legislation that exceeds 800 pages, but has only a few mentions of hemp. The Farm Bill passed both the U.S. House of Representatives and the U.S. Senate by overwhelming margins prior to being signed by the President. Mitch McConnell, the Senate Majority Leader, a Republican from Kentucky, a State seeking to replace declining tobacco sales, was the driving force in legalizing hemp pursuant to the Farm Bill.

The Farm Bill defines hemp as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol [THC] concentration of not more than 0.3 percent on a dry weight basis.” THC is the psychoactive ingredient in marijuana.

The significance of the Farm Bill is that it removes hemp from the list of drugs in Schedule I under the Controlled Substances Act (“CSA”).Schedule I is the most restrictive designation under the CSA. Schedule I includes drugs that currently have no acceptable medical use and carry high potential for abuse (e.g. heroin, lysergic acid diethylamide (LSD), peyote, methaqualone, and 3,4-methylenedioxymethamphetamine ("Ecstasy")).

The U.S. Food and Drug Administration (“FDA”) has largely blocked medical research involving marijuana. In contrast, opiates, which have so frequently been in the headlines lately, are on the less restrictive Schedule II because they have an accepted medical use. The Farm Bill is likely to lead to an increase in Cannabis-based medical research, particularly research involving low THC extracts.

Current Use of Hemp

Hemp is currently used in a variety of industrial applications pursuant to the2014 Farm Bill (“2014 Farm Bill”), which ultimately facilitated the establishment of fairly small pilot programs for hemp in 40 states. The 2014 Farm Bill expired on September 30, 2018; the Farm Bill is typically renewed or replaced every five years. Although the current annual U.S. hemp market is estimated at only $820 million, with the passage of the Farm Bill, multiple industry sources are predicting a sales forecast that will exceed $20 billion annually for hemp-related products in just a few years’ time.

CBD

Perhaps the most important future legalized market for Cannabis is the ability to easily extract cannabidiol (“CBD”) from hemp. The non-psychoactive compound CBD has been showing up online and in many stores, illegally it seems, in drops, liquids, creams, candies, gummies and beverages. In September the Drug Enforcement Administration (“DEA”) moved one drug for adolescent epilepsy, Epidiolex, which includes CBD, to the far less restrictive Schedule V of the CSA. Numerous mainstream news outlets at the time incorrectly reported that CBD had been legalized. However, the fact that the DEA was treating each drug containing CBD as an item that had to be separately considered and rescheduled if it met certain criteria, most definitely meant that CBD had not been legalized. At best CBD resided in a gray regulatory space that no one showed much interest in clarifying. Now that the Farm Bill was passed, however, CBD is indeed legalized and those consumers looking for a mild mood enhancer, anti-inflammatory agent or localized pain relief from tennis elbow or a sore knee will drive substantial CBD sales. As a side note, CBD’s medicinal or healing properties are subject to wide debate, partly as a result of sparse scientific research into Cannabis in the United States since the passage in 1937 of the Marijuana Tax Act.

Sales Projections

According to Bloomberg Business Intelligence and other sources, hemp-based CBD products will drive sales from the estimated $264 million in 2018 to $646 million by 2022. Bloomberg also reports that global Cannabis sales are projected to jump 40 percent in 2019, with North American sales being the primary driver. Hemp is apparently easy to grow in a wide variety of climates, and estimates are that an acre of hemp, due to its high yield of CBD, could yield a farmer 2-4 times the gross revenues of an acre of soybeans or corn. The tobacco growing States, as well as the eleven States with adult recreational use Cannabis statutes, and thus growing Cannabis industries, are sure to benefit in investment activity, job growth and taxes from the legalization of hemp.

Regulation

The Farm Bill moves the regulation of hemp to the U.S. Department of Agriculture (“USDA”). The USDA is charged with developing national hemp regulations “as expeditiously as practicable.” States are expected to share a fairly sizeable role in regulations of the nascent industry and the USDA is only given 60 days upon receipt to reject or accept a State regulatory plan. Upon rejection, the Federal rules will prevail. Interestingly, the FDA retained the authority to regulate CBD in food, drugs and cosmetics. Accordingly, the notion that CBD infused beverages, supplements or creams may be appearing legally in stores quickly may have to be tempered. It is possible, however, that the FDA may restrain its enforcement to false claims, advertising and misleading packaging.

Conclusions: Effect on Market Participants

What does all this mean for the greater Cannabis industry? Plenty. The Farm Bill’s importance cannot be overstated. With the new Farm Bill in place, hemp cultivators and processors will be able to sidestep many of the obstacles that make the Cannabis industry so difficult to navigate. The chief among these obstacles, until now, has been the overhanging threat of federal criminal prosecution. But now, federally charted banks will not have to worry about theoretical money-laundering charges and will happily bank the hemp industry. Other financial participants, like the credit card processing networks, can now, for the first time, accept deposits, move money and process transactions related to hemp and CBD. Insurance will become widely available to the hemp industry as well. Likewise, public and private investment funds and other institutional investors, which to date have avoided investing in the industry, will no longer risk federal prosecution and are likely to make substantial funding available to the industry, which will allow companies to grow and create jobs in the industry. Hemp related businesses will not have to worry about the confiscatory nature of Section 280E of the U.S. Internal Revenue Code, which currently denies Cannabis touching-the-plant businesses all normal business operating deductions other than for cost of goods sold.

Cannabis businesses with marijuana touching-the-plant businesses and hemp businesses (think of them as high THC and low THC businesses) may seek to split off their hemp/CBD operations into separate companies to avail themselves of quantifiable regulatory relief. Those newly liberated hemp/CBD businesses should have no trouble raising financing from a wide variety of institutional sources, which have been avoiding the Cannabis industry. Some of those hemp/CBD businesses will finally be able to list their stocks on Nasdaq or the New York Stock Exchange. Up until now, U.S. touching-the-plant businesses, as violators of Federal law, have been denied listings on U.S. stock exchanges. This has caused many of them to list on the Canadian Securities Exchange, often through mergers with publicly-traded shell companies, which has given greater visibility to the hemp industry and provided a potential viable exit plan for investors investing in private companies. It is not long before the food, wellness and beverage giants will seek to enter into joint ventures with, make large investments into, or outright purchase hemp/CBD businesses. Overall financing and M&A activity will explode. Jobs will be created. Taxes will be collected. The overall Cannabis industry will finally move beyond the start-up stage to a rapidly growing, profitable industry.

This article was first published on Bloomberg Law’s Corporate Law News on January 14, 2019.

For more information on the topic discussed, contact:

• James Rieger  |  rieger@thsh.com  |  212-508-6728