On October 31, 2019, the US Department of Agriculture (USDA) released its long-awaited regulations governing hemp.1 Those regulations provide critical guidance to the hemp industry following the Agriculture Improvement Act of 2018 (2018 Farm Bill), which legalized the cultivation, production and interstate sale of hemp and hemp-derived products. The 2018 Farm Bill gave the USDA regulatory authority over hemp cultivation and required the USDA to outline a regulatory regime governing hemp.2
The interim rule (the Rule) sets forth requirements for hemp producers as well as oversight requirements for states and tribes seeking to regulate the cultivation of hemp in their respective jurisdictions. Under the Rule, states and tribes may maintain primary regulatory authority over hemp production if they develop regulatory plans and have them approved by the USDA. State and tribal plans must set forth a process for, among other things, issuing licenses to grow hemp, reporting crop information to the federal government and addressing violations. Hemp producers operating in jurisdictions without approved state or tribal plans may apply for licenses directly from the USDA. Regardless of whether hemp producers operate pursuant to a state, tribal or federal regime, they will be required to obtain a license, sample and test hemp crops for compliance with federal regulations, and dispose of crops that exceed a delta-9 tetrahydrocannabinol (THC) concentration of 0.3 percent on a dry-weight basis. The Rule became effective immediately (on October 31, 2019) and will remain in effect until November 1, 2021, subject to change based on public comments.3 Individuals seeking to comment on the Rule must submit comments no later than December 30, 2019.4
In light of these requirements, financial institutions and other businesses contemplating doing business with hemp producers, or manufacturers of hemp-derived products such as cannabidiol (CBD), should consider implementing due diligence procedures to ensure that hemp was produced in compliance with USDA regulations. As explained further below, such due diligence procedures might include obtaining a copy of the applicable state or USDA license, collecting information regarding the producer’s procedures for sampling and testing crops and disposing of noncompliant plants, and securing representations regarding any past disciplinary action for noncompliance.
Below we analyze the key provisions of the Rule and its implications for hemp producers, identify lingering uncertainty in the hemp industry, and discuss the due diligence procedures financial institutions and other businesses should put in place when engaging in business with hemp and CBD companies.
II. The 2018 Farm Bill and Implementing Interim Regulations
In December 2018, Congress passed and the president signed the 2018 Farm Bill. The law removed industrial hemp and hemp by-products, such as CBD, from the definition of marijuana in the Controlled Substances Act (CSA), 21 U.S.C. § 841.5 As defined in the 2018 Farm Bill, the term “hemp” means the plant species Cannabis sativa L. and any part of that plant with a THC concentration of not more than 0.3 percent on a dry-weight basis. Plants, or portions thereof, with a THC concentration of greater than 0.3 percent are considered marijuana under federal narcotics law.
The 2018 Farm Bill created an avenue for the legal cultivation, processing and sale of hemp and hemp-derived CBD, but it did not establish specific rules that hemp producers could operationalize. Instead, it required the USDA to outline the provisions by which it would approve hemp production plans submitted by states and tribes. On October 31, 2019, the USDA formally released a comprehensive set of interim regulations for the domestic production of hemp. The Rule creates a dual regulatory and enforcement program for legalized hemp production, which allows states and tribes to maintain primary regulatory authority over hemp production. To maintain such authority, a state or tribe must submit a plan to the USDA that indicates how the state or tribe intends to regulate hemp production. Hemp growers in jurisdictions not covered by an approved state or tribal plan may apply for a license from and be regulated by the USDA. Regardless of whether hemp producers are regulated pursuant to a state or federal program, they are required to:
- Obtain a license under a state or tribal program or under the USDA program;
- Provide the location—using a legal description of the land and, to the extent possible, exact coordinates—of where hemp production will take place;
- Share their hemp crop acreage information with the Farm Service Agency;
- Sample and test their hemp crops in Drug Enforcement Administration (DEA)-registered labs within 15 days of an anticipated harvest to ensure the plants do not exceed 0.3 percent THC;
- Destroy noncompliant plants; and
- Comply with audits and inspections.
We discuss the state and federal regulatory structures in turn.
A. State and Tribal Oversight and Enforcement
To maintain primary control over hemp production within its jurisdiction, a state or tribe must submit and have approved by the USDA a plan for:
- Issuing licenses to state-authorized hemp producers;
- Collecting and reporting information on each state-licensed hemp producer to the USDA, such as producer contact information, crop locations and acreage;
- Sampling and testing plants pre-harvest to ensure the concentration levels of THC are within the federal limits (0.3 percent or below);
- Promptly notifying the USDA of any cannabis plants that do not qualify as hemp under the regulations;
- Disposing of hemp crops with excessive THC concentrations; and
- Enforcing hemp regulations through annual inspections and procedures for addressing violations.
With respect to enforcement, states and tribes must establish a corrective action plan for negligent violations. The plan must dictate a reasonable date by which the producer will remedy the violation and must require periodic reporting from the offending producer for at least two years after the violation. For more serious violations, states and tribes must immediately report the producer to the attorney general and the chief law enforcement officer in the state or tribe.
The USDA has set the floor for state or tribal requirements; the interim regulations expressly allow states and tribes to impose more rigorous requirements on their hemp producers. The Rule also makes clear that states and tribes may continue to prohibit hemp production within their respective jurisdictions. As of the date of this alert, the only states that continue to prohibit hemp production are Idaho, Iowa,6 Mississippi and South Dakota. Consistent with the 2018 Farm Bill, however, the Rule makes clear that states and tribes may not prohibit the interstate transport of hemp produced in accordance with the Rule—even in states that have banned hemp. This provision offers comfort to the hemp industry after Idaho state police seized $1.3 million in hemp being transported through the state by truck in January 2019.7
Once a state or tribal plan has been submitted to the USDA, the agency has 60 days to review the plan and decide whether to approve it. Eleven states have already submitted plans for approval: Arizona, Georgia, Kentucky, Louisiana, Montana, North Dakota, Oregon, Pennsylvania, Tennessee, Texas and Wyoming.8 Eleven tribes also have pending applications.9 The USDA will decide by the end of 2019 whether to approve those plans. If these plans are approved, federal authorities will conduct periodic audits of the state and tribal programs—at least once every three years.
B. Federal-Level Oversight and Enforcement
Producers located in jurisdictions not covered by an approved state or tribal plan may apply for a permit directly from the USDA. In these instances, the USDA is the principal regulator monitoring compliance. The federal regulatory framework is complex and nuanced, but federal oversight falls mainly into three categories: licensing, harvest and production, and audit and reporting. Producers operating pursuant to USDA regulations are required to obtain and renew their USDA licenses every three years. Once a hemp producer has obtained a USDA license, the producer must report hemp crop acreage and location to the USDA. The producer must also adhere to a series of stringent requirements for sampling and testing the plants before harvest and production of the hemp product. For example, producers cannot harvest their crops unless they have approved agencies or representatives collect a sample within 15 days of their anticipated harvest to test THC levels. After collection of the sample, a producer must harvest the plants within 15 days or—if the producer misses the 15-day window—seek a second pre-harvest sample before harvesting the plants. Producers must also take care to keep harvested crop lots distinct; producers cannot mix harvested crop lots without prior written approval from the USDA. From there, only production lots with samples that met the acceptable hemp THC levels can be sold commercially. Crops that test above the acceptable THC limit (0.3 percent) are considered to be marijuana under the CSA and must be disposed of in accordance with DEA regulations, 21 C.F.R. § 1317.15.
To ensure compliance, the USDA may randomly audit licensees. Negligent violations (e.g., failure to provide the location of hemp crops) will be addressed with a Notice of Violation, while willful violations will be reported to the attorney general and the chief law enforcement officer of the state or tribe. Production of hemp without a USDA license may be reported to the attorney general. The USDA can suspend a license if a licensee violated the provisions in the Rule or failed to comply with a written order from the Agricultural Marketing Service related to a negligent violation. Producers with suspended licenses will be prohibited from removing, handling or producing hemp.
The USDA will start accepting license applications on December 2, 2019, and will continue accepting applications for one year. Thereafter, applications must be submitted between August 1 and October 31 of each year. Applicants must provide all required contact and business information and must provide records showing that the individual producer—or key participants, in the case of a business entity applicant—have not been convicted within the past 10 years of a felony related to controlled substances.
III. Lingering Uncertainty for the Hemp Industry
The Rule provides much-needed guidance for the hemp industry, but uncertainty remains. To start, the regulations provide only interim guidance and may continue to evolve based on comments. Industry participants have already identified several concerns with the regulations. For example, in making the Rule effective immediately, the USDA has given hemp producers preparing to harvest crops pursuant to existing state-level regulations little time to comply with federal regulations. The regulations also fail to account for compliance issues outside producers’ purview. Namely, the rules do not take into account the possibility of a backlog at testing laboratories. As plants mature, THC concentration levels typically increase, such that crops could potentially rise above the permissible 0.3 percent THC level if the laboratory does not complete testing promptly. The regulations also fail to address whether producers can harvest crops for which a sample was provided on time but for which results are delayed due to laboratory delays.
Industry participants have also criticized the Rule’s strict approach to plants containing greater than 0.3 percent THC. There is no mechanism for hemp producers to salvage crops that slightly exceed the 0.3 percent THC level (even for use as fertilizer), and the industry expects that crop insurance will not protect producers forced to destroy their crops. The Rule provides some comfort to producers in that producers whose crops exceed the acceptable hemp THC level are not deemed to be acting negligently as long as they used reasonable efforts to grow the plants and the plants contain no more than 0.5 percent THC. Crops that contain 0.3 to 0.5 percent THC are nevertheless considered marijuana and must be destroyed.
However, there is at least a theoretical risk that hemp producers that ship crops for testing in another state could be exposed to criminal liability for noncompliant crops. If a producer in a state without a DEA lab sends its crops to a DEA lab in another state and the crops exceed 0.3 percent THC—and are therefore considered marijuana rather than hemp plants—the producer could be exposed to risk of criminal prosecution for sending marijuana across state lines. Although criminal prosecution of producers that ship crops that, unbeknownst to them, exceed the acceptable threshold in an effort to comply with federal regulations seems unlikely, the Rule does nothing to obviate that risk.
Finally, the Rule is limited to matters directly within the USDA’s purview and does not address areas of great interest to the broader hemp industry, such as the infusion of CBD in food and beverages.
IV. Implications for Doing Business With Hemp and CBD Companies
The Rule also has implications for financial institutions and other businesses contemplating engaging in business with hemp and hemp-derivative companies, such as CBD companies. For example, financial institutions would be well advised to institute due diligence procedures to ensure that any hemp producers with which they do business are operating in compliance with state and/or federal regulations. Likewise, they should conduct due diligence with respect to CBD companies to ensure that their products are derived from hemp produced in accordance with federal regulations. But developing due diligence procedures based on the USDA regulations may not be sufficient. Hemp producers must comply with applicable state or tribal regulations—which may be more stringent than the USDA regulations. Because state regulations may vary, the due diligence procedures with respect to a hemp producer operating in Arizona may differ from the procedures applicable to a producer operating pursuant to a USDA license. As a result, understanding the different state and federal regimes will be important for any businesses considering engaging in hemp- or CBD-related commerce.
Depending on the nature of the business, reasonable due diligence might include, among other things, obtaining:
- A copy of the hemp producer’s applicable state, tribal or USDA license;
- Information regarding the procedures for sampling and testing crops in DEA-registered labs to ensure the plants do not exceed the acceptable hemp THC level;
- Information regarding the process for disposing of noncompliant plants;
- Representations as to whether the producer has been subject to disciplinary action for noncompliance;
- Representations and warranties that the company will provide immediate notice if it is deemed noncompliant with state, tribal or federal regulations;
- Representations and warranties concerning due diligence performed by the hemp-derivative company (e.g., the CBD manufacturer) on the producer; and/or
- Representations and warranties that the producer has shared information about its crop acreage and location with the applicable regulators.
The 2018 Farm Bill and the USDA’s implementing interim regulations provide a regulatory framework for commercial hemp and hemp-derived product production. But those rules are not yet final: The USDA is requesting public comment through December 30, 2019, and it is critical that hemp producers and other stakeholders participate in that process. In the interim, industry actors should develop and implement due diligence policies and procedures that ensure compliance with the interim regulations and any applicable USDA-approved state or tribal plans.