Since the 2018 Farm Bill passed in December 2018, removing hemp from the Controlled Substances Act and thus legalizing it under federal law, consumer goods containing the hemp-derivative cannabidiol (CBD) have become exceptionally popular. With that growing popularity among consumers has come increased scrutiny by federal regulators whose mission is consumer safety and protection, such as the Food and Drug Administration and Federal Trade Commission, and now by the plaintiffs’ bar, which files consumer class actions based on advertising. As the recent spate of warning letters and consumer class actions demonstrate, hemp-derived CBD product manufacturers and others in the supply chain for those products have to be mindful of the claims they make to consumers about their products.
In this first article of his Cannabis Patent Review series, Duane Morris partner Vince Capuano reports on the patenting of technology related to cannabis extraction and cannabinoid purifications.
One of the more active areas in the patenting of cannabis technology in 2019 is the related fields of cannabis extraction and cannabinoid purification. Cannabis operators now must educate themselves and navigate an emerging landscape of U.S. cannabis extraction and purification patents for freedom to operate, while also looking for opportunities to patent their own innovations. So far in 2019, the U.S. Patent and Trademark Office (USPTO) has granted over 30 patents with claims directed to cannabis extraction technologies and many others related to distillation of cannabinoid components and techniques for obtaining active compounds from marijuana and hemp. Dozens more are pending.
Duane Morris partner Tracy Gallegos is featured in MyVegas magazine as one of the Top 100 Women of Influence. The list recognizes women who have made a “huge positive impact … and continue to change the shape of Las Vegas on a daily basis[.]”
Ms. Gallegos has a multifaceted practice that touches upon corporate, real estate, cannabis, sports and entertainment law for clients ranging from startup companies to established businesses. Her clients include cannabis companies involved in retail, manufacturing and cultivation, as well as companies providing ancillary services to the cannabis industry in both California and Nevada.
Banking has been an impediment for the cannabis industry because the Bank Secrecy Act of 1970 (BSA) and related regulations―which seek to prevent money laundering and other financial crimes―place onerous requirements on banks when a transaction is suspected to involve illegal activity. 12 C.F.R. Section 21.11. Notwithstanding billions of state-legal cannabis dollars exchanging hands, the commercial banking industry, which is largely federally regulated, is virtually nonexistent in the cannabis space. In 2014, the Treasury’s Financial Crimes Enforcement Network (FinCEN) provided guidance intended to enhance the banking of cannabis-related monies by establishing a category of suspicious activity reporting for “marijuana related businesses.” But, according to FinCEN, as of June 30, 2019, just 553 commercial banks and 162 credit unions had filed an SAR for a “marijuana-related business.”
On November 12, 2019, the Canadian Securities Administrators (CSA), the organization that oversees securities regulations in the 10 Canadian provinces, released Multilateral Staff Notice 51-359 Corporate Governance Related Disclosure Expectations for Reporting Issuers in the Cannabis Industry (the “Guidance”). The Guidance specifically relates to the disclosures required in merger and acquisition transactions. The CSA expressed concern over the perceived inadequate transparency relating to the cross-ownership of financial interests involved in such transactions.
The rapid growth of the cannabis industry and the heightened pace of mergers and acquisitions has resulted in many cannabis companies and their directors and executive officers having a higher than usual crossover of financial interests. Often times these interests are intertwined within various management companies, leasing companies, real estate companies and across numerous license holders, as well as interests in investment advisory services entities and other transaction service providers that are receiving compensatory transaction fees.
The Guidance reiterates that in the disclosure document filed in connection with the transaction, the acquiror and/or the acquiree should disclose all relevant and material the cross-ownership of financial interests held by either by the acquirer, the acquiree, or either of their directors or executive officers.
“Investors need to understand the conflicts of interest that could arise when issuers have crossover of financial interests, because those conflicts could have implications for the possible M&A transaction,” said Louis Morisset, CSA Chair and President and CEO of the Autorité des marchés financiers. We would advise, to avoid potential shareholder litigation, that the disclosure should go beyond the Canadian disclosure requirements and adhere to the more stringent related party transaction disclosure required under U.S. securities laws as many of the cannabis companies have US shareholders or dual listings in the US.
The second issued raised by the Guidance is the determination of director independence as a result of such cross-ownership of financial interests. The CSA stated that they have, “observed instances where cannabis issuers have identified board members as being independent, without giving adequate consideration to potential conflicts of interest or other factors that may compromise their independence.” Again, the cross-over relationships should be reviewed to make a full independent determination.
It is important for reporting issuers to review closely all disclosures made in connection with a merger and acquisition. As a result of the release of the Guidance, the review conducted by the reporting issuer and its counsel is more critical than ever. The board of the reporting issuer should review closely all potential conflicts among its members and should consult with its code of business conduct and ethics to ensure that all procedures have been followed relating to conflicts of interest, as well as considering the jurisdiction rules of its shareholder base.
The importance of proper disclosures has been highlighted by a recent proposed class action lawsuits filed against Canopy Growth and Aurora Cannabis, each lawsuit alleging that the companies made false and misleading statements or withheld material information in their securities filings. While the lawsuit is not related to statements in connection with an M&A transaction, these lawsuits do highlight the importance of reviewing closely all disclosures made in US and Canadian securities filings.
When the United States Department of Agriculture released the interim final rule for the hemp program in October 2019, many stakeholders—including businesses and state agencies—were caught off guard by certain testing-related requirements contained in the rule. Because hemp is now legal under the 2018 Farm Bill if it contains no more than 0.3 percent THC concentration, testing for THC levels is critical. However, significant questions and issues with the testing requirements must be clarified.
On November 20, 2019, Senators Ron Wyden and Jeff Merkley, both from the state of Oregon, submitted a letter to the secretary of the USDA, in which they flagged—“in no particular order”—five controversial testing-related requirements and requested modifications to those requirements. Below, we have summarized the senators’ concerns and proposed solutions to three particularly controversial testing-related requirements in the interim final rule.
Duane Morris Partner Frederick Ball is quoted in the Agri-Pulse article “Regulatory Uncertainty Hangs Over Production of Industrial Hemp.”
Nearly a year after the 2018 farm bill legalized industrial hemp production, the business community continues to seek answers to questions about testing and marketing of products derived from the crop, the commercial potential of which has sparked interest throughout the country. […]
Rick Ball, a lawyer with Duane Morris in Boston, said on the sidelines of the FDLI meeting that he has “no clue” when FDA might take action.
Ball said regulatory confusion is stoked in some cases by different rules in different states. In Massachusetts, for example, farmers were left holding their hemp after the state followed FDA and said CBD cannot be used in foods or dietary supplements or marketed with health claims.
“They lost a huge market for their product,” Ball said. […]
To read the full article, visit the Agri-Pulse website (subscription required).
New Jersey’s top lawmakers have decided to let voters decide on legalization of cannabis during the 2020 presidential elections.
The constitutional amendment introduced today, November 18, 2019, by Senate President Stephen Sweeney and Senator Nicholas Scutari would legalize the use of recreational marijuana for anyone at least 21 years of age, and establish a Cannabis Regulatory Commission to oversee the new market.
The amendment does NOT detail the taxation rate, which was $42 an ounce in the original bill. It is also not clear if the commission will have 5 members, like the original bill.
According to NJBiz., Gov. Phil Murphy and legislative leadership long-resisted pursuing legalization via a ballot question because any, inevitable, changes to the program would have to go before voters in yet another ballot referendum.
“We made further attempts to generate additional support in the Senate to get this done legislatively, but we recognize that the votes just aren’t there,” reads the joint statement from Sweeney, D-3rd District, and Scutari, D-21st District.
To appear on the 2020 ballot as a constitutional amendment, both houses would need to pass the measure by a super-majority by the summer, or they would need to pass it 2x in both houses by a simple majority for 2 years in a row.
Just hours earlier, several progressive and social justice groups made a plea to legislative leadership to push through a legalization bill, pointing to a growing increase in low-level cannabis offenses which have disproportionately affected people of color.
A video replay of the webinar “Privacy and Data Protection in the Cannabis and Hemp Industries” is available to view.
A video replay of the webinar “Overview of New Federal Rules on Hemp Production and Q&A” is available to view.