CBD: Hazy Regulations, Huge Rewards Lure Entrepreneurs
The market for CBD is booming in a gray area of the law. Little is clear except there is a lot of money to be made.
Risk versus reward. It’s the equation hundreds, if not thousands, of companies across the United States are weighing with regards to CBD.
And despite an overwhelming lack of clarity at the federal level, companies of all shapes, sizes and philosophies are wading into the ever-deepening pool of hemp-based consumer products. From retail giants like Safeway and Rite-Aid to smaller, regional chains like New Seasons Market. From iconic, luxury retailers like Barneys to boutique wellness shops throughout the country. From major CBD brands like Charlotte’s Web, which boasts sales to more than 3,000 retail outlets nationwide, to startups like New York-based New Highs CBD.
The manufacture and sale of CBD products remain legal gray areas, but companies are moving fast to establish their brands, jockeying for the advantage of being first-movers and capitalizing on the cannabidiol rush.
Whether CBD is the next big boom or a bubble surging to its bursting point, no one can say for certain. Like Tulip mania and the dot-com frenzy, it’s probably a combination of both. But the CBD industry is definitely in the midst of its watershed moment.
Legalization vs. the FDA
CBD’s momentum has been building for years. Its sharp rise can be tracked to CNN’s “Weed” documentary, which in 2013 exposed the world to the Stanley brothers and their CBD-rich cannabis varietal that helped young Charlotte Figi treat grand mal seizures.
That building buzz turned to roar with the passage of the 2018 Farm Bill, formally titled the Agricultural Improvement Act of 2018. However, the Farm Bill’s passage also led to widespread misconceptions.
“No doubt about it,” says Ronie Schmelz, an attorney in California with Tucker Ellis, who advises clients on regulations set forth by the FDA, Federal Trade Commission and other agencies, as well as representing them against class-action lawsuits brought by consumers.
Schmelz points out that the Farm Bill does a lot to protect hemp farmers, allowing the wonder-crop to be grown legally, removing it from Schedule I and providing safety mechanisms for interstate transportation, insurance and financial services. However, the landmark bill doesn’t address the parameters of selling the end products.
“That remains within the purview of each individual state, and states have taken different approaches to legalization of marijuana,” Schmelz says.
Following the passage of the act, the FDA issued a statement that ingestible products containing cannabis or cannabis-derived compounds remain under the purview of the FDA and the Federal Food, Drug and Cosmetic Act. FDA Commissioner Scott Gottlieb’s statement spurred several states and municipalities to enact stricter regulations, including New York City, which now prohibits restaurants and bars from selling CBD (read more about the crackdown on Page 140).
“It didn’t necessarily throw any wrenches into our plans,” says New Highs CBD founder Sarah Remesch, whose company is based in the Big Apple. “There were talks of using our products in cocktails or food; none of those really made sense for us. I think it’s actually good to have some regulation to keep the consumer safe at the end of the day. A lot of people don’t know what’s in CBD, so they see it on a menu -- ‘Oh yeah, toss that in my latte’ -- and they don’t know how it’s going to affect them.”
“It’s remarkable how many products are out there on the marketplace,” says Richard Fama, a New York-based lawyer with Cozen O’Conner, who has been involved with FDA regulations and class-action litigation against food and beverage companies for more than a decade. “There were certainly a lot of marketers who jumped on the bandwagon after the passage of the Farm Bill, but I don’t know how much attention was paid to Commissioner Gottlieb after that.”
Lawyers, lawmakers and entrepreneurs alike are waiting impatiently for clarity on the subject.
“It is still a quagmire,” Schmelz says. “I think a lot of people assume that because the Farm Bill was passed, it’s open season now and it’s risk-free to go ahead and sell products that contain hemp products that meet the definition in the Farm Bill. That’s simply not the case.”
Related: Martha Stewart Living the CBD Life
Much like marijuana, each state has vastly different rules about the legality of CBD, who can sell it, what type of licenses -- if any -- are required, what type of products are allowed, what regulatory authority oversees the production and sale, and how CBD products factor into state-sanctioned medical and recreational marijuana programs. These rules are in a constant state of flux; a wide-open opportunity one day could face an impossible barrier the next, and vice versa.
“What I can tell you is that there are states out there -- Texas is one example -- that are very hostile to marijuana, so you probably run a huge risk if you want to sell products there,” Schmelz says. “But it remains to be seen whether other states, which are more hospitable to marijuana, for example for medical purposes, will permit the sale of hemp and hemp-derived products in their states.”
That said, the opportunity is proving irresistible to modern oil prospectors, even in the Lone Star State. Like the brazen wildcatters of lore, CBD retailers are staking claims in the new frontier of the cannabis space. Prohibition Creamery in Austin began selling CBD-infused ice cream on Valentine’s Day. Dab is a CBD/hemp café in San Antonio. Amsterdam Co. plans to open a CBD-themed coffee shop in Houston later this year. LazyDaze Counterculture is a prominent smoke shop and CBD café chain with storefronts in Austin, San Antonio, Killeen, Laredo and Pflugerville and more in the works. American Shaman, the booming CBD retail franchise, has opened shops across Texas. SA Botanicals is a local CBD manufacturer and distributor with more than a dozen retail locations in San Antonio.
The Oklahoma-based franchise CBD Plus USA has one store open in Plano and lists locations in Amarillo, Frisco, Grapevine, Lewisville, McKinney, Tarrant County, The Colony and Wichita Falls as “coming soon” on the company’s website. Countless smoke shops, head shops and “wellness” centers sell CBD and hemp products -- some of which are indiscernible from the packaged cannabis flower sold in dispensaries up and down the West Coast. And don’t forget Texas’ favorite son, the legendary Willie Nelson, who sells the Willie’s Remedy line of CBD-infused coffee throughout the country.
In some cases, these emerging CBD businesses are in direct competition with Texas’ three licensed producers of high-CBD, low-THC cannabis for card-holding medical patients. And that’s just in Texas -- a state that still has some of the most draconian marijuana laws in the universe. One can imagine what the CBD market looks like in weed-friendly Washington, Oregon, California or Colorado.
It’s easy to hear the siren’s song of CBD. Its potential as an additive in any type of product -- from cosmetics and topicals to foods and beverages -- and its non-psychoactive properties are the makings of a multibillion-dollar commodity.
An excerpt from a Bloomberg article by journalists Craig Giammona and Kristine Owram hit the nail on the head: “The growing demand for CBD dovetails with Americans’ long-standing appetite for super foods and ingredients that promote wellness. In a divided and anxious nation, moreover, many people are willing to try products that claim to ease insomnia and stress. CBD is following a path already traveled by tumeric, acai berries, ginkgo biloba and so on. People tell each other the stuff works, word travels, and the cash registers keep ringing.”
By all accounts, those cash registers will be kept busy in the coming years, as hemp production ramps up and more Americans have access to, and interest in, CBD products.
In its 2019 Global State of Hemp report, Hemp Business Journal estimated total CBD sales in the U.S. could hit $1.5 billion by 2020 and $2.26 billion by 2022, up from $641 million in 2018. Based on data from Hemp Business Journal, BDS Analytics and wellness-focused data firm SPINS, the report’s 2022 projection is comprised of $1.3 billion in hemp-derived CBD sales, $647 million from marijuana-derived CBD and $310 million from pharmaceuticals (Epidiolex).
Meanwhile, the Chicago-based market research firm Brightfield Group has predicted even steeper growth, estimating CBD sales hit $22 billion by 2022.
It remains to be seen if -- or more precisely, when -- some of the major retail holdouts will begin stocking their shelves with CBD. To date, giants like Walmart, Costco, Target, Kroger, Amazon and Whole Foods have been CBD-free zones (although Target briefly flirted with CBD in 2017 before pulling Charlotte’s Web’s CW Hemp products from its shelves, and Amazon sells dozens of “hemp oil” products that are essentially identical to “CBD-infused” merchandise sold elsewhere by the same manufacturers).
With the vast regulatory uncertainty hanging over the CBD industry, most lawyers would suggest a wait-and-see attitude. But that advice is not putting any sort of damper on the entrepreneurial spirit.
Charlotte’s Web, the company founded by the Stanley brothers and named after the strain made famous by “Weed,” is still the most well-known CBD company, posting $48 million in sales -- and gross profit of $36 million -- in the first three quarters of 2018 (fourth quarter financials had not been released by the company as of publication). Charlotte’s Web went public in 2018.
Green Roads, a Florida-based company, sells its CBD-infused products in about 6,000 stores and 2,000 doctors’ offices nationwide. Brightfield lists it as the largest private company specializing in hemp-derived CBD; co-founder Arby Barroso estimated the company’s 2018 revenue at $45 million.
And Cura Wellness, one of the fastest growing marijuana companies in the country, made mainstream inroads in February, announcing a partnership to sell Cura’s Select CBD brand at New Seasons Market grocery stores in California, Oregon and Washington.
There’s a parallel between the emerging CBD trade and the birth and development of the medical marijuana industry as entrepreneurs in both categories have charged ahead without full consent from the Feds, blazing their own trail and daring regulators -- and competitors -- to keep up.
Like Craft Cannabis Alliance executive director Adam Smith said in the March 2019 issue of Marijuana Venture, “Waiting for explicit permission from the federal government in cannabis has never been a winning strategy.”
State and federal legislation for CBD -- and in fact, for all things cannabis -- is trending toward acceptance. Most people believe there’s no going back. The train, as they say, has left the station, but how can CBD producers and retailers planning to carry CBD products protect themselves as much as possible from violating the complicated rules?
“Of course, like any good lawyer would say: They should seek legal advice,” Schmelz says.
“Just because the Farm Bill has passed, they shouldn’t think they have a risk-free opportunity to sell products with CBD derived from hemp in their stores,” she says, “particularly given the stated position of the FDA that it is unlawful to introduce food and dietary supplements containing CBD or THC into interstate commerce, regardless of whether they are hemp-derived. Retailers also need to consider whether there are state or local ordinances that restrict the sales of such products.”
She also recommends businesses to look at whether selling CBD products could invalidate their insurance policies, lease agreements, bank accounts, etc.
And for both manufacturers and retailers, it’s important to ensure the label on the packaging matches what’s actually in the product. With CBD products, in particular, there have been widespread reports of wildly inaccurate labeling -- including products that contain THC, despite being labeled as having zero percent THC.
Grandiose health claims are also not uncommon.
“I was just buying my dog some pet food and they had CBD-infused pet treats saying it cured epilepsy and seizures,” Fama says. “I think that’s where you’re going to see the FDA cracking down more significantly -- products making health claims.”
He suggests avoiding any claims that a product could prevent, cure or diagnose a disease -- including in pets, as those products are not immune from penalties related to false or deceptive claims, such as unsubstantiated medical benefits.
Retailers can require an indemnity clause in their sales agreements. Fama says he always tells people entering a food or beverage business -- including those of the CBD-infused variety -- that “an indemnity provision is only as good as the financial position of the company that is agreeing to indemnify you.”
For a lot of companies selling CBD, “their ability to indemnify a future loss might not exist,” he says. “So the retailer really needs to be doing their due diligence.”
The bottom line is that despite the explosive growth of the CBD market, businesses still need to follow the same basic steps as any startup.
“Don’t rush into it,” Fama says. “Do your homework. Consult legal counsel.”