Considerations for Entrepreneurs Entering the Cannabis Industry

Overview of Cannabis Law

The legal framework governing the cannabis industry in the United States is incredibly complicated and involves a complex web of conflicting federal, state, municipal laws, regulations and policies.  While marijuana remains a Schedule I controlled substance under the Controlled Substance Act several states have begun to relax restrictions on its use allowing businesses and individuals under certain circumstances to grow, process, transport, dispense, study and/or consume cannabis or cannabis-derived products.

Forming Your Business and Creating a Foundation for Success

When creating your cannabis business your first step will be to decide on the most advantageous entity type.  Lindabury’s corporate and tax attorneys advise on the pros and cons of forming your business as a corporation, partnership, limited liability company or other entity type.  Choosing the proper entity structure for your new business will depend on liability, tax, and management considerations.

If your cannabis business wishes to obtain a medical cannabis cultivator, medical cannabis dispensary or medical cannabis manufacturer permit under the Jake Honig Compassionate Use Medical Cannabis Act (“CUMCA”) , business owners, directors and managers should have individual experience in the medicinal cannabis industry. Receiving municipal support and permits requires compliance with regulations in several areas including corporate structure, governance, accreditation, financial controls among others.  

Financing and Daily Operational Transactions for Your Cannabis Business

Securing access to capital is extremely difficult for cannabis industry businesses since banks and other financial institutions fear that providing financial services to those in the industry could violate federal criminal laws and financial regulations such as “The Bank Secrecy Act” and the “Money Laundering Control Act” codified under both sections 1956 and 1957 of Title 18, of the United States Code. If the Department of Treasury determines that banks or financial institutions are in violation of these federal laws, those institutions may no longer be eligible to participate with the Federal Deposit Insurance Corporation or Federal Reserve. 

While certain New Jersey banks have taken on cannabis accounts, obtaining loans and capital to start a business in the industry has proven difficult.  Given the reluctance of banks to provide cannabis entrepreneurs with loans, many individuals look to friends, family and private investors for funding. This creates a need for investor, shareholder and operating agreements, loan documentation and other commercial contracts.  Lindabury’s team of corporate, banking & financial services and litigation attorneys are well suited to advise on drafting, negotiating and enforcing these agreements.

Site Control and Zoning Compliance

When deciding on a location for your business you must consider whether the municipality or neighborhood where you plan to operate has made a preemptive determination concerning cannabis businesses.  In anticipation of cannabis becoming legal in New Jersey, many municipalities have taken preemptive steps and positions which prohibit the cultivation, sale and purchase of cannabis in their town. 

Even before New Jersey lawmakers have completed drafting a cannabis legalization bill, nearly 40 towns in the state have preemptively banned legal marijuana or cannabis industry businesses from operating within their borders. While state legislators are currently drafting legislation that would legalize the recreational-use and sale of cannabis products, most drafts have included provisions allowing municipalities to ban cannabis businesses. Lindabury’s Real Estate, Zoning & Land Use attorneys regularly appear before municipal zoning and land use boards and advocate for variances and permitting uses on behalf of businesses.

Labeling, Packaging & Advertising

At the federal level, the Agriculture Improvement Act of 2018 (the 2018 Farm Bill) was signed into law on December 20, 2018. Among other things, this new law changes certain federal authorities relating to the production and marketing of hemp.  The Farm Bill however explicitly preserved Food and Drug Administration’s (FDA) authority to regulate products containing cannabis or cannabis-derived compounds under the Federal Food, Drug & Cosmetic Act and section 351 of the Public Health Service Act (PHS Act).

The FDA requires any cannabis product (hemp-derived or otherwise) that is marketed with a claim of therapeutic benefit, or with any other disease claim, to be approved by the FDA for its intended use before it may be introduced into interstate commerce.  When it comes to edible items containing CBD the Farm Bill expressly preserved the Food and Drug Administration’s (“FDA”) authority to regulate products containing cannabis or cannabis-derived compounds under the Federal Food, Drug, and Cosmetic Act (FD&C Act) and the Public Health Service Act. As such, if a hemp product is intended for use as a drug, food (including dietary supplement), device, or cosmetic by humans or animals and is introduced into interstate commerce, the product is subject to FDA regulation regardless of its source.

CUMCA requires applicants to include a written description concerning the applicant’s qualifications for, experience in, and knowledge of packaging and labeling. 

Lindabury’s corporate team can assist reviewing the language used in advertising and packaging materials for medical cannabis and CBD products to meet FDA regulations.  

Transportation and Distribution

Under the 2018 Farm Bill, CBD products are allowed for interstate transport and sale. The Farm Bill essentially expanded federal law to cover a wider range of commercial hemp activity and gave the United States Department of Agriculture (“USDA”) regulatory authority over the cultivation of hemp.  States cannot prohibit hemp or hemp products from passing through their territory provided that the hemp or hemp products were produced in compliance with Section 10113 of the 2018 Farm Bill.  

In New Jersey, the Department of Agriculture is awaiting the USDA to propose its hemp rules in order for the Department to receive the requisite federal approvals. Once the USDA rules are approved, the USDA then will have to approve the rules for each state. The USDA has said it intends to review state proposals in the fall of 2019. The rules for each state will include testing procedures, certification methods, inspection plans and additional measures.

In addition to the foregoing, New Jersey has repealed its Industrial Hemp Pilot Program and replaced it with the New Jersey Hemp Farming Act. The purpose of this new law is to “promote the expansion of the State’s hemp industry to the maximum extent permitted by federal law,” among other things. Moreover, consistent with the 2018 Farm Bill, the Hemp Farming Act states that it is lawful to possess, transport, sell, and purchase legally produced hemp products in the state.   

CUMCA also addresses rules and regulations that pertain to individuals who perform work for or on behalf of a medical cannabis cultivator, medical cannabis manufacturer, or medical cannabis dispensary, issued a permit in accordance with state law. It requires that individuals transporting, transferring, relocating, or delivering medical cannabis be issued a medical cannabis handler certification. CUMCA also directs the commission to enact rules and regulations governing the transfer of medical cannabis and medical cannabis products between medical cannabis cultivators, medical cannabis manufacturers, medical cannabis dispensaries, clinical registrants and testing labs. The current regulations under CUMCA are complex as it relates to the transportation and distribution of medical cannabis product. 

Lindabury works with companies to draft transportation and distribution agreements for a variety of products.  Our understanding of the Federal and state regulations governing cannabis products allows us to provide guidance to clients seeking to enter the cannabis industry. 

Disclaimer: Using, possessing, distributing and/or selling marijuana is illegal under federal law, regardless of any state law. Businesses and individuals should be aware that compliance with state law does not assure compliance with federal law. Federal laws may be enforced in the future. Legal advice provided by Lindabury, McCormick, Estabrook & Cooper, P.C., is designed to counsel clients regarding existing and/or proposed cannabis law. No legal or business advice we give is intended to provide any guidance or assistance in violating federal law.