The Industrial Hemp and CBD Industries, and the Potential Risks for Merchant Cash Advance Funders
Authored by Josh Herndon of Global Legal Law Firm
It seems that we are constantly being bombarded by news of the growing industrial hemp and cannabidiol (more commonly known as “CBD”) industries. Indeed, industrial hemp (and products derived therefrom, such as CBD) is now legal, and these industries have experienced substantial growth that is expected to continue into the foreseeable future. As such, the businesses in these industries seem to be ideal candidates for merchant cash advances (an “MCA”, or “MCAs”), as such businesses seem more than capable of repaying an MCA.
However, businesses in the industrial hemp and CBD industries are still subject to federal law, and their ability to sell their product can be impacted by enforcement of federal law by federal agencies. MCA funders partnered with such businesses may be harmed by if those businesses are unable to generate the sales needed to repay MCAs. Nevertheless, the possibility of an enforcement action by a federal agency doesn’t mean that all activities in which a business in the industrial hemp and CBD industries could engage would be a violation of federal law. Indeed, there are industrial hemp-related and CBD-related business- activities that likely would not violate federal law.
In sum, MCA funders considering MCAs to businesses in the industrial hemp and CBD industries need to be aware of all risks associated with such MCAs before making an informed decision about whether to make such MCAs.
Background Regarding The Industrial Hemp And CBD Industries.
A fast-growing, sustainable and inexpensively produced plant, industrial hemp is a variety of cannabis sativa L. that contains less than 0.3 percent plant chemical delta-9 tetrahydrocannabinol (more commonly known as “THC”). Unlike marijuana (which, like industrial hemp, is derived from cannabis), which is cultivated to yield psychoactive THC, industrial hemp yields more than 25,000 oil and fibrous products that are embraced by farmers as a hedge against lower-value soy, cotton and alfalfa crops.
Industrial hemp was legalized late last year pursuant to the Agricultural Improvement Act of 2018 (also commonly known as the “Farm Bill”). Related thereto, production of industrial hemp skyrocketed in 2018, with 112,000 acres licensed for cultivation, 3,546 cultivation licenses issued, 78,176 total acres cultivated, and 40 universities conducting research.
Numerous products are derived from industrial hemp including CBD, which is an oil-based product that has uses as a nutritional supplement and food additive In fact, seventy-eight percent of all industrial hemp grown in 2018 was for CBD. The market for CBD has exploded, and is expected to continue exploding. According to the Brightfield Group, industrial hemp-based CBD sales hit $170 million in 2016, and it is anticipated that a 55% compound annual growth rate over the five years thereafter will cause the market for industrial hemp-based CBD to crack the billion-dollar mark.
In addition to legalizing industrial hemp, the Farm Bill also guarantees that industrial hemp and industrial hemp-derived products can be imported, exported and transported from state to state like any other crops. The Farm Bill also allows industrial hemp businesses to access insurance and banking.
The FDA And Its Role With Respect To The Industrial Hemp And CBD Industries.
Although the Farm Bill legalized industrial hemp, industrial hemp and CBD businesses do not have carte blanche to take whatever actions they want with respect to their products. That is because the United States Food and Drug Administration (the “FDA”) is responsible for protecting and promoting public health through controlling and supervising food safety, tobacco products, dietary supplements, prescription and over-the-counter pharmaceutical drugs, cosmetics, animal foods and feed and veterinary products.
The FDA has stressed that although industrial hemp is no longer an illegal substance under federal law, it will continue to regulate cannabis products under the Food, Drug, and Cosmetic Act (the “FD&C Act”) and Section 351 of the Public Health Service Act. That means that any cannabis product (such as CBD) that is marketed with a claim of therapeutic benefit, regardless of whether it is hemp-derived, must be approved by the FDA before it can be sold. In fact, the FDA has specifically cited deceptive marketing practices as one of its chief concerns, and it has clearly established that selling unapproved products with a therapeutic claim is unlawful.
The FDA has also confirmed that the addition of CBD to food products and dietary supplements is unlawful, even if the CBD is derived from industrial hemp. The FDA’s rationale is that CBD is an active ingredient in FDA-approved drugs, and its addition to the food supply and dietary supplements is illegal under the FD&C Act.
Recent FDA Actions Involving The Industrial Hemp And CBD Industries, And The Impact On Those Industries.
The FDA recently, and dramatically, showed how it will exercise its authority over industrial hemp and CBD products on March 28, 2019, when it (along with the Federal Trade Commission) issued warning letters to three businesses who sell CBD products alleging false, unfounded, unsubstantiated, and egregious health claims about (without sufficient evidence or FDA approval) their products’ ability to limit, treat or cure. The three businesses had advertised a range of CBD-containing supplements, and boasted the ability of those supplements to effectively treat diseases (including cancer, Alzheimer’s and fibromyalgia) and “neuropsychiatric disorders” in both humans and animals. The FDA threatened the three businesses with product seizures, injunctions and sales proceeds reimbursement.
The above actions by the FDA understandably sent shockwaves through the industrial hemp industry, and those actions underscore the risks faced by industrial hemp and CBD companies. For instance, virtually all CBD products that make health and wellness claims, or are deemed a food or drug, are potentially subject to scrutiny from the FDA because such products are mostly sold over the internet and enter the “stream of interstate commerce”. However, it is such health and wellness applications, and food and beverage infusion, that makes CBD and other oil-based hemp derived products attractive to the consumers who are the target market of CBD companies. As such, industrial hemp companies that sell CBD products almost inevitably invite FDA scrutiny as a result of their efforts to market their products to their customers, and potentially imperil their ability to sell their products to those customers.
A Cautionary Tale For MCA Funders.
Although the industrial hemp and CBD industries seem to be ideal markets for MCA as a result of their past and anticipated future growth, the recent actions of the FDA described above highlight the very real perils faced by businesses in those industries. At first glance, businesses in those industries seem to be ideal candidates for repaying MCAs because of what appears to be bountiful future sales. However, product seizures and/or injunctions ordered by the FDA obviously could prevent businesses in those industries from selling their product and generating receivables from such sales. An MCA funder partnered with such a business would obviously be harmed if the business couldn’t generate the receivables needed to repay an MCA.
Fortunately, there are circumstances under which businesses in the industrial hemp and CBD industries can likely operate without fear of an enforcement action by the FDA. For instance, the FDA allows cannabis and cannabis-derived products to be introduced into interstate commerce where it approves such products (such as with the FDA’s approval of Epidiolex, a seizure medication containing CBD, in 2018). Moreover, the FDA has identified three lawful hemp derivatives (including hulled hemp seeds, hemp seed protein, and hemp seed oil) that can be marketed legally as long as they are not promoted with a therapeutic claim.
Based on the above, the circumstances under which an MCA funder should, or should not, make an MCA to a business in the industrial hemp and CBD industries can be very confusing. MCA funders need an insight into the industrial hemp and CBD industries, and the very real risks faced by those industries as described above, before making MCAs to businesses in those industries.
Fortunately, competent legal counsel versed in the MCA industry, as well as the industrial hemp and CBD industries, can provide such insight, and legal advice related thereto. As a practical matter, an MCA funder should not make an MCA to a business in the industrial hemp or CBD industries without first getting advice from such legal counsel so that the MCA funder can fully understand the risks involved in making such an MCA, and the circumstances in which such an MCA should, or should not, be made.
Mr. Herndon is an attorney at the Global Legal Law Firm, whose attorneys are well recognized as top industry experts. Mr. Herndon works in the compliance field helping electronic payment processing companies avoid getting fined, arrested, violate rules, or get sued from internal or external threats. Mr. Herndon is also involved in litigation in the payments space, including defending and pursuing electronic payments companies.