Both sellers and consumers may benefit as bad actors are forced out
By: Stephanie Ramirez
“Lack of regulation has not been helpful to most companies either, because how do you sell a product you can’t say anything about?” —Sterling Cook, Co-founder and CEO, Green Compass
Every five years, Congress passes legislation that sets national agriculture, nutrition, conservation, and forestry policy, commonly referred to as the “Farm Bill.” The last Farm Bill, signed into law by then President Trump, expressly removed “hemp” from the definition of “marijuana” under the Controlled Substances Act (CSA), thereby legalizing industrial hemp and industrial hemp-derived compounds.
This move brought on a windfall of companies offering CBD products, including several direct sellers. However, since the 2018 Farm Bill was passed, the Federal Drug Administration (FDA) has repeatedly and explicitly stated that CBD may not be added to food and dietary supplements because under the Federal Food, Drug, and Cosmetic Act (FDCA), a food or dietary supplement may not contain ingredients that are also active ingredients in an FDA-approved drug product.
Epidiolex is a CBD isolate product formulated by GW pharmaceuticals and is a drug often used to treat epilepsy in children. The FDA has largely been silent on the enforcement of this and, instead, they have been focused on health claims.
The FDA has been sending warning letters to CBD companies for the past few years with a focus on unwarranted health claims. However, in November 2022, the FDA’s newest round of warning letters target CBD food products and also involve entities selling products in states that have legalized CBD food products.
While the FDA has stated it can’t set any regulations for over-the-counter CBD products because it doesn’t have enough data to say they’re safe, some direct selling executives believe that this latest flurry of activity is the FDA’s way of signaling a shift in or expansion of its enforcement priorities. They say that expanded regulation may actually help the industry and increase consumer confidence.
“Two years ago, when you looked at the CBD market there were thousands of brands out there, the vast majority of which were just white-labeling products,” says Sterling Cook, co-founder and CEO of social selling company Green Compass, which markets and sells organically grown, hemp-derived products from its base in North Carolina.
“At that time, 95% of all revenue in the CBD market, as a whole, was from companies with under a million dollars in annual revenue, and most didn’t know where it was coming from. They really didn’t even know what they were selling. It was like the Wild West gold rush.”
Green Compass has been growing hemp since 2017, and in early 2019, just after the Farm Bill passed, it launched the direct selling business. The company provides full traceability from the field to the table.
Without a clear regulatory path to ensure the safety of a product, many have speculated that the CBD industry had seen its glory days because some of the industry’s biggest suppliers such as GenCanna in Kentucky and Folium Biosciences in Colorado had filed bankruptcy, Cook says.
“There were just a few big distributor manufacturers that were just white labeling for everybody, and then COVID killed more than half of those 3,000 some odd brands because they were all based on retail or were little mom-and-pop shops,” adds Cook.
“And, lack of regulation has not been helpful to most companies either, because how do you sell a product you can’t say anything about?”
As consumers become more aware of the health benefits of CBD, Cook says consumers need to look for brands that have vertical integration, that offer full transparency and full traceability, because right now it’s an unregulated market.
Expected Changes in the 2023 Farm Bill
The U.S. Senate Committee on Agriculture, Nutrition, and Forestry formally kicked off its process for the 2023 Farm Bill with field hearings in
both Michigan and Arkansas in 2022. Hearings continued in November and December, and will continue throughout the early parts of 2023.
Although addressing the agricultural industry as a whole, it is anticipated that the 2023 Farm Bill will have cannabis-specific changes that will be a game-changer for hemp growers, processors, wholesalers, and retailers.
Some of the key areas the Committee said it will address are:
- The FDA’s position on CBD – Lawmakers have been encouraged to incorporate language into the 2023 Farm Bill regulating CBD and other non-intoxicating cannabinoids as dietary supplements. Regulation of hemp and hemp derivatives as a dietary supplement would force new and stringent FDA compliance requirements on a currently unregulated market.
- Intoxicating Cannabinoids – Currently, compliant hemp products contain no more than 0.3% THC. However, there have been proposals to raise the allowable percentage to 1.0%, which may bring the implementation of percentage limits on delta-8 THC and other intoxicating cannabinoids.
- Revising banking and insurance regulations – Without a mature regulatory framework for the industry, risk averse banks and insurance companies have been wary of doing business with hemp operations. Revising bank regulations will help hemp companies obtain the loans needed to build thriving businesses.
- Removing DEA lab testing requirement – The requirement that hemp can only be tested for THC content at DEA-registered facilities is limiting capacity, which is bottlenecking production, and some argue that non-registered labs are able to conduct testing just as effectively. The USDA has however delayed this requirement as of now until December 2023.
Cook says he welcomes the idea of regulating hemp-derived products as a dietary supplement. “We’ve been welcoming that for a few years now as it will force a lot of the bad actors out of business,” he adds. “I’m not one for pro-regulation, but in this case, I am. The industry needs it because the consumer needs clarity.”
Cook says many companies will not be able to weather the regulation that is coming. He says the barriers to entry are going to increase, and a lot of people are not going to be able to keep up with the regulation.
Banking & Merchant Account Requirements
Even with potential changes to the Farm Bill as it relates to CBD, Cook speculates those changes will not necessarily cause banks or credit processing companies to be willing to work with just anyone offering CBD.
Nikky Kuykendall, director of business development for Nexio—a payment processor, AI platform, and payouts orchestration service for direct sellers—says there are a number of things banks and credit card processing companies consider before offering loans or creating merchant accounts.
“Nexio has some great relationships with the sponsored banks that we work with, and we have to continuously check in with them on their CBD regulations because, from an underwriting standpoint, they have the final say as to whether or not a merchant account is approved or denied,” Kuykendall says.
“There has been some fluctuation as far as how banks view those types of accounts. With so many shifts in the industry, that’s probably going to continue for a little while until the market has a chance to stabilize.”
Kuykendall indicates there is no guarantee a bank will grant a merchant account to a company wanting to sell CBD, but prior experience in the CBD industry or having an already established business in a related space may help. Nexio offers its potential customers looking to enter this space a list of “must haves,” which can fluctuate as federal and state regulators evolve their positions based on law.
Things a direct selling organization may need to provide to gain a merchant account if they offer CBD products include:
- Previous nutraceutical processing history – Banks are more receptive to applicants who have previous nutraceutical processing history. Ingestible and topical CBD are both considered a nutraceutical to sponsoring banks; while the rules vary, ingestible CBD products have more stringent guidelines because they are intended for human consumption.
Merchants are more likely to get approval for CBD products if they have been selling nutraceuticals in the past and can demonstrate the consumers are satisfied with the products and that the processing history was healthy.
- Structure or function claims – Nutraceutical, and especially CBD, accounts can face challenges with structure or function claims. Structure/function claims are any claims that a merchant makes, including testimonials on their website, marketing, packaging, social media or distributors’ social media about how the product can help consumers. Guidelines around what can be claimed are strict, particularly if there is a claim that a product will change the structure or function of a consumer’s body in some way. Any structure/function claims identified would likely need to be modified, removed, or substantiated with clinical studies that meet the FTC and FDA guidelines.
- Product testing guidelines – Every product batch will need to have a certificate of analysis (COA) from a reputable company to confirm THC levels. Each product must contain no more than 0.3% THC on a dry weight basis. Best practices for testing will include testing for residual heavy metals, solvents and hydrocarbon pesticides, among others.
- Business practices – Merchants need to demonstrate they understand and are in compliance with federal and state laws as well as regulatory agencies. For example, shipping to states where CBD products are not permitted by law is strictly prohibited.
Kuykendall adds that there may be additional requirements as each case and company is different, but these are a few of the most important. She says she hopes that the industry has had some time at the state level to make a few mistakes and figure a few things out. That way, at the federal level they can take that information and implement laws and regulations that will be beneficial across the board.
What’s Next for the CBD Industry?
One company that’s been at the forefront of the CBD industry, and more specifically on the regulatory side is Texas-based Zilis. Founded in 2015, Zilis is a provider of hemp-based health products that has worked closely with the Hemp Round Table and with Senator Mitch McConnell’s office when the 2018 Farm Bill was being revised.
“As members still with the Hemp Round Table, who still continue to lead the interests of the CBD industry, [we believe] there is an expectation that the FDA will either have its hand forced, or at least take the next step toward clarifying CBD’s ability to be used in dietary supplements,” shares Gabriel Ettenson, senior innovation strategist for Zilis. “The belief is that they will permit it in dietary supplements.”
While the 2018 Farm Bill made CBD legal, Ettenson says the FDA has not enforced its position that it is not currently a dietary supplement, which is what has accelerated the growth of the industry.
He says this has resulted in a proliferation of synthetic cannabinoids such as THC (Delta 8) and THCO, both of which have greater psychoactive properties.
“It’s basically putting a lot of people at risk,” says Ettenson.
“It’s turned an industry that was focused on health and being a super food ingredient into a legal way to get high. The FDA does see that there is a problem here if they don’t put regulations in place. I think it’s going to be positive in that [new regulations] will allow CBD and other non-intoxicating cannabinoids to find their way into the nutritional market.”
He adds that there may still be state-to-state decisions around whether people can continue to sell synthetic cannabinoids, but for the most part, he feels that the FDA will probably knock that out of the equation.
“If the FDA does regulate, then companies will need to move through the traditional process of establishing their CBD as a new dietary ingredient,” says Ettenson.
“That’s a pretty expensive process. It could be several-hundred-thousand dollars. I think what we’ll see on the other side of the regulatory framework is that 85% to 90% of the companies that are currently selling [CBD] products will be wiped out.”
While some of these shifts are a natural part of the process when new products and ingredients are entering the market, Ettenson says he believes people are ready to start looking more seriously at plant medicine. Consumer confidence will grow as the regulatory framework is developed.
He adds that Zilis is already seeing growth into different demographics.
“I think in the beginning of the CBD industry it was being promoted as anti-inflammatory and neuroprotectant so the early consumers, a high number of them, were 50-plus,” Ettenson says. “What happened during COVID was interesting. There was all of a sudden a rise in Gen Z and millennials making up the majority of the customer demographics.”
In terms of how the new regulatory framework will play out across states, Ettenson believes that most states, if they don’t already have their own framework, will refer to the FDA’s framework to remain compliant.
“There’s very few states left that present any issues,” he adds. “The states have just slowly started taking it on themselves knowing that these products were going to be sold regardless of the FDA’s position.”
Ettenson says he is confident that CBD and other hemp-derived products will have their own channel soon. He anticipates that it will be better regulated, offer better quality products than what’s on the market right now, and the companies that have been doing it right from the beginning will be the ones still standing as the regulatory framework is established.
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