October 14, 2019Client Alert

Regulatory Updates in the Cannabis Industry

Over the past few weeks, two evolving stories have progressed the national and political discussion of the regulation of the cannabis industry in the United States—deaths and illnesses caused by vaping, and the tenuous but persistent advance of the Secure and Fair Enforcement Banking Act, which lets banks provide financial services to the cannabis industry.

Vaping Crisis

An outbreak of vaping-associated pulmonary injury (VAPI) has sickened thousands of people, some fatally, across the United States. As of October 10, the CDC reported 1399 confirmed and probable cases in 49 states. As many 26 patients may have died from the condition.

The CDC, FDA and HHS advised consumers to avoid buying cannabis vapes or using products off the street because they are unregulated, untested, and often contaminated.

An investigation into the origins of the various components of a street-market THC vape cartridge identified that the contaminated supply chain begins in the manufacturing centers of China, runs through the wholesale markets in Los Angeles and disperses to regional pen-filling operations before being sold to consumers. The cartridge may pick up lead, pesticides, and unsafe additives like vitamin E oil along the way.

Vitamin E oil emerged as a common cutting agent added to cannabis vape cartridges near the end of 2018. While Vitamin E oil meets the Food and Drug Administration’s Generally Recognized As Safe (GRAS) standard for certain uses (Vitamin E is widely used in skin care and as a dietary supplement), when vaporized and inhaled, Vitamin E disrupts the function of the fluid lining of the surface of the lungs.

The vaping crisis has the potential to lead to more regulation of the cannabis industry. Massachusetts, for example, took an extraordinary step and put a moratorium on vaping products. The crisis has also spurred some politicians, notably former FDA Commissioner Gottlieb, to push for the federal regulation of marijuana. Adult-use licensed states have been more immune to the VAPI outbreak than prohibition states because most state cannabis regulators have recalled problematic products, tightened ingredient disclosure requirements, and tested products to deter additive use. However, regulations in legal adult-use cannabis markets still do not explicitly ban many additives. Therefore, a number of state cannabis regulatory agencies could enact new emergency regulations in light of the vaping crisis.

SAFE Banking Act

In a significant achievement, the U.S. House of Representatives recently passed a bill that would let banks provide financial services to businesses in both the hemp and marijuana industries that are legally operating pursuant to state laws. The Secure and Fair Enforcement Banking Act of 2019 (SAFE Banking Act) allows hemp businesses and marijuana businesses in adult-use states to obtain loans, open bank accounts and use credit card services.

The SAFE Banking Act also instructs federal banking regulators to issue guidance to financial institutions confirming the legality of hemp and hemp CBD products within 90 days of enactment. Despite the federal legality of hemp, financial institutions have been hesitant to support hemp businesses due to recent examples of some businesses funneling money from marijuana transactions through accounts set up only for hemp business. The lack of access to financial services remains one of the largest restrictors of growth for the hemp industry.

The fate of the SAFE Banking Act is uncertain as it heads to the Senate, but we will keep our clients updated on the progress of the bill as it continues. 

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