USDA Releases Interim Hemp Regulations

1. Introduction

   On October 31, 2019, the US Department of Agriculture (USDA) released its long-awaited regulations governing hemp.1 Those regulations provide critical guidance to the hemp industry following the Agriculture Improvement Act of 2018 (2018 Farm Bill), which legalized the cultivation, production and interstate sale of hemp and hemp-derived products. The 2018 Farm Bill gave the USDA regulatory authority over hemp cultivation and required the USDA to outline a regulatory regime governing hemp.2

   The interim rule (the Rule) sets forth requirements for hemp producers as well as oversight requirements for states and tribes seeking to regulate the cultivation of hemp in their respective jurisdictions. Under the Rule, states and tribes may maintain primary regulatory authority over hemp production if they develop regulatory plans and have them approved by the USDA. State and tribal plans must set forth a process for, among other things, issuing licenses to grow hemp, reporting crop information to the federal government and addressing violations. Hemp producers operating in jurisdictions without approved state or tribal plans may apply for licenses directly from the USDA. Regardless of whether hemp producers operate pursuant to a state, tribal or federal regime, they will be required to obtain a license, sample and test hemp crops for compliance with federal regulations, and dispose of crops that exceed a delta-9 tetrahydrocannabinol (THC) concentration of 0.3 percent on a dry-weight basis. The Rule became effective immediately (on October 31, 2019) and will remain in effect until November 1, 2021, subject to change based on public comments.3 Individuals seeking to comment on the Rule must submit comments no later than December 30, 2019.4

   In light of these requirements, financial institutions and other businesses contemplating doing business with hemp producers, or manufacturers of hemp-derived products such as cannabidiol (CBD), should consider implementing due diligence procedures to ensure that hemp was produced in compliance with USDA regulations. As explained further below, such due diligence procedures might include obtaining a copy of the applicable state or USDA license, collecting information regarding the producer's procedures for sampling and testing crops and disposing of noncompliant plants, and securing representations regarding any past disciplinary action for noncompliance.

   Below we analyze the key provisions of the Rule and its implications for hemp producers, identify lingering uncertainty in the hemp industry, and discuss the due diligence procedures financial institutions and other businesses should put in place when engaging in business with hemp and CBD companies.

2. The 2018 Farm Bill and Implementing Interim Regulations

   In December 2018, Congress passed and the president signed the 2018 Farm Bill. The law removed industrial hemp and hemp by-products, such as CBD, from the definition of marijuana in the Controlled Substances Act (CSA), 21 U.S.C. § 841.5 As defined in the 2018 Farm Bill, the term "hemp" means the plant species Cannabis sativa L. and any part of that plant with a THC concentration of not more than 0.3 percent on a dry-weight basis. Plants, or portions thereof, with a THC concentration of greater than 0.3 percent are considered marijuana under federal narcotics law.

   The 2018 Farm Bill created an avenue for the legal cultivation, processing and sale of hemp and hemp-derived CBD, but it did not establish specific rules that hemp producers could operationalize. Instead, it required the USDA to outline the provisions by which it would approve hemp production plans submitted by states and tribes. On October 31, 2019, the USDA formally released a comprehensive set of interim regulations for the domestic production of hemp. The Rule creates a dual regulatory and enforcement program for legalized...