Marijuana Business Magazine March 2019

March 2019 | mjbizdaily.com 61 T he Farm Bill’s passage presents marijuana cultivators, extractors, manufacturers and retailers with a boatload of federally legal business opportunities by way of hemp-derived CBD. But the pivot from a mainly marijuana company to a CBD company is fraught with regulatory hurdles, gray areas and logistical challenges. That’s why entering the hemp-derived CBD space isn’t as simple as starting a new product line. It’s more like starting a new company, according to Craig Hen- derson, CEO of Extract Labs, a Boulder, Colorado-based extraction firm and CBD products manufacturer. While you’ll need new hemp products with a THC content below 0.3% to be legal, you’ll also need new buildings, new employees and often new equipment. And while some old restrictions are gone, new hurdles have arisen. “I’m not seeing many marijuana peo- ple coming in yet, probably because it’s hard,” Henderson said. Hard … but not impossible. KEEP THEM SEPARATE Marijuana entrepreneurs who want to enter the federally legal CBD industry should consider starting a CBD business separate from the marijuana entity. “I don’t think the two industries will be allowed to cross over. If you have a marijuana facility, you can’t just run hemp inside of it,” Henderson said. Keeping marijuana and CBD operations separate also will be important when wooing major investors, particularly those wary of pumping money into MJ businesses. Consider Vertical Companies, a Los Angeles-based medical and recreation- al marijuana company with multistate operations that in January spun off its hemp-based CBD assets in a new entity called Vertical Wellness. “We’ve been talking with hedge funds and institutional investors for a while, and everyone is interested, but no one will commit (to cannabis) because of the federal prohibition,” said Smoke Wallin, president of Vertical Companies and CEO of Vertical Wellness. “We’ve taken all of that hemp- based business—the brands, the manufacturing and farm contracts—and put them all under Vertical Wellness as its own stand-alone company, because you just cannot have cannabis- touching activity if you want to access institutional capital,” Wallin said. While marijuana and CBD businesses must be separate, they can be owed by the same person, according to Sean Covi, a vice president at Trilogy Financial, a California-based financial services firm with offices in Denver. “As long as they own the hemp business separately from the higher- THC-content business, the same person can own both,” Covi said. CULTIVARS AND FORMULATIONS Another challenge facing marijuana companies angling to enter the CBD industry will be finding cultivars that are rich in CBD. For extractors, the issue is developing hemp-based formulations that are compliant with federal law—less than 0.3% THC—yet still effective. Consider the case of Vancouver, Washington-based Fairwinds, which makes infused products such as tinctures, capsules, topicals and others with ratios that can be THC- or CBD- dominant. The company now wants to enter the hemp-derived CBD business by capitalizing on the Farm Bill’s passage. Currently, Fairwinds offers several products with high-CBD and low- THC ratios that are derived from oils extracted from plants of the Omrita strain, which are grown in-house and can have as much as 26% CBD and less than 1% THC. But Omrita is a marijuana plant whose low-THC content is still higher than is allowed under the new Farm Bill. As a result, those products can’t be shipped across state lines or sold legally at the federal level. The solution wasn’t simply removing THC from the products, because that would make them less effective. Rather, in anticipation of hemp legaliza- tion, Fairwinds CEO James Hull and his team spent more than a year finding new cannabinoids that could replace THC in formulations that would be federally legal while still an effective treatment. “It required a lot of studies on formu- lations. We saw this day coming and have been working on this for over a year now, asking, ‘How can we formulate products like the PM300—an anti-inflammatory, pain-relieving tincture that uses THCA and a little THC—and bring it into the hemp-CBD market and not lose any of the effectiveness?’” Hull recalled. “Many Fairwinds products can be brought into the hemp-CBD market with very slight modifications in cannabinoid ratio, without reduction in performance. We can use different cannabinoids.” The CBD extracts that Fairwinds uses in products that the company wants to sell nationwide don’t come from marijuana plants grown in-house. Marijuana entrepreneurs interested in establishing federally legal CBD businesses face regulatory and logistical challenges that make such a pivot difficult. But it can be done if you keep in mind the following: • Marijuana entrepreneurs who want to enter the federally legal CBD industry should consider starting a CBD business separate from the marijuana entity. • CBD must be extracted from hemp cultivars with a THC content below the federal limit of 0.3%. • While hemp-based CBD is now legal to sell nationwide, entrepre- neurs still have to be careful how they market their products and what kind of claims they make about its effectiveness. • CBD extractors process significantly more biomass than marijuana extractors—therefore they require heftier machines.