As the State of New Jersey continues to evaluate the expansion of current legislation related to medicinal use cannabis and the legalization of recreational cannabis, proposed legislation advancing in the New Jersey legislature has set its sights on marijuana’s less psychotropic relative – industrial hemp.

If passed, Assembly Bill No. 1330 (the “Bill”), introduced in February of 2018 and sponsored by Assemblyman Reed Gusciora, would enable licensed businesses to plant, grow, harvest, possess, process, distribute, buy and sell industrial hemp for commercial purposes. The Bill defines industrial hemp as an agricultural product that is part of the plant of any variety of Cannabis sativa L. with a delta-9-tetrahydrocannabinol (“THC”) concentration of 0.3% or less on a dry weight basis. This threshold of THC is intended to ensure that legally harvested industrial hemp maintains no more than a small percentage of THC, the psychoactive, “high-producing” ingredient in marijuana. To ensure compliance, the Bill requires that licensees submit, on an annual basis, documentation confirming that such industrial hemp is of a permissible type and THC concentration.

Pursuant to the Bill, prospective growers and distributors must apply to the Secretary of Agriculture (the “Secretary”) for an industrial hemp license, which must include specific documentation with respect to, and a legal description of, the land to be used for growth and production of the crop. Applicants are also required to submit to fingerprinting and both a nationwide and statewide criminal history and background check by the Department of Law and Public Safety and/or the Federal Bureau of Investigation. All issued licenses will be valid only for the site or sites specified in the license, and for a period of one (1) year from the date of issuance, unless otherwise adjusted by the Department of Agriculture to align with the normal growing season and to facilitate reasonable harvesting, processing and sale or distribution timing.

The Bill also tasks the Secretary, in consultation with the Attorney General, to adopt certain rules and regulations facilitating administration and enforcement. These regulations include (1) the establishment of approved varieties of industrial hemp and methods to distinguish it from other types of marijuana, (2) testing protocol for THC levels, (3) licensing requirements, fees and renewal procedures, and (4) penalties for administration and enforcement. Finally, the Bill requires that licensees notify the Secretary and the Attorney General of all sales or distributions of industrial hemp during the calendar year, and identify by name and address each distributee of industrial hemp for such calendar year.

Beyond the Bill, industrial hemp would be subject to the protections of the Right to Farm Act, and the land used for its cultivation may be eligible for valuation and taxation benefits provided by the New Jersey Farmland Assessment Act of 1964 – an Act permitting land actively devoted to agricultural use to be assessed at its productivity value, which is often less than the property tax assessment value of the property.

The enactment of the Bill is poised to offer a substantial boost to New Jersey’s agricultural industry, introducing what some view as a new “cash crop” to New Jersey’s repertoire and would afford New Jersey farmers the opportunity to diversify their products and compete in a nearly $500 million industry, catalyzing manufacturing and economic opportunity across the State. The Bill now also finds federal legislative support, following introduction of the Hemp Farming Act of 2018 in late April, co-sponsored by Senate Majority Leader Mitch McConnell (R-KY) and Senate Minority Leader Charles E. Schumer (D-NY). The federal bill, among other things, would remove industrial hemp from Schedule I of the Controlled Substances Act, and would empower the states to be the primary regulators of the industry.

After months of uncertainty surrounding the enforceability of state marijuana legislation in light of federal prohibitions, President Trump may have offered the legal cannabis industry some solace.

Late last week, President Trump promised to abandon Justice Department efforts to target recreational marijuana in states that have legalized adult use. The threat of increased federal enforcement came in early January, with Attorney General Jeff Sessions’s rescission of the Obama-era “Cole Memorandum”. The issuance of the Attorney General’s competing memo garnered opposition from Senator Cory Gardner – a top Senate Republican from the State of Colorado, who immediately blocked nearly twenty Justice Department nominees in retaliation. After a months-long stalemate, President Trump assured Senator Gardner that rescission of the Cole Memo would not adversely impact the legal cannabis industry in Colorado, and committed to supporting a “federalism-based legislative solution to this states’ rights issue”.

For many, including Senator Gardner, this proclamation by the President assuages concerns about a cannabis industry stifled by federal regulation and fear of prosecution.  At a minimum, many feel that this demonstrates a shift in the federal narrative toward looser regulation, governed on a state-by-state basis. On the other hand, many remain cautious in light of mixed signals from the administration, fearing that the President’s commitment applied only to Colorado under these narrow circumstances.

With this backdrop, lawmakers continue to pursue a bi-partisan legislative solution, aimed at prohibiting the use of federal funds and resources to target recreational marijuana businesses operating legally under state law. If successful, these measures would provide much needed comfort to the legal cannabis industry, likely fostering rapid growth and increased investment opportunities.

On March 23, 2018,  in response to Governor Murphy’s Executive Order 6 which directed the New Jersey Department of Health (“Department”) to review New Jersey’s Medical Marijuana Program (the “Medical Marijuana Program” or “Program”), the Department issued  its report  focusing on how to expand the Program’s scope and patient access to medical marijuana (the “Report”).

The Report focused on the following four principal areas:

  • The rules for siting of dispensaries and cultivation facilities and the number of alternative treatment center (“ATC”);
  • The conditions for physicians participating in the Program and prescribing medical marijuana;
  • The number of medical conditions which qualify for the Program; and
  • The maximum monthly product limit, THC dosage limits and the types of medical marijuana products available for patient use.

Certain aspects of these recommendations may be affected by Department regulatory action, while others will require amendment of the existing New Jersey Compassionate Use Medical Marijuana Act (the “Act”).

In order to service the growing population of patients with conditions treatable by medical marijuana, the Department plans to amend the existing regulations to permit ATCs to dispense medical marijuana at satellite locations and permit more than one cultivation site per ATC, subject to Department approval. The Department also plans to create an endorsement system to allow ATCs to engage in some combination of production (including edibles), cultivation, and dispensing designed to increase the supply and availability of medical marijuana.  As stated in the Report, the goals of these amendments are to increase the supply and access to medical marijuana for qualifying patients. The Report also makes the statutory recommendation to amend the Act to permit the existing six (6) licensed ATCs, which are statutorily required to be non-profits, to operate as for-profit companies.

The current regulations require that a physician interested in providing care to patients who qualify for medicinal marijuana to first register with the Department, creating a limited number of doctors who can prescribe and treat qualifying patients. The Report indicates that the Department plans to eliminate the physician registry in Spring of 2018 to ensure that any and all New Jersey doctors meeting the good standing  requirements set forth in N.J.A.C. 8:64-2.5 may prescribe medicinal marijuana for patients meeting Program requirements.

Prior to March 22, 2018, the conditions that qualified for treatment by medicinal marijuana under the  Act  were limited to (i) seizer disorders, intractable skeletal muscular spasticity or glaucoma (provided that  such conditions were resistant to conventional medical therapy), (ii) HIV, acquired immune deficiency syndrome or cancer (provided that  sever or chronic pain, nausea, vomiting, cachexia or wasting syndrome resulted from such condition or treatment thereof), (iii) amyotrophic lateral sclerosis, multiple sclerosis, terminal cancer, muscular dystrophy or inflammatory bowel disease, (iv) a terminal illness (provided that a physician determined a prognosis of less than 12 months of life), or (v) other medical conditions approved by the Department by way regulation. As outlined in the Report, a final agency decision was made to effectuate the addition of the following categories to conditions qualifying for treatment by medical marijuana: chronic pain related to musculoskeletal disorders, migraines, anxiety, chronic pain of visceral origin, and Tourette’s syndrome. The Report also recommends an amendment to the Act permitting medical marijuana to be used as a first-line treatment rather than a last resort for the illnesses described in section (i) above.

Under the current Program, physicians are limited to prescribing two ounces of medicinal marijuana to patients within a 30 day time period. According to the Department’s findings set forth in the Report, physicians should have discretion to authorize more than the Program’s current two ounce limit. As a result, the Department is recommending that the statutory limit be increased to four ounces, which aligns more with our neighboring states such as New York, Pennsylvania and Delaware. The Act presently restricts use of edible marijuana products to qualifying patients who are minors. As stated in the Report, the ingestion of medical marijuana is healthier than smoking, the Report, therefore, also recommends amending the Act to permit the manufacture of edible and topical products and their use by patients.  The Report also provides that the Department will eliminate the regulatory dosage limit of 10% THC limit to allow for more effective treatment of the debilitating medical conditions covered under the Program.

The Report and recommended expansions to New Jersey’s Program  set forth above evidence both the Governor’s and the Department’s goal of growing all aspects of the Program related to the production of and access to medicinal marijuana.

The first two weeks in March 2018 have seen a number of developments with respect to the regulation of cryptocurrencies in the United States.

Regulation of Online Cryptocurrency Trading Platforms

On March 7, 2018, the Securities and Exchange Commission (“SEC”) issued a release addressing the regulation of online trading platforms (or exchanges) on which investors have bought and sold digital assets, including coins or tokens sold in initial coin offerings (“ICOs”).  Consistent with prior SEC articulated positions, the SEC stated that many of these tokens sold in an ICO meet the definition of a “security” and accordingly these trading platforms on which ICO tokens trade should register with the SEC as a national securities exchange or alternative trading system unless exempt from registration.  In its release, the SEC expressed its concern that many of these trading platforms may appear to investors as SEC-regulated exchanges, but are not and do not meet the regulatory and listing standards of a registered exchange. In light of this, in its release, the SEC listed a series of questions that investors should ask before trading assets on an online trading platform.  These include, but are not limited to, asking if:  (i) is the platform registered as a national securities exchange or an ATS with the SEC?; (ii) is there information in FINRA’s BrokerCheck ® about any individuals or firms operating the platform?; (iii) how does the platform select digital assets for trading?; (iv) what are the trading protocols?; (v) how are prices set on the platform?; (vi) how does the platform safeguard users’ trading and personal identifying information?; (vii) what are the platform’s protections against cybersecurity threats, such as hacking or intrusions?; and (viii) does the platform hold users’ assets?  If so, how are these assets safeguarded?  For a complete list of these questions and a copy of this SEC release see SEC Release.

Money Transmitter Rules Apply to Initial Coin Offerings

In a letter published March 6, 2018 by the Financial Crimes Enforcement Network (“FinCEN”), which had previously been sent on February 13, 2018 to Senator Ron Wyden of the Senate Committee on Finance, FinCEN reiterated that in combatting the financing of terrorism (“CFT”) and illicit financing of criminal activity, the Bank Secrecy Act (“BSA”) and anti-money laundering (“AML”) laws and regulations applied to virtual currency exchanges and administrators that are based in the United States or that do business in whole or substantial part in the United States. These would include “a developer that sells convertible virtual currency, including in the form of … ICO coins or tokens, in exchange for another type of value that substitutes for currency….” FinCEN indicated that these exchanges and administrators would be considered a money transmitter who would have to be register with FinCEN as a money service business (“MSB”) with an established written AML compliance program designed to mitigate money laundering risks. These AML/CFT compliance programs would include filing of BSA suspicious activity and currency reports, maintaining records for certain transactions over some monetary threshold and obtaining customer identification information. The letter also clarified that in the case of an ICO that is structured as a sale of a security or derivative, the participants in the ICO could be subject to regulation by the SEC or the Commodity Futures and Trading Commission (“CFTC”).  In such cases, the SEC or CFTC AML/CFT requirements would apply.  Companies and exchanges involved in ICOs should consult legal counsel to clarify and satisfy their respective AML/CFT obligations.

U.S. District Court  Rules that the CFTC has Authority to Regulate Cryptocurrencies Not Involving Derivatives

In a Memorandum and Decision of the United States District Court for the Eastern District of New York, issued on March 8, 2018, Judge Jack Weinstein issued a ruling as to the authority of the CFTC to prosecute a fraud case that it had brought against Patrick Kerry McDonnell, the operator of a cryptocurrency business.  Defendant McDonnell was alleged to have “operated a deceptive and fraudulent virtual currency scheme” whereby his company solicited investments from investors to assist them in purchasing and trading Bitcoin and Litecoin, but instead misappropriated their funds.  In his ruling, Judge Weinstein, after discussing the definition of a commodity under the Commodity Exchange Act (“CEA”) and relying, in part, on a 2015 CFTC administrative ruling that cryptocurrencies were commodities, held that “virtual currencies can be regulated by CFTC as a commodity,” and that, in the absence of federal rules, the CEA permitted the CFTC in a fraud case to exercise its jurisdiction over cryptocurrencies that did not directly involve the sale of futures or derivative contracts.

Judge Weinstein ruled that the CFTC could proceed prosecuting the case against the defendant and granted a preliminary injunction barring the defendant from further engagement in cryptocurrency investments as the case continues. For a copy of the case, see CFTC v. McDonnell.

Growing cannabis, especially indoors, is energy-intensive. It can take upwards of 5,000 kWh to grow just one kilogram of cannabis (2,000 kWh to grow one pound) as compared to 10,000 kWh of energy to power a residence in the United States for one year. Recent reports show that the cannabis industry is having a significant impact on the use of electricity in states that have legalized it for medical and/or adult use. In 2015, various reports concluded that cannabis growers accounted for approximately 1.7% of the United States’ total electricity usage, a cost of upwards of $6 billion. The vast majority of states that have legalized cannabis cultivation, for medical and/or adult use, have not addressed the issues surrounding energy consumption prior to enacting legislation. As a result, municipal governments, state agencies and public utilities have had to take a reactive approach to the astronomical utilization of energy.

Currently, states and municipal governments that have legalized medical and/or adult use are implementing various techniques in order to curtail electricity use. The techniques vary, but the most common are taxes and/or fees on energy consumption. For example, Boulder County, Colorado has a requirement that growers either offset energy consumption with the use of renewable energy or pay a $0.02 charge per kWh of energy use. In addition, some state regulations have an adverse effect on energy consumption and compliance results in an increase in energy consumption by growers. For example, when Pennsylvania legalized cannabis in 2016 for medical use, its regulations required growers to contain their entire crop in indoor facilities  without addressing how the State would cope with the corresponding energy use from such requirement.

Although New Jersey has not yet weighed in on the energy use issues associated with the emerging cannabis industry, it is imperative that growers (and those that are contemplating growing operations) consider the impacts of their operations regarding electricity use in order to be prepared for any future regulations and/or taxes that might negatively affect their operations and profitability.