Jesse Mondry
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On October 31, the U.S. Department of Agriculture (USDA) published its interim final rules for the production of hemp under the 2018 Farm Bill. Our firm has provided a broad overview of the rules and written about the potential impact of the testing rules on the hemp industry. Today we address disqualifying criminal history for the purpose of participating in the hemp industry.

The interim rules outline the requirements for States and Indiana Tribes hemp production plans, which must be approved by the USDA.  Among these requirements is that if the producer is a business entity, the State or Tribe must collect and submit information that includes:

  • The full name of the business,
  • Address of the principal business,
  • The location, full name and title of the “key participants”,
  • An email address if available, and
  • The EIN number of the business entity

Applications for a producer license – whether submitted to the USDA, a State, or a Tribe – must be accompanied by a completed criminal history report for each key participant. This is because the 2018 Farm Bill prohibits persons convicted of a felony related to a controlled substance under State or Federal law from producing hemp for 10-years following the date of conviction. An exception applies to persons who were lawfully growing hemp under the 2014 Farm Bill before December 20, 2018 (the date that the 2018 Farm Bill was signed into law), and whose conviction occurred before that date.

Who is a key participant? A key participant is:

  1. A person or persons who have a direct or indirect financial interest in the entity producing hemp, such as an owner or partner in a partnership;
  2. Persons in a corporate entity at executive levels, including chief executive officer, chief operating officer and chief financial officer.

The rules expressly state that “key participants” do not include other management positions like farm, field or shift managers.

USDA is requiring a criminal history records report for key participants because those persons are likely to have control over hemp production, whether production is owned by an individual, partnership, or a corporation. What does this mean? It means that the USDA considers those persons as responsible for ensuring compliance with the regulatory requirements. For a corporation, if a key participant has a disqualifying felony conviction, the corporation may remove that person from a key participant provision – failure to do so will result in a denied application or license revocation.

What is unclear from the interim rules is how far into a web of corporate relationships the requirement of identifying and providing criminal history reports for key participants’ extends.  Consider a scenario in which Company X is applying for a hemp production license. Company X is owned in equal parts by two individuals and Company Y. Company Y’s ownership is comprised of three individuals and a trust.  Read broadly, the requirement to identify key participants and submit criminal history reports would apply to C-level employees of Company X, five individuals and the beneficiaries of the trust and may include the trustee.  This is a basic example of the kinds of corporate structures that we often see and which can create burdensome headaches when it comes to identifying “key participants.”

Those of us operating in states that have legalized recreational marijuana are used to reading the identification as extending through the entire corporate family.  For example, here is a recent post on this issue California. And here is a post about considerations for foreign companies when investing in US cannabis. As these articles explain, financial interest disclosure requirements can be incredibly difficult to comply with and it may not always be clear who has an “indirect” interest.  The goal of such regulations is to ensure that the government knows the identity of every person who may profit from the recreational marijuana business.

It appears that may also be the case for hemp and there is much more to say on this and other topics. So stay tuned as we delve further into the interim rules governing hemp production in the coming weeks and please register for our webinar this afternoon at 12:00 PM.

 

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The Canna Law Blog™ is a forum for discussion about the practical aspects of cannabis law and how it impacts those involved in this growing industry. We will provide insight into how canna businesspeople can use the law to their advantage…

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Please be mindful that possessing, using, distributing and selling marijuana are all federal crimes and that this blog is not intended to give you any legal advice, much less lead you to believe that marijuana is legal under federal law.

 
 

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