Governor Newsom's Emergency Hemp Rules in California: A blow to the hemp industry, but an invitation to build a beverage bill

As a licensed cannabis (DCC) and hemp (CDPH) operator in the State of California, this topic is near and dear to my heart and explains why my phone and inbox have been flooded since last Friday. I figured I'd get my thoughts down on paper to help streamline the conversation a bit. This is a live conversation and I by no means claim to have all the answers, so I reserve the right to have my mind changed or to be proven wrong. /disclaimer

As you've likely heard, last Friday, September 6, 2024, Governor Gavin Newsom announced emergency regulations aimed at banning any detectable levels of THC in retail hemp products in California. While unexpected - the press conference was announced the day prior - it was not a surprising move understanding the history of cannabis regulation in the state and the desperation to do something in the face of yet another failed legislation in AB2223.

Here's what's proposed (full text here):

• Ban the manufacturing, warehousing, distribution, offering, advertising, marketing, or selling of industrial hemp final form food products.

• Product will have no detectable THCs (an exhaustive list has been identified) and limited to 5 servings per container.

• All hemp products will be age-gated to 21+

As many in the industry will quickly identify, it's a pretty far swing of the pendulum.

The Press Conference

Things kicked off with a brief preamble from the departing California Health and Human Services (CalHHS) Secretary, Dr. Mark Ghaly, who thanked the Governor for his leadership. Newsom then took to the mic and proceeded to give an impassioned speech - perhaps theatrical at times - for the next 12 minutes.

Here were the salient points:

• Newsom has been intimately involved with the cannabis industry since helping draft, organize, and pass Prop 64 in 2016, which set to regulate THC for adult use with a strong intention of protecting the youth.

• He acknowledged the Farm Bill's passing in 2018 and how AB45, authored by Assemblymember Aguiar-Curry and signed by Newsom in 2021, was intended to add more parameters to the federal action, but then stated that "none of us expected the kind of exploitation that we've experienced in the hemp industry since."

• This year, AB2223, again authored by Aguiar-Curry, was intended to correct the perceived loopholes created by AB45 and enable the regulated market to benefit from access to the hemp supply chain. When it failed to pass, Newsom was determined to do something in the interim before the next legislative session.

• He looks forward to working with Aguiar-Curry again on a bill for 2025 and left the door open for consideration of these products in regulated channels through legislative action. Until then, he indicated that authorities with Alcohol Beverage Control (ABC), tax authorities, and law enforcement will strictly enforce the rules immediately after passing through the Office of Administrative Law (OAL).

There is much I could pick apart about the stigmatizing language used, or the validity of some of the claims against the products sitting on the stage (see Jake Sitler's post), but I don't think it's accretive to the discussion at this point. However, I find it interesting that when the Governor opened up for Q&A after the address, there was but one clarifying question about the enforcement of hemp products followed by 16 minutes and 45 seconds of completely unrelated dialogue (longer than the entire hemp-related press conference). This certainly raises questions about public sentiment and concerns on the issue.

California's citizens deserve a more mature discussion about THC, beyond age-old fear-mongering rhetoric.

What Wasn't Said

There is bad blood between Sacramento and the hemp industry. Aguiar-Curry has expressed a number of times that they were "duped" by the U.S. Hemp Roundtable when drafting AB45 and that subsequent efforts to declare 5 mg of THC as non-intoxicating didn't help with credibility.

I believe it's essential for everyone to have a clear understanding of the landscape as they make decisions about their future and choose their collaborators. As authors, we bear a responsibility for our writing and shouldn't rely solely on a single sponsor. I've taken that responsibility seriously in my own work here on LinkedIn, and I hope others will do the same. That said, I'm not seeking to engage in any conflict with the Majority Leader in the Assembly or USHRT. I see this as an opportunity to align, once again, and carve a united path forward as we look to develop a more thoughtful approach heading into 2025.

Either way, in the vein of plotting your immediate next moves, I think I should also highlight that AB45 gave CDPH deference to make these rule changes stating that the Department “shall adopt new regulations either as necessary pursuant to the federal law or deemed necessary to protect consumers.”

This would explain the mechanism of using the department, the OAL, and the focus on youth safety.

The Silver Lining: It's Not AB2223

AB2223 was an incredibly complicated bill that sought to redefine hemp, when compared to the Farm Bill's definition, as a means to limit the amount of THC found in the resulting material. It created pathways for licensed cannabis operators to onboard hemp material into Metrc, but didn't consider a licensed cannabis operator that wanted to serve the broader hemp marketplace. There were no taxes associated with the original bill, so it was unclear how the already strained agencies were going to regulate the new system. There were many other elements addressed, but for every detail there seemed to be a gap. While it was sponsored by the California Cannabis Industry Association, it drew opposition from many sides - from intoxicating hemp, to ONE HEMP, on over to the legacy cannabis growers of Origins Council.

Had AB2223 passed as CCIA, the Department of Cannabis Control, the author's office, and the Governor's office were set to do, I think everyone would have been sorely disappointed with the outcome.

In the very least, the emergency rule does less systemic damage than AB2223 would have done and allows for a more thoughtful approach come the next legislative session.

Immediate Next Steps

The emergency hemp regulations will be filed with the OAL this Friday.  Once the emergency regulations are filed, they will undergo a 5-day comment period for interested parties. The OAL then has to approve the emergency regulations within 30 days at which point they will become effective immediately. I'll be surprised if they take that long.

I will post again when the comment portal becomes available.  

Looking Towards the 2025 Legislative Session

August marked the end of the 2024 legislative session and we are now less than two months away from election day where we'll see about a 30% turnover in the California legislature. That means a number of new stakeholders and potential champions for new bills. All that to say, the old guard is still very much at play. Governor Newsom retains his position until 2026 and you can expect Aguiar-Curry to remain an influential leader in the Assembly during that time period as well.

Between now and the end of the year is the time to engage stakeholders and build momentum for bills seeking to be presented at the beginning of 2025.

Some things I feel the broader California community needs to consider when taking another crack at the bat:

1. If we want the broader California cannabis brand to gain national recognition like legislators and regulators have often claimed to support, we need to ensure that California maintains the federal definition of hemp. In the event California chooses to continue restrictions on those products sold in the state, safe harbor should be explicitly granted to the growers, extractors, processors, and manufacturers of finished products so that California hemp companies can compete on the national stage. This will keep jobs in the state and enable California businesses to benefit in states that have already established hemp product legislation.

2. Regulated cannabis is broken in CA and companies have been struggling since 2016. Taxes are too high, regulations are too cumbersome, and we're treated like second class businesses. Forcing hemp companies into a broken system, or giving cannabis companies access to hemp cannabinoids will not solve these issues. If rethinking hemp regulations, perhaps we should be rethinking cannabis regulations.

The Beverage Opportunity

Surprised it took me this long to mention beverage? Me too!

Over the past 9 months, a few things became very clear:

• The regulated industry in California isn't interested in giving up much in the way of revenue generators for their struggling retail shops. They see gummies, vapes, and flower of any potency as directly competitive with their business. They also have a number of sympathetic ears in Sacramento. Rationalizing a low-dose hemp marketplace is a tough sell in CA. It doesn't mean you can't find a champion for your cause, but recognize that Sacramento is a consensus-based legislature and the Governor has expressed his views on the matter.

• There has been receptivity for a low-dose beverage pathway where alcohol is sold with a number of regulators, legislators, and even regulated cannabis associations. As I expressed at length in my earlier article series, this is one of those cases where the beverage industry would be best suited in forging this path with the sole focus of getting low-dose beverages into the broader, age-gated sales channels.

• There is a clear economic incentive due to the proven traction and tax revenue potential in the mainstream compared to the vapid sales of low dose beverages in the dispensary channels, again outlined in one of my previous articles if you wish to dig deeper.

• Regardless of what you're advocating, any proposal must come with consideration of testing and safety at least on par with the regulated market, age-gating for 21+, and some semblance of tax parity with the regulated space. Recognizing that 15% to 19% is untenable for both segments, consider being very thoughtful about this last piece.

Conclusion

This is quite obviously an ongoing situation without a totally certain outcome, but as I indicated above, the tea leaves this year have indicated an outcome like this was coming hell or high water. The benefit is that there's no more hiding in the shadows, loopholes, or unintended ambiguous language. It is time to push for hard and fast rules that lay a foundation for scalable businesses and happy consumers.

In California, the hemp industry needs to understand the anchoring of the conversation. The next steps should be an evolution or exception from the current regulated frameworks, not an exercise in Farm Bill federal preemption. Further, I encourage the THC infused beverage category to not be used as a tip of the spear for a broader hemp conversation. As I've said before, beverage needs to advocate for itself and build allies within the broader beverage industry as an adult beverage alternative. If you're interested in discussing what this looks like in action, please reach-out and we can setup a time to discuss.

Seeing THC infused beverages in my local Total Wine and BevMo has been a dream come true. It's disappointing to know that it can all go away, but we always knew it was a possibility. It's time to galvanize and create a permanent path forward.

Cheers! -B.

If you are new to my articles, be sure to check out my eight-part series on how Low Dose Beverages Will Pave the Way for Legalization and subscribe to stay tuned.