Podcast Diaries: The Cannabis Conversation E17

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The Transcript:

The Cannabis Conversation, a European perspective on the emerging legal cannabis industry.

Welcome to The Cannabis Conversation with Anuj Desai, where I explore the new legal cannabis industry by speaking to the professionals that are helping to shape it. Today's show is a legal update for the UK where I'll be speaking to Jonathan Deverill who's a partner at a leading law firm in the cannabis space. He's going to update us on the novel foods regulations and the Proceeds of Crime Act, which sounds quite scary, but it's a useful piece of information to know if you're thinking about investing in cannabis companies overseas. Hope you find it useful. Enjoy.

Great. I've got Jonathan Deverill on the show today. He's from a law firm called DAC Beachcroft. He's a corporate partner there. Jonathan is a great guy to come and talk to us about various legal and also market developments that he's seeing from his work in this area. DAC are taking a very active approach in the cannabis industry and representing various clients from across the sector. Welcome, Jonathan.

Thank you very much. Great to be here.

Good, good. How's it all going?

Yeah, it's been great. Thank you. It's been really quite an interesting journey over about 18, 21 months now since I first started looking at this in September 2017.


Like many things, of course, it all started by accident. I had the firm's Canadian desk and I was in Calgary and Vancouver in September 2017. I thought we'd be talking about mining and oil and gas as usual, but actually all anyone wanted to talk about was cannabis, given the changes in Canada that were taking place on that front at that time. In particular, people were talking a lot about all the money they were making for their clients, and also personally, in some cases, from what they called the green rush on the stock exchange in Canada. I came back to the UK and I started thinking about how I could use this information in our practice.

With my Canadian desk hat on, the first thing that we thought about was being ready to answer questions from Canadian law firms if they phoned up and said that their clients wanted to sell cannabis stocks in the UK. That caused us to look at the Misuse of Drugs Act in the UK and also our Proceeds of Crime legislation. It's really moved on from there.

Great, great. Cool. We'll come onto a bit of backstory of how yourself and the firm got involved in the sector, but thought we would maybe kick off with some of the high level legal developments. We had a previous show with Nick Davis from Memery Crystal. He took us through some very high level stuff, and it'd be good to maybe get a kind of update on developments in that area.


Maybe we just start with, and it's a thing that's been mentioned a few times on previous episodes, around CBD and the novel foods regulations. We've had a few explanations of what's happening, but I was wondering if you could give us a more up to date, and maybe start with the background of what it is.

Yeah, sure. The first place to start really is CBD oil. It's an extract from cannabis or hemp plants, which is widely available in the UK at the moment. You may have seen that Holland & Barrett and others are stocking product. It's estimated that there's about 1000 different people selling these products in the UK.


We understand that the ... Well, they're in the novel foods legislation. What that's about, it's designed to protect the public in the UK when there are novel or new food stuffs made available. It's got nothing to do with cannabis, it could be a meat, a fruit, a nut. It could be anything. The point is, if something wasn't in widespread consumption in the EU before, I think it's the 15th of May 1997, certainly a date around then, then there has to be further investigations, safety testing, registration, with a view to ascertaining that that product is safe for the public in the UK.

The other point to make is that there's no specific law on CBD products in the UK at the moment, no single piece of legislation. When we've been looking at this for clients, it involves an examination of the Misuse of Drugs legislation, the UK Medicines legislation, and also UK food safety legislation and the product needs to meet certain criteria under each of those regimes in order to be able to be sold lawfully in the UK.

Where are we at the moment with the whole host of CBD products on the market? Are they flouting the law or are they validly allowed to sell those [crosstalk 00:05:00]?

Well, provided the product meets certain tests under each of those three legislative areas, then it should be fine to be sold. The main point under the drugs legislation is that the level of the THC, which as everyone knows, is the active ingredient that gives you the high, that needs to be ... Well, indeed, the seeds from which the plant from which you extract the oil has been grown, that needs to have a 0.2% or less THC content. Then when you're selling a product to a consumer, that needs to have no more than one milligram of THC in the bottle that you offer to the consumer.


Sometimes, and not wishing to be facetious about it, the advice to the client is to use a smaller bottle. That should get you out of the, or make sure you're exempt under the Misuse of Drugs legislation. Then the key points under the medicines legislation are that the product must not make any claims that it is a medicine. That's why if you go into shops where the oils are sold, you never see any advertising, or you shouldn't, saying that this is good for your backache or some other ailment that you may have. There's also a test around the functionality of the products. Then under the food legislation, the key issues are safety testing, novel foods, which I'll come on to again in a minute, and also correct labeling of the products so everyone knows what's in it. Under the food legislation, I mean, that is equally applicable if we were selling a can of tomatoes.

Yeah, yeah. I mean, that's brilliant. That's a really, really good summary. We've been getting bits of information, but you pulled it there together really nicely. One piece of information that I don't think we've heard on the show before was around the one milligram per bottle, because I think lots of people were assuming that it was 0.2% THC, but it's really good that you made the distinction between the seed and actually what ends up in the bottle.

Yes. I don't practice US law, but I know from a recent piece of work that we've done that different countries, perhaps not surprisingly, look at this in different ways, but certainly in Europe, the focus seems to be, and certainly in the UK, the focus is on the seed rather than on actually what is the content of the product inside the bottle, other than this one milligram test.

Right. Very interesting. Okay, cool. Moving on specifically to the novel foods recommendations, that emanates from the EU.

That's right. That's an EU directive. It's part of the law in the UK, as well as in the rest of the EU. What happened, as I understand it, is there was a vast growth in the number of CBD products that were available for sale. I think it's right that the UK regulator contacted the European regulator and said, "Maybe we need to have a look at this." They did have a look at it in Europe, and there was various evidence presented to the regulator, both in Europe to start with, and nevertheless they concluded, in their view, most of the CBD products, I think it depends a bit on how you've extracted it and changed it, but most products would be caught by the novel foods definition. Prior to that, I think most products were not sold as if they were novel foods. I'm not sure there are really any that had the approval.

Then that decision was handed down. The UK regulator then looked at that and decided that they would follow that as well and there was a consultation here. That ended on the 31st of March. As I understand the position at the moment, the UK regulator has agreed with the European regulator that CBD products are novel foods. However, unlike in Austria ... We understand in Austria, what they did as soon as they heard that CBD products were novel food, they instructed everyone to take CBD products off the shelves of the shops.


That has not happened here yet. I understand the FSA takes a view, the Food Standards Agency in the UK, that there's no public safety issue at the moment which requires them to take that action. We understand that what they're saying they will do is to take reasonable and proportionate steps to implement the decision that these products are novel foods.

So far, nothing further has been published that we've seen which lays out what this will mean. We anticipate that what they will probably do is have, if you like, a transition period which may last a year or two where they say, "So long as you are applying for novel food status, you can continue to sell your products." Certainly, last time I was out at the shops, there were still lots of these products available on the shelves.

We understand that one of the industry groups has taken steps to try to have a judicial review of the FSA decision that CBD products constitute novel foods. We're not close to that. That's interesting and we will monitor on behalf of our clients what happens there. I think where this will all lead probably in the next year or two, depending on what happens with this legal action, I suppose, is ... Having said earlier, there is no specific set of rules for CBD products today. I think where we will end up probably is with a specific set of guidelines that say, "So long as you're doing certain testing and labeling and some other requirements, then that's the benchmark for products for sale in the UK."

Yeah. I mean, there's a lot of interesting stuff there. I mean, primarily the motivation around behind novel foods is to increase a minimum standard of quality for those products. The drive is a good one, I think, in order to get rid of all the ... There's quite a lot of rubbish on this in the market, I think.

Well, I think from the point of view of our clients who operate towards the ... Everyone we're involved with is operating towards the top of the market, and actually already complying with the rules and following the sort of procedures which I think these new rules will lay out. I think yes, for them there is a potential benefit, because as you say, some of the smaller companies either will not be able to meet the new standards or won't be able to survive if they have to undergo a period when they can't sell anything because they have to update their processes and procedures.

Following on from that, therefore, from an investment perspective, investors may be a bit ... If you're investing in a CBD brand, for example, given that it's slightly unclear, even though your advice is this is the likely outcome, it's still unclear. Is that a kind of, not fear factor, but an unknown, if you like?

Well, yes, it is unknown at the moment, absolutely. As we've been discussing, I have some views and others in the market no doubt have some views as to where we may end up, but at the moment that is supposition on our part. You're absolutely right. There's nothing that I've seen at least that is concrete which says this is what the rules will be, or this is where we end up. I think if you were investing in one of those businesses today, then yes, that would be something that you would need to bear in mind, because as of now we don't know exactly what the outcome will be or what the consequences of that will be for the companies or their investors.

Yeah. Cool. Okay. Well, thank you. That's a really good summary on CBD and novel foods. Moving on to an area I don't think we've covered on the show so far is around investing in cannabis businesses in general worldwide, and it's something called the Proceeds of Crime legislation. I was wondering if you would sort of take us through a high level of what that is and what the risks are in relation to it.

Yeah, sure, sure. The Proceeds of Crime Act came into force in the UK in 2002. It's been with us for a while. I think the background to it, again, as with the other legislation which had nothing to do with cannabis at all really, but it was to stop people committing crimes, and then being able to live off the proceeds of those crimes and traffic them in a way which wasn't covered adequately, it was thought, by the existing legislation. There's various things which the act provides for, but in relation to money laundering, which is what we're really talking about in this context, it creates a variety of offenses for possessing, transferring, using and so on the proceeds of crime in the UK.

Along then came the cannabis industry. As I alluded to earlier, this is one of the things that we started looking at back in 2017 when we first got interested in this in the Canadian context, but you're absolutely right, that it's got a global application. Where this has come up specifically for us is in relation to persons in the UK holding shares or debt instruments issued by a cannabis business, and where they then receive money from the activities of that business, could that amount to the proceeds of crime? The reason is because of two things. Firstly, as we all know, there's various criminal laws in various parts of the world criminalizing some or all activities connected with cannabis. Of course in the UK, we have our own Misuse of Drugs legislation to that effect. Also, what the legislation says is that where you're receiving money from overseas, it is dirty money unless the activity from which it flows is lawful in the place where it's carried on, and also, if that same activity were carried on in the UK, you would get less than 12 months in prison for carrying on that activity in the UK.

Right, okay.

I suppose the other point to make in relation to that is that apart from the fact it requires you to use a bit of imagination sometimes in looking at how an activity would be treated in the UK, all the Misuse of Drugs Act defenses which are likely to be relevant carry maximum sentences of between 5 and 14 years.


If you do do something in the UK which would infringe the Misuse of Drugs Act, then you will automatically be beyond the 12 month threshold.


Some of the first companies were investing in Canada and also looking at opportunities in America. Really, the two stage test involves us in getting a lawyer in the country concerned to say whether or not they think the activities are lawful in that country. In Canada, the answer is usually yes, because they now have legalized on a federal level both recreational and medical cannabis, having had medical cannabis available for some time, and now recreational cannabis since the 17th of October last year. In the US the analysis is a bit more difficult, because although a number of states, under their own laws, have legalized medical, and in some cases, recreational cannabis as well, and for example, California and Colorado are two examples of states which have legalized both, as we understand it, US federal law still effectively criminalizes all forms of cannabis. There is a separate regime, however, in the US, we're told, for certain hemp products under what they call the Farm Bill.

In the US, unless you fall within the Farm Bill exemption, it's very difficult to see how your activities would not be caught by the federal statutes even if the state in which you're operating has legalized the activities. That means it's very difficult to see how you could answer the first question, yes, that it's lawful in the place where it is done, whereas in Canada, as I said earlier, it's different because probably the answer on the local law will be that it's fine.

Europe, to take an example as well, there's only limited legalization, I think, of recreational products here. That's not really an issue. There's no legalization of recreational products in the UK. You're almost always looking at medical products or CBD. Again, for reasons we'll come on to, that should probably be okay. With Canada and America, the issue is really around the federal statutes in the United States. Then with Canada, the issue arises where the company has recreational activities, because now medical cannabis is okay in the UK. As we've talked about, CBD, subject to certain conditions, can be sold here. If the products are produced lawfully overseas and they fall within to those categories, you should hopefully be able to conclude that it would be lawful to carry on those activities here. Then you may be able to give the opinion that everything is okay.

I should add that in each ... This is obviously just a general level. In each case, when we're looking at these, we have to do quite a lot of work to understand the exact facts and get legal opinions from the overseas lawyers on a case by case basis, but where there's a recreational activity concerned, either in ... well, particularly in Canada, as I said, there's no basis in the UK for getting licenses for recreational cannabis. That means you would be committing an offense here normally, and therefore you would have a potential issue, therefore, pulling all this together if you were the person in the UK holding a share or a bond issued by some of these companies and the flow of money could be seen to be tainted.

Right. There's potential danger. If you're thinking of investing in cannabis businesses in the US and in Canada, you need to be careful about what you're doing.

Well, I think I'd go further than that and say that with any cannabis investment at the moment, it's something you should think about. You're right, that North America is a particular area where there might be issues for the reasons we've been talking.

Is there anyone kind of lobbying for clarity around this at all from the government?

Yeah, I think there are a few groups who are pushing for some clarity on this, or I don't know whether it would be possible to get a change of law. Some people have suggested it would be easier to get the NCA, the National Crime Agency, to issue some guidance. We're not involved in that process. We're not lobbyists. We'll just have to see whether anything happens on that front, I suppose. In the meantime, we're guiding people as best we can on the current legislation.

Cool. I mean, that's good. I think I frequently get asked about investing in North America. This is an area that people have asked me questions about, so it's good to have you on to clarify, or at least try to clarify what is a very murky area. Cool. Thank you for that. I think we've had two good questions there. Given your involvement on the kind of corporate level, what are you seeing from your clients in the UK and Europe? Because I mean, obviously there's lots happening in North America, but things are starting to wake up here a bit too. What's your kind of market overview?

Well, perhaps stating some obvious points, but we are, I think, sort of very early stage here in the UK, and I think it's fair to say probably in most of Europe, compared to North America where these industries are well established and have been around for a long time. It's no surprise, perhaps, that some of the Canadian and American businesses, but particularly the Canadians, are looking at Europe. Europe, compared to North America, is a huge potential market for products. This is people from all around the world looking at that market. As we touched on in the earlier piece, at the moment, at least the focus in Europe is and has to be on medical products and CBD, effectively, wellness, wellbeing products. There's no established recreational market in Europe. People are looking at that. It's at an early stage. I think in London, you've not seen so far perhaps as many stock exchange listings of companies as we'd expected, but I think that may come in time.

Then I think there's a bit of an effort being made by the regulators here at the various stock exchanges to make sure that the companies which come to try and avoid perhaps the sort of bubble in this area, where all the prices rush up. Some people make lots of money, others don't, and then prices come crashing down and other people then lose quite a lot of money. That seems to be a trend here, certainly at the moment on that front, but there's a lot of activity with startup businesses. Having said that, there are some businesses listed in the UK which are exploring this area. There's huge amounts of activity. I think we touched much earlier on the fact, of course, it's European Cannabis Week coming up in London shortly. There's lots of events. There's going to be the Cannabis Europa flagship event. There's lots of other events going around at the same time. I always think it's interesting to hop back to the first time I went to the First Wednesday events organized by Hanway, which was in June, I think, last year. Only about 30 or 40 people there.

We've since then sponsored two other events, but there was one in about March or April this year which was at the Institute of Directors when they had a panel discussion about various issues for an hour or so followed by some networking. There were 300 people at the event. I think other people had applied and unfortunately couldn't get tickets. I thought, "Haven't we come a long way from where we were in a room just off Tottenham Court Road."

Absolutely. I was there too.


It was a very august event and evening compared to exactly a year ago where it was just a few people in a pub, really, just socializing.

Exactly. I think someone else commented recently that the world of cannabis is a bit like dog years, that for every real year, you get sort of what feels like seven years of activity from all the participants. There is certainly no shortage of people trying to make things happen, building businesses, looking at deals, raising money. I think the other thing I always say to people is, quite apart from the fact that it's been fascinating dealing with all the various legal issues that have come up in this, and it's been a new area and I think we've been applying some of these older statutes to new products and new ideas, which has been great, but it's been so much fun to be caught up in the energy and the excitement and the enthusiasm. There's a real buzz around the industry of people working together and trying to help each other out.

Yeah. It's a kind of phrase that I use every day, I think, is that the industry is so young that there is a huge amount of collaboration. I'm really enjoying that. Also loving the fact that as it's so young, no one really knows what they're doing. It's really exciting to sort of make and shape and build something new, I think.

Exactly. Yeah.

Cool. Great. Thank you for that kind of overview. I guess getting back a bit to your ... You may have talked about this already, but a bit about DAC and your personal involvement, I mean, being a lawyer myself, we're quite a conservative fraternity. When you came back at that time from Canada and you said, "Guess what, guys? We should get into this," how did that conversation go?

It went pretty well, actually. The firm's been hugely supportive to what I and the others in the team have been trying to do. I think it's worked really well that in addition to our corporate practice and my longstanding interests in Canada, we've got probably the leading healthcare practice in the UK in the firm and also a well established and respected life sciences practice.

Pulling all of those strands together, in one sense it's an ideal industry for us and we've been able to participate in it in quite a large number of different ways, not just corporate transactions, but also some of the regulatory advice, product analysis. There's even been one or two questions in relation to the crossover between cannabis activities and insurance products. It's been really interesting to see how it's developed. Yes, we have some discussions every now and then internally about what we're up to and what we're doing and whether we should act for certain people and whether that's the right thing to be doing, and we continue to take that very seriously, but so far we've not had any issues as far as I'm aware. We've been able to work with clients from everything from some large Canadian companies to a couple of the UK listed companies to a whole bunch of startups with some great ideas.

Great. Yeah, it must be really exciting, actually, and lots of kind of new capital coming in, but also therefore new businesses coming, new entrepreneurs with new ideas. It is going to be different in Europe, I think, to how it's rolled out in the States. There's lots to learn from North America, but there will be a slightly different model here, I think.

Yeah, I think that's right. I think one of the issues someone was raising actually at a discussion we had recently was the fact that in most of Europe healthcare is funded in a different way from North America. I imagine that will have some impacts on how it all comes out. Also, I expect inevitably people will see what's worked and what hasn't worked quite so well, perhaps, in other jurisdictions, and perhaps learn from that when they're rolling out programs over here.

Cool, fantastic. I will finish with my customary last question, which is, what did your family say when you said you were getting into the world of cannabis?

Well, I think maybe I should use my teenage son as the benchmark here. I mean, overall, they've all been very happy and delighted that I'm working on something that I find so fulfilling and exciting, but I think it was his reaction that he thought actually it was quite cool that his dad was tweeting about this industry. He certainly takes some amusement from that.

Oh, good. Good, good. Yeah. Teenagers are the litmus test, I think, but I guess if your dad's getting involved, maybe it's not cool anymore. I don't know. Cool. Well, Jonathan, thank you very much for taking us through that. It was a really kind of nice summary of both points around the two pieces of legislation, and I think it's going to be really useful for a lot of the listeners, both consumers and the people looking at it from a business perspective. Thank you.

Thank you very much.

Cool. I hope to see you again soon.

Look forward to it. Take care.

Thanks for joining me for that show. Hope you enjoyed it. It was a really good summary, I thought, from Jonathan on a couple of very important legal issues that affect this area. As he mentioned, next week is actually European Cannabis Week in London, which is quite something really, considering how quickly this is all sort of moving. The flagship event is called Cannabis Europa, which is a two day conference at the Southbank Centre. There are loads of great speakers. There's about 80 speakers and loads of interesting panels. You've got politicians, doctors, scientists and industry leaders from all over the world flying into London to discuss all things cannabis. Actually, this time last year was my first ever cannabis conference when I went to Cannabis Europa last year, which was at the Barbican. I know I found it incredibly useful. If you aren't able to make Cannabis Europa itself, hopefully there's an event during European Cannabis Week that you can make. I'll be providing links, et cetera on my social, so please check them out. Hopefully you can get down to an event and get as much out of it as I had from last year.

As always, if you're enjoying the show, please subscribe. Next week I am going to hopefully be doing a co-branded show with the Cannabis Europa guys from the event. I'm hoping to grab hold of some of the speakers that are attending and try and put together a show. It will be my first roving reporter type show. It may well end in disaster, but that's the ambition at least, let's say. Until next week, I hope you have a good one.


Show Notes:

In this episode, we speak to Jonathan Deverill, corporate partner at DAC Beachcroft. We discuss the Novel Food Regulations affecting the CBD sector, and the Proceeds of Crime Act affecting international investors. We also look ahead to European Cannabis Week 2019 taking place in London.
Find out more about DAC Beachcroft - https://www.dacbeachcroft.com/
Find out more about Europe CBD Expo - https://www.ecwevents.com/

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