Hemp-derived THC beverages comprise one of the fastest-growing beverage categories in the United States right now. With Circle K and Target recently announcing market entry the industry is quickly reaching mainstream status and creating interest for more brands to enter the space. At the same time states across the country are quickly enacting legislation to regulate these products in vastly different ways, creating a unique set of challenges for early-stage companies.

Seed funding for food and beverage enterprises already incorporates obstacles other industries may not face. Most notably, early-stage capital needs to be sufficient to fund an entire supply chain of tangible—and sometimes perishable—goods. As a result, investor readiness hinges on showcasing not only a differentiated product but also early commercial traction. Selecting the right target markets is one of the most critical decisions brands will have to make, and for hemp beverage brands, it has to involve a comprehensive and detailed analysis of a patchwork quilt of state regulations that is unlike any other industry.

One of the largest mistakes early-stage companies make is focusing on a few regulatory factors like THC mg limits to the exclusion of all others. A common strategy is to maximize revenue in the states without a current regulatory framework, or a very minimal one, like North Carolina or Indiana. The problem with focusing on some of these states is that the sale of hemp-derived cannabinoids in products intended for human consumption could violate state food laws, or if there are no regulations in place, the landscape can shift dramatically and quickly. This happened earlier this year in Arizona where a previously thriving market was completely upended overnight by a declaration by the state Attorney General that the sale of THC-infused products violated state law. The passage of Senate Bill 3 in Texas posed a similar risk until there was a veto and a special session called. In early October the governor of Ohio issued an executive order temporarily banning these products which created industry upheaval and is the subject of a hearing on an injunction October 28. The regulatory uncertainty in some markets may result in a short-term revenue boost but may create a significant hurdle in obtaining capital commitments from investors looking for more certainty.

Seemingly more minor regulatory shifts may also have a dramatic impact on how well suited a product is for a specific state market. Some states have opted to regulate these products similarly to alcohol and have restricted what types of businesses may hold retail licenses. If part of a strategic plan for a brand was distribution in convenience stores new regulations going into effect in states like Tennessee, Kentucky, or Alabama would restrict that. Testing, labeling, and packaging considerations may also play into margins. States like Virgina and Georgia require child-resistant packaging while states like Minnesota or Alabama specifically carve out beverages from this requirement or allow for standard aluminum cans to meet this requirement which can significantly influence margins on the products.

As the hemp beverage marketplace matures, so will state-by-state regulations, and as a result, the analysis for brands on which markets to choose and how to plan to show early brand success becomes increasingly complex. Investors, particularly institutional or venture-backed investors, will want to see that a brand not only has the appeal to get on shelves but that the company has done the analysis to ensure the product can stay there without undue risk. Recognizing the individualized and detail-oriented nature of this analysis, Husch Blackwell’s cannabis law team has developed efficient tools to store and monitor this information that can assist us in spending legal time efficiently on deliverables tailored to our clients’ needs in a rapidly changing regulatory environment. To explore these options, reach out to Alyssa B. Samuel or your Husch Blackwell attorney.