New Developments in the Cannabis Regulatory Framework

News date: 05 August 2021Source: https://www.jdsupra.com/legalnews/new-developments-in-the-cannabis-3740004/

After three (3) draft projects, on July 23, 2021, the Decree No. 811 of 2021 ("Decree 881") was issued by the Ministry of Health, which entirely replaces Title 11, Part 8, Book 2 of Decree 780 and revokes Decree 613 of 2017 ("Decree 613"), the formerly main regulatory framework.

Decree 811 is the result of a joint review led by the Ministry of Health, the Ministry of Law and Justice ("Ministry of Justice") and the Ministry of Agriculture (together with the Ministry of Health and the Ministry of Justice, the "Ministries"). It became effective as of July 23, 2021, but the regulation of some issues, as indicated below, is pending.

The following are the most relevant changes:

  1. Industrial Use: Clarifies the industrial use of seeds for planting, vegetable component (plant components other than cannabis, which is defined as the flowering or fruited tops, except seeds and leaves not attached to the tops, from which the resin has not been extracted), grain and non-psychoactive cannabis derivatives, in products for human and veterinary consumption, including:
  • fiber use;
  • hortocultural [products];
  • food, beverages and dietary supplements; and
  • cosmetics.

The foregoing, considering that: (i) the 1961 United Nations' Single Convention on Narcotic Drugs defines term "cannabis" and classifies it as a narcotic drug, and excludes seeds and leaves not attached to the tops, and (ii) the conclusion of the World Health Organization about CBD not being included in the controlled drugs schedules and in the United Nations Conventions for the international drugs control of 1961, 1971 and 1988.

  1. Licenses:
  • License Term Extension: The term is now extended to 10 years (formerly 5 years). Current licensees may request the extension of their licenses to 10 years by paying the follow-up costs corresponding to such additional term.
  • New license to manufacture non-psychoactive cannabis derivatives: From now on and in order to "improve the traceability and legality", a license is required to manufacture non-psychoactive cannabis derivatives.

Nevertheless, the psychoactive cannabis derivatives manufacture license includes both the manufacture of psychoactive and non-psychoactive derivatives.

Current manufacturers have a transition period of 6 months from the entry into force of Decree 811 to apply for such manufacture cannabis license, if required. Manufacturing of non-psychoactive derivatives may continue as long as the application is resolved.

  • New extraordinary licenses: Formerly known as "extraordinary authorizations", may be requested for both planting and manufacture of derivatives, for stock depletion and non-commercial research. The requirements will be subject to future regulation as will be established by the Ministries.
  • Changes to the use of seeds for planting license: The scope of the use of seeds for planting license is extended to include the use of grains under a new category: grain transformation. Licensees, who currently transform grain, have six (6) months from the entry into force of Decree 811 to request the inclusion of this new category.
  • New categories in cultivation licenses: Cultivation licenses now include the following categories: (i) "Industrial Purposes" for the delivery or use of plant component (excluding cannabis) for industrial use (excluding manufacture of cannabis derivatives), and (ii) "Export" of cannabis plants, cannabis, plant component, according to the limitations established in the foreign trade section of Decree 811.
  • Changes to the category of scientific purposes: It is now named "research category" and is required to perform agronomic evaluation tests (AET) under the cultivation licenses (previously the AET required the seed production category for planting and grain). Licensees have six (6) months from the entry into force of Decree 811 to request the inclusion of this category. AETs may be carried out under the seed and grain production categories while the application is resolved.
  • Definition of Medical and Scientific Purposes: In addition to defining "industrial purposes", medical purposes are defined as human and/or veterinary therapeutic uses for prevention, relief, diagnosis, treatment, cure, rehabilitation and palliation, while scientific purposes are defined as the uses of cannabis and cannabis plants within an orderly and systematic process of analysis and studies, where appropriate methods are applied to obtain and report new knowledge.
  • Definition of hemp: A definition of hemp is included; however, the term is not used in Decree 811. According to the Ministry of Health and the Ministry of Law, the intention is to promote the development of this segment of the industry.
  • Outsourcing: The outsourcing of any licensed activity Is regulated in greater detail, clarifying that changes in outsourced activities ((i) cultivation, harvest and post-harvest, (ii) grain processing, (iii) storage of seeds, grain, plant components, cannabis plants, cannabis and cannabis derivatives, (iv) manufacture of cannabis derivatives) require modification of the respective license; changes related to the outsourced activities must be reported to the competent authority as novelties prior to the implementation of such activity.
  1. New Requirements for granting Licenses: New requirements for granting the licenses will be included, such as:
  • Real estate property:
  • Land use certificate evidencing that the activities of the corresponding license are permitted in accordance with the applicable land use regulation.
  • Natural Parks certificate (excluding urban properties) indicating that the land is not located in a protected area of the National System for Protected Areas ("SINAP"). In case the cultivation or manufacture of derivatives area is totally or partially located in protected areas of the SINAP, it will also be required to provide a certificate from the corresponding environmental authority certifying that it is possible to develop the activities from the license in accordance with the legal framework of protected areas.
  • Shareholders: Report the applicant company's shareholders' composition, identifying the shareholders with participation equal or greater than 20%.
  • Origin and Form of Access Seeds: For cultivation licenses, it will be required to demonstrate such origin and access:
  • If the seeds are owned by the licensee, current registration as manufacturer of selected seed and technical data of the cultivars presented as seed source (in the case of non-psychoactive, the ICA must certify that each cultivar has THC <1%).
  • If the seeds are acquired by third parties, proof of the legal relationship with the supplier of the seeds for planting, which shall be registered as a manufacturer of selected seed and cultivation or seed license shall be required, as well as proof that the supplier has at least one (1) cultivar of its seed source registered in the National Register of Commercial Cultivars ("RNCC").
  • In the case of imported seeds, current registration as seed importer, proof of the existence of an agreement between the phytosanitary authorities of Colombia and the country from which the seed is intended to import, and the agreement with the seed supplier and the distributor in Colombia.
  • ICA Registrations: For the new seeds license for planting and grains, current ICA registries as trader, importer, exporter, if applicable, is required. Small and medium cultivators can demonstrate that the registrations are in process.
  1. New Obligations: New obligations for the licensees are included, such as:
  • Send an immediate notice to the Ministry of Justice and the National Narcotics Fund ("FNE") when:
  • Psychoactive derivatives that were presumed to be non-psychoactive are obtained, the FNE must be informed and final disposition must be made.
  • As a result of agronomic evaluation, a crop from a variety considered as non-psychoactive turns out to be psychoactive, the ICA, the FNE and the Ministry of Justice must be informed and final disposition must be made. In any case, it may be registered as psychoactive in the RNCC, but its use will require a psychoactive cultivation license and the respective quota.
  • If a crop from a cultivar registered as non-psychoactive in the RNCC turns out to be psychoactive, the FNE and the Ministry of Justice must be informed. Its use and disposal must be done according to future regulations to be issued by the Ministries.
  • Use at least one (1) quota in the first two (2) years of the license term and, from the third year, one (1) quota for each year of the license term.
  • Request the cancellation of quotas for non-use.
  • Comply with the advertising rules that apply to each cannabis-based product.
  • Modify the licenses and/or inform as a novelty the changes that occur with respect to outsourced activities, as applicable.
  • Begin cultivation activities of non-psychoactive cannabis plants within nine (9) months following the granting of the corresponding license.
  1. Quotas: A new category of "exceptional" quota is included to be used with derivatives and surpluses, provided that it is requested to the Technical Group of Quotas in an ordinary or supplementary manner and according to the terms and conditions to be issued by the Ministries.
  1. Foreign Trade: Decree 811 includes a more detailed regulation regarding foreign trade:
  • Imports (from the rest of the world to free trade zones ("FTZ")): the entry of seeds for planting, grain, plant components, cannabis plants, cannabis, cannabis derivatives and final products is allowed. Those authorized to import are cannabis licensees (as long as they have the respective ICA registration), with the exception of importers of plant components, in which case no license is required (as long as they are not used for the manufacture of derivatives). Imported goods must be consigned to an industrial user of goods or services or of goods and services. The prior license and prior approval regime is maintained, always indicating the intended medical, scientific or industrial use. If it is imported to manufacture psychoactive derivatives, a quota is required.
  • Export: The export of seeds for planting, grain, plant components, cannabis plants, cannabis derivatives and cannabis based-final products obtained from cannabis derivatives and plant component is allowed. Decree 613 prohibited the export of "cannabis, dried cannabis flower or unprocessed cannabis" except for scientific purposes. This prohibition is replaced by the prohibition to export cannabis, controlled derivatives or controlled products, without complying with the requirements set forth in the applicable regulations; leaving the door open for the export of dried cannabis flower, subject to the issuance of the corresponding regulation.

Regarding cannabis:

  • From the national customs territory ("TAN") or FTZ to the rest of the world: the exception for export for scientific purposes is maintained. Nevertheless, Ministries are able to regulate additional purposes and applicable requirements.
  • From TAN to FTZ: It is allowed to export to industrial users of goods and industrial users of goods and services duly qualified or authorized, who have the corresponding license for the manufacture of cannabis derivatives or non-psychoactive derivatives and the respective quota when applicable, in order to carry out the manufacturing activities of derivatives.

However, in the Colombian customs regulation, companies that want to be considered as industrial users of a FTZ:

  1. Must be a: (i) new legal entity or (ii) a company that has not developed its corporate purpose, has not had operating income, or that changes its corporate purpose to that of being a FTZ user.
  1. It cannot have income-generating activities or assets outside the FTZ.

To that extent, and taking into account that Decree 811 prohibits the assignment of licenses (for example, from a company domiciled in the TAN to an industrial user in the FTZ (that complies with a. and b.)), in our opinion, a cannabis company operating in the TAN that does not comply with the requirements mentioned here, will not be able to operate in the FTZ.

The possibilities we see to take advantage of the FTZ tax benefits are, initially and as long as the customs regulation is not modified or the assignment of manufacturing licenses for cannabis derivatives or non-psychoactive cannabis derivatives to industrial users in the FTZ is not allowed: (i) to incorporate a new company that does comply with the requirements of industrial user of a FTZ and that is the one that applies for the respective license or (ii) to notify the Ministry of Justice and/or Invima that the activities of cultivation and/or manufacture of derivatives will be carried out under the respective license, but through the services contracted to a third party in the FTZ.

  1. Final Products: Their control now varies according to whether or not they are special control products and including the following clarifications and changes:
  • Types: They may be chemically synthesized drugs (according to the guidelines and protocols of the Instituto de Evaluaciones Tecnológicas en Salud), phytotherapeutic, homeopathic and master formulas. Final products not subject to special control may have industrial use.
  • Master Formulas:
  • Human use: manufactured in authorized pharmaceutical establishments and services and authorized in good manufacturing practices with specific emphasis on cannabis by the Invima.
  • Dispensing and/or sale: may be carried out in pharmacies and drugstores under the technical direction of a pharmacy manager or pharmaceutical chemist, complying with the guidelines of national pharmacovigilance program and the pharmaceutical service management model.
  • Raw material: the use of imported derivatives is not allowed except for master formulas for homeopathic medicines. Likewise, the Ministry of Health will issue a technical regulation regarding cannabis derivative quality conditions as raw materials for the production of final products for medical purposes.
  • National use: Sanitary registration or marketing authorization granted by the Invima or ICA, as applicable, is required (except for master formulas).
  • For manufacture and marketing of controlled final products (including master formulas): they must be registered with the FNE.
  1. Dispensing of Master Formulas: The sale of master formulas is allowed in pharmacies and drugstores under the technical direction of a pharmacy regent or pharmaceutical chemist.
  1. Advertising: the prohibition to promote or advertise, through the media or social networks, or flyers or any other means, seeds for planting, cannabis plants, cannabis, cannabis derivatives and products containing it is eliminated. The Ministries, however, shall issue regulations on the promotion or advertising of seeds for planting, grains, plant components, cannabis plants, cannabis, cannabis derivatives and cannabis-based final products.
  1. Corrective Measures and Sanctions:
  • Corrective Measures: The competent entities may impose corrective measures that result in the suspension of licenses (not less than once (1) month and not more than six (6) months).
  • Sanctions: New grounds for termination are included and others are modified. Once the license is cancelled as a consequence of the occurrence of one of the grounds for termination, a new license will not be granted to such person (or its shareholders with a participation equal or greater than 20%) during the following two (2) years from the execution of the administrative act of cancellation.
  1. License Denial Amendment: From now on, the granting of licenses may be denied in case of a current criminal conviction for crimes related to drug trafficking against the legal representative or shareholders who have a participation of 20% or greater.
  1. Transition: (i) Applications prior to the issuance Decree 811 are regulated according to Decree 613; (ii) the Ministry of Health and the ICA, according to their functions, will regulate food, beverages, dietary supplements and cosmetics of the grain, vegetable component and non-psychoactive derivatives of cannabis for human and veterinary use, as well as the uses in medicines, phytotherapeutic, homeopathic and master formulas preparations for veterinary use of psychoactive and non-psychoactive cannabis: and (iii) the Ministries will have three (3) months from the entry into force of Decree 811 to issue the regulations in their charge.

However, much can be discussed regarding the convenience, feasibility and necessity or not of modifying Decree 613. The truth is, as it has occurred in other jurisdictions such as Canada, as the industry evolves, governments, through their regulatory entities, are adapting to new market realities and correcting and adjusting several aspects of the legal framework. In this case, the Government seeks to have greater control over both the granting and surveillance of the licenses, which may be beneficial for the sector since it seeks to secure a real development of the projects.

In any case, critical issues for the industry still need to be strengthened and clarified, such as (i) the processing times for the granting of licenses, which are not being modified but in practice are not complied by the competent authorities; (ii) the difficulty for cannabis companies in opening and maintaining bank accounts, monetizing resources and obtaining loans from financial institutions; and (ii) greater clarity regarding the way in which the new rules for foreign trade are going to be implemented.