Launching a CBD Business
28 August 2020
If you’ve spent lockdown dreaming about launching your own CBD startup, in many ways there’s never been a better time. CBD, or cannabidiol, is one of over 60 different cannabinoids (and 300 or so other chemical compounds) found in the Cannabis plant. Cannabinoids interact in a range of ways with the body’s endocannabinoid system, producing a wide variety of effects. THC (∆-9-tetrahydrocannabinol) is probably the most famous, and is responsible for the ‘high’ associated with Cannabis.
You’d have to have been hiding under a rock for the last year or so not to have seen the massive rise in popularity of all things CBD in the UK, from cosmetics to sanitary products, gummies and even beer. You may even have seen estimates that the potential size of the UK CBD market could be around £1billion a year by 2025. Many claims have been made for CBD’s positive effects, and it certainly does have medicinal effects in sufficient concentrations – indeed it’s an active ingredient in several licensed medicines (including for pain relief and treating certain types of childhood epilepsy).
With all this in mind – and the increased focus on wellness and health which has come with the COVID-19 pandemic – there still seems a lot of room in the market for new and innovative CBD brands and products. If you’ve been inspired to start your own CBD business opportunities are still there for the taking.
Getting from idea to product launch, and beyond into profitability, is a challenge for any startup – however, for those wanting to create a thriving UK CBD business, because of the nature and origin of CBD itself there are several additional challenges.
In this guide, solicitor Ben King sets out what your thought process should look like when you’re shaping your CBD startup. Very simply, we believe you should think Product – Business – Brand.
It’s absolutely vital to get your CBD product right from a regulatory point of view from the outset. CBD products sit in something of a regulatory grey area, and one which is changing all the time – are CBD products narcotics? Medicines? Health supplements? Novel foods? All of the above? The answer is heavily dependent on what else is in the product, how the product is intended to be consumed, and how it is packaged and marketed. And the answer really matters, because – depending on the answer – your CBD product could be subject to very heavy and costly regulation as a human medicine, removed from the shelves for being a novel food, or even seized by the police for containing controlled drugs.
Whatever CBD product you’ve decided to create – drink drops, gummies, vape pens, or anything else – there are certain legal and regulatory issues which you need to take into account from the very start.
CBD and controlled drugs
CBD itself is not a controlled drug in the UK. However, all parts of the Cannabis plant itself and several other cannabinoids found in Cannabis-derived products – in particular THC (∆-9-tetrahydrocannabinol) – are listed as controlled drugs under the Misuse of Drugs Act 1971 and the Misuse of Drugs Regulations 2001. A CBD product must not contain any demonstrable level of any controlled drug if it is to be sold in the UK (other than as a licensed medicine). This is why you see ‘THC Free’ or ‘0% THC’ on CBD products – these products claim to have been shown in laboratory tests not to contain any THC, therefore reassuring consumers that the products are legal to possess and use in the UK. It is unlikely that most of these products are in fact absolutely free of THC, but the levels are sufficiently low that they don’t show up on laboratory tests. It’s also possible to use synthetic CBD, although this is generally more expensive.
What this means for you as a CBD startup is that you need to find a reliable and regular source of good quality, lab-tested, THC-free CBD extract or isolate to put into your chosen product. You’ll need to shop around and find a supplier you trust, get your own lab analyses done to make sure they live up to their claims, and getting in place a solid supply agreement which makes the supplier contractually liable for the quality and composition of the CBD they supply to you.
If you want to sell a product for human consumption (i.e. a food, a drink or a food supplement) which was not consumed in the EU to ‘a significant degree’ before May 1997 – a ‘Novel Food’ – you need your Novel Food product to be authorised. Whilst we are still in the EU, this process is run by the EU Commission and the European Food Safety Authority (EFSA). After 1 January 2021, the UK Food Standards Agency (UKFSA) will take over this responsibility for the UK, but the law will remain essentially the same, and the FSA have said they will not diverge from the EFSA processes and decisions, at least for the foreseeable future.
Products containing CBD extracts are considered ‘Novel Foods’ and require authorisation. Initially, given the large number of CBD foods already being sold in the UK, the UKFSA took a softly-softly approach, allowing products that weren’t demonstrably unsafe to stay on the shelves to avoid creating a ‘black market’ for CBD products sold from overseas via the internet – better the devil they knew, so to speak. However, in March 2020, the FSA moved to clarify this situation. Any CBD product which is currently on the market may continue to be sold, but after 31 March 2021 will be removed from the shelves if a ‘validated application’ for Novel Food authorisation has not been submitted for them. The FSA also stated that no new CBD food products can be placed on the market in the UK at any time, unless they have received Novel Food authorisation (not just having had an application submitted).
This is a massive issue if you want to sell CBD food products in the UK – the Novel Food authorisation process currently takes at least a year, requires a level of regulatory knowledge and experience, and is very expensive. This means that unless you can take advantage of a supplier’s CBD Novel Food authorisation (if and when any are obtained), the barrier to entry may be too high – the investment required (both financial and in terms of time to market) would be too much for all but the most well-funded new business.
If your idea is based around CBD food or drink products, this is not necessarily the end of the story, but you will need to think very carefully about how you’re going to work around the Novel Food issue. You may well need to seek advice from a regulatory professional. If you rely on a supplier’s authorisation, you will likely be limited to re-branding ‘white label’ products, meaning that you simply put your brand on an existing CBD formulation which has been authorised as a Novel Food– if you add ingredients to the product you will likely be outside of the authorisation, and will be prohibited from sale in the UK.
Human medicinal products
Any product which falls within the definition of a ‘human medicinal product’ given in the Human Medicines Regulations 2012 must be licensed by the UK Medicines and Healthcare products Regulatory Agency (MHRA) or (before the Brexit transition ends) the European Medicines Agency (EMA), and be given what is known as a Marketing Authorisation, which sets out what the medicine should be used to treat, dosages, safety information, side effects, interactions and other information. Obtaining a Marketing Authorisation requires the manufacturer to have carried out multiple studies and clinical trials, and represents an investment of often several million pounds.
You are unlikely to have the resources or inclination to obtain a Marketing Authorisation for your product. This means that your product must avoid being classified as a ‘human medicinal product’, either because it actually exerts a pharmacological or metabolic action or because it is presented (in terms of its packaging, marketing or mode of administration) as treating or preventing disease in humans. As most consumer CBD products will not have CBD content sufficient to exert a pharmacological or metabolic action, it is the ‘presentational’ test which is the greatest risk for consumer CBD products. You need to make avoid making any claims in your marketing (including your website, and any product descriptions on third-party vendor websites) which might be considered claims to treat or prevent any disease, and avoid packaging your product in a way which makes it look like a medicine. The MHRA has the power to remove products from the shelves if it considers them unlicensed medicinal products.
Products like CBD vapes (provided they don’t contain (and can’t be refilled) with nicotine products) or cosmetics are generally not under so much regulatory scrutiny at the moment, provided that they don’t contain any controlled drugs and are not presented as medicinal products. As already stated, however, the regulations around CBD products are rapidly changing, and it’s unclear at the moment whether (in the UK at least) this will lead to more or less stringent regulations.
Of course, CBD products must also comply with all of the other usual rules applicable to consumer products – they must be safe, any marketing must not be misleading, and so on. Having to meet all the additional regulations in an evolving regulatory landscape is a considerable additional burden. The potential payoff is the opportunity to stake a claim in what may be a very lucrative UK CBD market.
In terms of the structure and function of the business itself, a CBD startup is pretty much the same as any other startup. You need to think about setting up a limited company, dividing up the equity amongst the founders appropriately, appointing directors, and making sure all of the proper arrangements are in place to make sure your company functions smoothly – payroll, accounts, etc. You need to start thinking about employing people, signing supply and customer agreements, sourcing warehouse or office premises, and so on. It’s vital to ensure that the contracts you put in place for all of these relationships give you the certainty and flexibility you need to grow your business – just because you’re a startup, don’t be afraid to negotiate and make sure you get what you need.
You’re also likely (unless you’re very fortunate) to need to find some kind of funding to get your business up and running. The general types of funding are debt (where you borrow money from a lender, usually against an asset owned by you or the business) or equity (where you give away a share of the company to professional investors in return for an investment). You can also consider alternative financing such as crowdfunding (through a platform like Kickstarter). Initially, you may just want to borrow money from friends or family, but professional investors can bring real value to your business along with the funding they provide. It’s important to spend some time exploring the opportunities for funding carefully, as making the wrong decision can have serious consequences for your company and, in the worst case, you personally.
It’s vital to bear in mind even at this embryonic stage that potential lenders, investors and (eventually) purchasers will want to scrutinise all aspects of your business – how your company is structured, who holds shares in the company and what rights they have, who the company owes money to, the strength and value of your contracts, and – especially with a risky product like CBD – what safeguards you have in place to ensure your product is legally compliant on an ongoing basis. If you don’t get these aspects right initially, sorting out problems later on can be very costly, and may even put off any investors or purchasers completely.
Last but most definitely not least, it’s essential as a startup in a crowded marketplace, one where brand can be a key differentiator, that you take early and effective steps to protect your intellectual property.
This starts right at the beginning of your branding journey. First, you need to ensure that your shiny new name and logos aren’t similar or identical to those already being used by anyone else. You should carry out general web searches, but also search Companies House to make sure the company name is not already taken. Trade mark search tools like TMView allow you to search registered trade marks, allowing you to ensure that your chosen name has not already been taken by someone else.
Once you’ve made sure you are free to use your name and branding, you need to take steps to prevent other people from using it. Your name and any logos can be registered as trade marks, either just in the UK or across the EU. If your products come in specially-designed bottles or packaging, you may want to register the designs. You will also need to set up a website which incorporates your new brand, and you may want to register several domains (.co.uk, .com, .eu and so on) to prevent opportunists registering these and causing you hassle later on.
Once you start putting out marketing materials (including your website), it’s important to think about copyright. You need to ensure that you have the rights to use any text or images you use, and you also need to be alert to others using your original work without your consent. In the UK and EU, copyright arises automatically in original creative works, so there is no register to search – you should assume that you will need permission to use any materials, unless they are clearly marked as being available to use under public licences such as Creative Commons.
Finally, where you are getting third parties to carry out work for your company, you need to make sure that you have a written contract in place, and that this contract assigns all of the intellectual property created by the contractor to your company. If you don’t, you can run into real problems later on. Under UK law, intellectual property created by anyone other than an employee is (usually) owned by the creator, not the company, unless there is a contractual assignment of the intellectual property. This is a question any future investor or buyer will ask straight away – ‘we love your products and your brand – can you just confirm that all of it belongs to the company?’ It’s fundamental to building your business that you nurture and protect all of the fruits of your hard work – essentially, make sure you own the intellectual property, and then take what steps you can to protect it, be that registration or contractual provisions making sure your customers and suppliers aren’t given any more rights over it than you wish to give them.
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In summary – build your business to last
This can seem like an insurmountable list of things to do – but taking this approach of ensuring compliance, building a robust business and protecting your brand and other intellectual property rights from the very start will ensure that your business is given the strong foundations it will need to thrive. Trying to remedy any issues when you’ve spent big on branding, or have a warehouse full of stock you can’t legally sell, can be expensive, and – worst case – can sink your startup entirely. Get it right, however, and customers and investors will recognise and reward your hard work.
If you’re interested in discussing your new business with one of our startup lawyers, please contact us at firstname.lastname@example.org.
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