H.R. 5371: Federal Hemp Ban Quietly Eliminates MSO Competition

How Section 781 closed the intoxicating hemp loophole and reset cannabis market dynamics

What Happened

On November 12, 2025, President Trump signed H.R. 5371—a government funding bill to end the 41-day shutdown. Buried in Section 781 of the 1,000+ page appropriations package was a complete redefinition of "hemp" under federal law that effectively bans intoxicating hemp products starting November 13, 2026.

The provision passed with minimal debate during a crisis moment when Congress had no choice but to fund the government. It represents the most significant shift in federal cannabis policy since the 2018 Farm Bill legalized hemp seven years ago.

The New Legal Definition

Section 781 redefines "hemp" as:

Cannabis sativa L. with total tetrahydrocannabinols concentration (including THCA) of not more than 0.3% on a dry weight basis.

Critical changes from 2018 Farm Bill:

• Old standard: Less than 0.3% delta-9 THC only
• New standard: Less than 0.3% total THC (including all isomers and THCA)

Additional restrictions on finished products:

• Maximum 0.4 milligrams total THC per container
• Excludes synthetic cannabinoids manufactured outside the plant
• Excludes cannabinoids with "similar effects to THC" as determined by HHS

What remains legal:

• Industrial hemp (fiber, grain, seed)
• Non-intoxicating CBD products below THC thresholds
• FDA-approved cannabis-derived drugs

What Gets Banned

Effective November 2026, the following become Schedule I controlled substances:

Intoxicating hemp-derived products:

• Delta-8 THC
• Delta-10 THC
• HHC (hexahydrocannabinol)
• THCP (tetrahydrocannabiphorol)
• THCA flower
• Any product exceeding 0.4mg total THC per container

Where these were sold:

• Gas stations
• Convenience stores
• Smoke shops
• Online retailers
• Essentially anywhere without cannabis licensing requirements

Market size eliminated: Estimated $28 billion industry supporting 320,000 jobs

Understanding the 2018 Farm Bill "Loophole"

The 2018 Farm Bill legalized hemp defined as cannabis with less than 0.3% delta-9 THC by dry weight. The law intended to support industrial hemp agriculture—fiber, grain, seed, and non-intoxicating CBD products.

Entrepreneurs discovered that while delta-9 THC was restricted, the law didn't explicitly prohibit other psychoactive cannabinoids. They could:

1. Extract CBD from legal hemp
2. Synthesize it into delta-8 THC, HHC, and other intoxicating compounds
3. Sell products that produced genuine psychoactive effects
4. Market them as "legal hemp" because delta-9 THC remained below 0.3%

The result: A $28 billion market of intoxicating products sold without:

• State cannabis licensing requirements
• Mandatory testing for contaminants
• Child-resistant packaging mandates
• Age verification at point of sale
• Excise taxation (15-37% in legal cannabis states)
• Seed-to-sale tracking systems

These products directly competed with state-licensed cannabis dispensaries while facing zero regulatory compliance costs.

The Political Players

Champion: Sen. Mitch McConnell (R-KY)

McConnell, who authored the 2018 Farm Bill legalizing hemp, championed Section 781 as his final legislative act before retirement. He framed it as closing an "unintended loophole" and protecting children from unregulated intoxicating products.

"The language I helped secure addresses a serious concern regarding the manufacturing and selling of unregulated, intoxicating THC products nationwide. It will keep these dangerous products out of the hands of children, while preserving the hemp industry for farmers."

Key distinction: McConnell supported industrial hemp agriculture, not intoxicating hemp products. Section 781 preserves industrial hemp (fiber, grain, non-intoxicating CBD) while eliminating synthetic cannabinoid products. His Kentucky hemp farmer constituents grow industrial hemp—they're largely unaffected.

Opposition: Sen. Rand Paul (R-KY) & Rep. Thomas Massie (R-KY)

Both Kentucky Republicans attempted to strip Section 781 from the final bill, arguing hemp policy deserved standalone debate rather than being buried in shutdown legislation.

Paul: "This is the most thoughtless, ignorant proposal to an industry that I've seen in a long, long time."

Their opposition failed. Only Paul and Sen. Ted Cruz (R-TX) voted for Paul's amendment to remove the hemp language. The provision stayed.

Context: Paul and Massie represent Kentucky hemp farming interests who feared federal overreach, not necessarily the intoxicating hemp product manufacturers who are the primary targets.

Response: Rep. Nancy Mace (R-SC)

On November 17, Mace introduced the "American Hemp Protection Act of 2025" to repeal Section 781. However, her bill contains no regulatory framework—just a straight repeal.

Hemp industry stakeholders expressed concern to Marijuana Moment that simple repeal returns the market to legal limbo. They want regulation, not deregulation.

Mace voted for H.R. 5371 despite opposing Section 781, later stating she'd "work tirelessly to reverse this harmful language and create a common-sense regulatory framework."

Who Wanted This Ban

Licensed Cannabis Operators

State-licensed dispensaries and Multi-State Operators have complained about hemp product competition for years. Their argument:

"We invested billions in licensing fees, compliance infrastructure, testing facilities, and security systems. Then hemp companies sell essentially the same intoxicating products with none of those costs, undercutting our prices while we pay 15-37% excise taxes."

The National Cannabis Industry Association and state cannabis trade groups actively lobbied for hemp restrictions. Industry estimates suggest intoxicating hemp products captured 20-30% of potential cannabis consumers who otherwise would have visited licensed dispensaries.

State Attorneys General

39 state attorneys general signed a letter supporting federal hemp restrictions, citing:

• Lost state tax revenue from unregulated sales
• Consumer protection complaints about mislabeled products
• Pediatric emergency room visits from accidental exposures
• Products marketed to look like candy

Prohibitionist Advocacy Groups

Smart Approaches to Marijuana (SAM) provided specific language for the 0.4mg THC cap and helped draft the prohibition framework. SAM has consistently opposed all forms of cannabis liberalization.

Who This Hurts

Hemp Product Manufacturers & Retailers

Businesses built around synthesizing and selling intoxicating hemp products face complete elimination. This includes:

• Chemical manufacturers converting CBD to delta-8 and other analogs
• Smoke shops specializing in hemp products
• Gas stations carrying hemp edibles and vapes
• Online retailers shipping to prohibition states

Consumers in Prohibition States

For residents of states without legal cannabis programs, hemp-derived products provided the only legal access to intoxicating cannabinoids. That option disappears in November 2026.

State Regulators Who Built Frameworks

States like Kentucky, Minnesota, Louisiana, and Utah created comprehensive regulatory systems for hemp-derived cannabinoid products—testing requirements, labeling standards, age restrictions. Section 781 overrides all state frameworks via federal supremacy.

The Industrial vs. Intoxicating Hemp Distinction

This is critical to understanding why McConnell's position isn't contradictory:

Industrial Hemp (Remains Legal):

• Fiber for textiles, rope, construction materials
• Grain and seed for food products and oil
• Non-intoxicating CBD products below THC thresholds
• Grown by farmers in agricultural operations
• This is what the 2018 Farm Bill intended to legalize
• This is what Kentucky farmers actually cultivate

Intoxicating Hemp Products (Now Banned):

• Delta-8, HHC, THCP (synthetic cannabinoids)
• Manufactured in laboratories from CBD isolate
• Not grown by farmers—created through chemical synthesis
• This is what the 2018 Farm Bill did not intend to create
• This is what competed with licensed cannabis dispensaries

McConnell supported hemp agriculture. He's now eliminating laboratory-manufactured synthetic products sold as "hemp." These are fundamentally different markets.

Impact on Cannabis Market Dynamics

The Competitive Landscape Resets

Intoxicating hemp products captured market share through regulatory arbitrage—selling psychoactive cannabinoids without the compliance costs required of licensed cannabis operators.

When Section 781 takes effect:

Consumers currently buying intoxicating hemp products must choose:

1. Licensed dispensaries in legal states (higher prices, regulatory compliance, testing)
2. Black market dealers (illegal, untested, variable quality)
3. Stop using intoxicating cannabinoids entirely

There's no fourth option of continuing to buy "legal hemp" at gas stations—that ceases to exist.

Market Share Dynamics

Licensed cannabis operators operated at a systematic disadvantage:

Cost structure comparison:

Hemp products weren't cheaper due to efficiency—they were cheaper due to zero regulatory burden.

Section 781 eliminates this competitive advantage. Legal dispensaries no longer compete against unregulated alternatives in gas stations.

Demand Redirection, Not Destruction

The hemp ban doesn't destroy cannabis demand—it redirects it.

Consumers who purchased intoxicating hemp products were:

• Existing cannabis users seeking convenient/cheaper alternatives to dispensaries
• Prohibition state residents without access to legal cannabis

Post-ban outcomes:

• Existing cannabis users return to licensed dispensaries (market share returns to MSOs)
• Prohibition state consumers revert to black market (never were legal market participants anyway)

Net impact on total cannabis consumption: Minimal Impact on licensed operator market share: Substantially positive

What Happens Next

The One-Year Window

Section 781 doesn't take effect until November 13, 2026, creating a 365-day period for:

Industry lobbying efforts:

• Hemp product manufacturers pushing for repeal or regulatory alternative
• Cannabis industry defending the ban
• Bipartisan lawmakers crafting regulatory frameworks

Business decisions:

• Hemp companies liquidating inventory
• Retailers deciding whether to exit market or pivot
• Manufacturers evaluating compliance options

Potential legislative outcomes:

1. Ban stands - Section 781 takes effect as written
2. Mace's repeal passes - Unlikely given lack of regulatory framework
3. Compromise regulation - New framework with testing/labeling requirements
4. Strategic non-enforcement - Federal agencies decline to aggressively prosecute

FDA Mandates

Within 90 days of enactment (by February 2026), FDA must publish:

• List of cannabinoids naturally produced by Cannabis sativa L.
• List of all THC class cannabinoids naturally occurring in the plant
• List of cannabinoids with "similar effects" to THC
• Additional specificity on definition of "container"

These lists will determine which products beyond obvious synthetics fall under the ban.

Legal and Policy Analysis

From Cannabis Attorney Vince Sliwoski:

"I'm not surprised by H.R. 5371. I think the ban, if enforced, will be good for state-licensed cannabis businesses and also consumers."

Sliwoski notes the ban addresses legitimate concerns:

• Inconsistent or absent testing
• Products mislabeled or contaminated
• Children accessing high-dose products packaged like candy
• Zero quality control or safety standards

However, he criticizes the process:

"I view H.R. 5371 as another ad hoc attempt to regulate the cannabis plant within a reactionary, 'slice and dice' framework. It's not wholistic policy—especially with marijuana rescheduling stalled out."

The fundamental critique: Congress addressed hemp through emergency appropriations while comprehensive cannabis reform remains stalled.

Constitutional and Practical Challenges

Potential litigation grounds:

• Due process challenges (minimal likelihood of success)
• Commerce Clause arguments
• State sovereignty claims

Most legal experts view these challenges as unlikely to succeed given federal authority under the Controlled Substances Act and Congress's commerce power.

Enforcement questions:

• Will DEA/FDA aggressively prosecute violations?
• Will U.S. Attorneys prioritize hemp cases?
• Will state/local law enforcement cooperate?

Strategic non-enforcement remains possible, particularly if Congress appears likely to pass alternative regulation.

The Bigger Picture

Section 781 exemplifies how federal cannabis policy develops: not through comprehensive reform, but through incremental changes buried in must-pass legislation during crisis moments.

Cannabis remains federally illegal as a Schedule I controlled substance. States have legalized medical cannabis in 40 states and adult-use in 24 states, creating a patchwork of conflicting state and federal law.

Hemp was supposed to be the "legal alternative" under the 2018 Farm Bill. That experiment has now ended for intoxicating products.

The result: greater regulatory clarity for licensed cannabis operators, elimination of gray-market competition, and a reset of market dynamics back to the intended structure—illegal federally, legal at state level, with robust regulatory frameworks for those operating legally.

But the fundamental federal-state conflict remains unresolved. Section 781 doesn't change marijuana's Schedule I status, doesn't create federal banking access, doesn't resolve 280E taxation burdens, and doesn't establish interstate commerce frameworks.

It simply closes one loophole while the larger policy dysfunction continues.

Bottom Line

The federal hemp ban eliminates $28 billion in economic activity built on regulatory arbitrage—selling intoxicating products without the costs and constraints imposed on licensed cannabis operators.

For licensed dispensaries and Multi-State Operators, this removes significant competitive pressure from unregulated alternatives. For hemp product manufacturers and retailers, it represents existential threat. For consumers in legal states, it means returning to tested, regulated dispensary products. For consumers in prohibition states, it means losing their only legal access option.

The policy achieves what the licensed cannabis industry has sought for years: elimination of legal gray-market competitors operating without regulatory burden. Whether this represents good policy or regulatory capture depends on your perspective.

What's clear: the competitive landscape for cannabis products has fundamentally shifted. Gas station gummies and convenience store vapes are finished. Licensed operators won.

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