Due Diligence for Swiss CBD Companies – What Investors, Financing Banks and other Financial Institutions should look for

Due Diligence

Due diligence exercises are a key feature to gain information on the buy-side and to enter fruitful negotiations. Banks and financial institutions need to conduct due diligence exercises for customer identification purposes, suspicious activity reporting and risk-based customer assessments. Therefore, it is crucial to understand the business of the Swiss CBD entity and the particularities of the Swiss CBD regulations and its legal and tax implications.

In particular, it should be considered whether the CBD company is (i) involved in growing CBD hemp plants (primary production) and/or producing processed CBD products (secondary production) in Switzerland, (ii) distributing raw material for primary production or processed CBD products in Switzerland, (iii) importing raw material or processed CBD products into Switzerland, and/or (iv) exporting raw material or processed CBD products to third countries.

1. Primary Production

When investigating the business of targets growing CBD hemp plants it is important to determine the production method, i.e. whether the plants are grown indoor and outdoor, to assess whether Swiss agricultural law is applicable. Based on this assessment, the regulations on Federal level as well as the particularities of the canton where the production facilities are located have to be reviewed since different notification obligations may apply.

Another important aspect is the tracking of the origin of plants. Different plant protection requirements apply to plants and seeds with a Swiss, European Union or non-EU origin. This impacts the exact phytosanitary documents to be provided for the due diligence.

As concerns hemp seeds and seedlings, as of 1 January 2021, the Swiss agricultural seed legislation has been changed now allowing for seeds and seedlings for agricultural production of CBD products being produced and placed on the market without any authorisations.

2. Secondary Production

In relation to companies processing raw CBD material, it is essential to understand the intended as well as foreseeable use of the CBD products being manufactured since the regulatory framework applicable to CBD products is determined by allocating the relevant products either to a specific product category, such as medicinal products, food, utility products (incl. cosmetics) or tobacco products (incl. tobacco substitutes), or to a catch-all group of non-categorised products. In consequence, different regulations, authorisation and notification obligations have to be complied with depending on the product category that would be deemed applicable.

In short and subject to certain exceptions, the production and distribution of medicinal and food products require governmental authorisations. In addition, the business has to be registered with governmental and/or cantonal authorities as well. Smoking products on the other hand are subject to a notification obligation. Utility products and other products that would not be caught by one of these product categories are subject to a self-control principle.

3. Import and distribution

In case raw CBD material for distribution or for secondary production is imported to Switzerland, it would need to be analysed whether the raw material is imported as dried or living products. This impacts the question whether plant passports or plant health certificates have to be made available in the due diligence and whether the Federal Plant Protection Office has to be informed. In either case, it is usually required to provide copies of the laboratory reports on the THC level which are normally obtained at the place of origin. In respect of the import and distribution of processed CBD products, the intended or foreseeable use of the respective CBD product has to be determined in order to associate the product to a specific product category and their regulatory and tax implications.
For a more detailed overview it is referred to our newsletter Swiss indirect tax implications for importing CBD products.

4. Distribution and export

Some obligations to obtain authorisations or notify authorities do not only apply to businesses growing CBD hemp plants or producing processed CBD products but do also apply to the Swiss company distributing CBD products. Therefore, it is important to understand a company’s position in the supply chain in order to assess whether these obligations have been complied with. In addition, due regard also has to be paid to marketing regulations, i.e. the rules applying to packaging and advertising of CBD products.

Many companies show an increasing interest in exporting CBD products. However, since there is no harmonized CBD legislation, the export to third countries requires a careful analysis of the regulatory and tax framework applicable in the countries where the products shall be exported to.

Pending legislative changes

In relation to medicinal products, the Swiss parliament is currently processing a revision of the Swiss Narcotics Act. It is intended to make cannabis based medicinal products (i.e., products with a THC level above 1%) a “controlled narcotic” with limited permissible marketability. This will allow doctors to prescribe patients cannabis medicines without obtaining a governmental authorisation. This will also bring along certain changes in the context of primary production of cannabis plants with a THC level above 1% and taxation of medicinal cannabis products. It is expected that the revised law will enter into force in 2022 at the earliest. Therefore, compliance with the 1%-THC level is currently still a strict requirement for companies active in the CBD business, unless a company has obtained a governmental authorisation from Swissmedic or the Federal Office for Public Health in connection with the development of medicinal products or scientific research.

Summary

As in all due diligence exercises, the understanding of the target’s business activity as well as proper documentation is key. Due to the complex regulatory framework on an international, national and cantonal level as well as certain specific indirect tax aspects, this is particularly true to the extent that the target is directly or indirectly involved in the CBD business. While many aspects can be addressed in the due diligence process based on a review of applicable authorisations and accompanying documentation such as laboratory reports on the CBD and THC levels, in relation to the products that are not subject to any authorisations implementing respective representations and indemnities should be considered.

About us

Loyens & Loeff is your ideal partner to advise on transactions involving CBD companies. We are known for combining our experience in the field of CBD regulation with a proven track record of M&A transactions and a renowned tax practice. At the same time, we have a unique standing in Europe and can offer cross-border business support thanks to our representation in our home markets Belgium, Luxembourg, the Netherlands and Switzerland.