The Federal Redefinition of Hemp Under H.R. 5371 – Compliance, Risk Mitigation, Strategic Repositioning, and Political and Legislative Considerations

The enactment of the Continuing Appropriations and Extensions Act (H.R. 5371) on November 12, 2025, has fundamentally altered the legal foundation of the U.S. hemp industry. Embedded within this omnibus spending measure are revisions to the Agricultural Marketing Act of 1946, which itself was amended by the Agriculture Improvement Act of 2018 (the 2018 Farm Bill).  These new revisions narrow the federal definition of hemp, impose rigorous limits on intoxicating derivatives, and effectively reclassify most current intoxicating hemp products as Schedule I controlled substances under the Controlled Substances Act (CSA) once the law takes effect on November 12, 2026.  The result is the near-total elimination of the national market for intoxicating hemp goods while preserving lawful pathways for non-intoxicating wellness, industrial applications, and strictly intrastate or state-licensed cannabis operations.

With a one-year grace period prior to effectiveness now underway, impacted businesses face profound operational, financial, tax, banking, contractual, and strategic imperatives. This alert integrates the core elements of our recent analyses into a single resource, providing clear guidance on what has changed, what risks are most immediate, adaptation strategies, and related political and legislative considerations.

The New Definition: What Qualifies as Hemp?

The 2018 Farm Bill identified hemp as cannabis with no more than 0.3 percent delta-9 THC content on a dry-weight basis, enabled explosive growth in hemp-derived cannabinoids – including delta-8 THC, THCA-rich flower, HHC, THC-O, THCP, and others – generating tens of billions in economic activity and supporting hundreds of thousands of jobs.

H.R. 5371 preserves the core identity of hemp as Cannabis sativa L. but dramatically tightens the boundaries of what may lawfully be produced, processed, or sold under federal law. The statute requires that the plant and every derivative, extract, cannabinoid, isomer, acid, salt, or salt of isomer must contain no more than 0.3 percent total THC on a dry-weight basis, measured after decarboxylation. “Total THC” explicitly combines delta-9 THC with THCA (and will later include any additional cannabinoids the FDA designates as having “similar effects” to THC).

Industrial hemp applications – fiber and viable grain from stalks, oil and cake from seeds, microgreens (provided they remain below 0.3% total THC), and research programs at institutions of higher education – remain fully protected. However, the law imposes three distinct and categorical exclusions that together eliminate virtually the entire intoxicating hemp sector:

1. Seeds and Planting Materials: Seeds or propagative material that exceed 0.3 percent total THC are excluded from the definition of hemp and may not be lawfully transported or cultivated. This applies even during the grace period if the intended end use is non-compliant production, effectively requiring immediate cessation of high-THCA genetics sourcing.

2. Intermediate Hemp-Derived Cannabinoid Products: Distillates, isolates, concentrates, bulk powders, resins, or other processing intermediates are excluded entirely if they (a) contain any cannabinoid not naturally produced by the living plant or (b) were synthesized, isomerized, or chemically converted outside the plant. This provision directly prohibits the entire CBD-to-delta-8/10, HHC, THC-O, THCP, and similar conversion processes that have underpinned the intoxicating market since 2019. Even intermediates that remain naturally derived remain capped at 0.3 percent total THC (including THCA and any future THC-like compounds).

3. Final Consumer Products: Finished items intended for human or animal consumption — edibles, beverages, vapes, tinctures, topicals, inhalables — are limited to no more than 0.4 milligrams of total THC (including THCA and THC-like cannabinoids) per innermost retail container, regardless of serving size or total package volume. This micro-dose threshold effectively bans every current intoxicating gummy, vape cartridge, beverage, or tincture sold nationwide.

Importantly, the new law directs the Food and Drug Administration (FDA), in consultation with other agencies, to publish a definitive list of naturally occurring cannabinoids and those with THC-similar effects, as well as guidance clarifying container definitions, by February 2026. These publications will materially influence compliance strategies, product reformulations, and legal risk management and will likely compromise operators’ relationships with banks, payment processors, retailers, insurers, and logistics companies, and may therefore function as a second and more impactful shock than enactment of H.R. 5371 itself.

Immediate and Future Impacts

Impacts of H.R. 5371 will unfold in sequence, with some manifesting within weeks and others building over months, and will accelerate sharply after the FDA lists and guidance are issued.

1. Banking and Payment Processing (Most Immediate / Already Beginning): Federally regulated institutions possess unambiguous CSA Schedule I justification to de-risk immediately, and so major banks and payment processors are likely to soon revise their models and terminate accounts. Multi-state operators reliant on national card networks may soon experience account restrictions or closures, with a second, larger wave likely to immediately follow FDA list publication.

2. Contracts, Leases, and Insurance (Q1 – Q2 2026, Accelerating Post-FDA): Contractual parties will quickly review change-of-law and illegality clauses that are activated by the new law. The FDA lists may provide the final trigger for landlords, distributors, white-label partners, and lenders to issue notices of default or reservation of rights. Insurance carriers may begin blanket non-renewals once FDA removes any remaining ambiguity.

3. Inventory and Supply Chain (Ongoing, Sharp Acceleration Post-FDA): Non-compliant intermediates and finished goods will become increasingly difficult to move, store, or insure. After FDA issues its lists, warehouses and third-party logistics companies may refuse shipments, retailers may pull product from shelves, and remaining wholesale buyers may vanish. Sunset inventory that might have been sold gradually through mid-2026 will face emergent sale conditions or outright destruction.

4. Tax Exposure via IRC Section 280E (Tax Year 2026 and Forward): The full tax burden hits in tax year 2026, but segregation failures in 2025–2026 records will trigger retroactive penalties.

The Next 12 Months

The one-year grace period constitutes a structured window for operational wind-down or pivoting. During this time affected businesses will need to undertake any number of analyses and actions as necessary in phases, including:

• Phase I – Assessment & Stabilization: Conduct comprehensive SKU-level audits to classify products as compliant or banned, assess burn rates for prohibited SKUs, review contracts for triggers based on illegality, and communicate with financial partners regarding transition plans.

• Phase II – Post-FDA Listings and Guidance: Strategically liquidate non-compliant inventory, adjust marketing and product claims, localize supply chains if pursuing intrastate operations, and halt raw material purchases for prohibited lines.

• Phase III – Restructuring & Repositioning: Address debt, renegotiate leases, implement employee retraining or reductions, recalibrate equipment and operational capabilities for compliant/Survivor lines, complete cannabis license applications.

• Phase IV – Final Compliance and/or Launch: Dispose of prohibited products through licensed channels with certificates of destruction, disable e-commerce for banned items, complete audits to ensure compliance documentation, and launch repositioned compliant or state-licensed operations.

Specific Pivot Strategies

Interwoven into the above phased strategy are certain actions designed to pivot to post-gray market federally compliant operations.  Three primary pathways are viable, and some operators may seek to pursue hybrids using separate entities:

1. Pure Compliant National Wellness & Industrial Hemp Model: Pivot entirely to non-intoxicating, naturally derived cannabinoids compliant with the 0.4 mg limit. This path eliminates Section 280E, restores normal banking/payment processing, and opens mass-retail, grocery, and pharmacy channels. First-mover advantage will be decisive in capturing share of what will become a newly legitimate, multibillion-dollar mainstream category.

2. Intrastate Shield Model: Utilize state hemp product frameworks that confine intoxicating products within state borders and route sales through licensed cannabis dispensaries. This offers practical continuity for operators able to fully localize supply chains, leveraging anti-commandeering principles and historical DEA enforcement priorities that prioritize diversion risk over compliant state programs.

3. Transition to State-Licensed Adult-Use Cannabis: Convert existing assets into state cannabis licenses. Hemp operators’ extraction, formulation, testing, and compliance expertise transfers directly. States with conditional or social-equity license pathways provide accelerated entry despite Section 280E burdens.

Political and Legislative Outlook

2026 is a federal midterm election year, with voting on November 5, 2026 – exactly one week before statutory enforcement of H.R. 5371 begins. The political calculus that enabled passage of H.R. 5371 in a post-election lame-duck session (public health concerns, youth protection rhetoric, pressure from licensed cannabis states tired of hemp competition) may shift dramatically in an election year.  Rural Republican districts in hemp-heavy states (Kentucky, Tennessee, North Carolina, Oregon) face significant job losses. Democratic districts with strong labor or minority-owned business participation in the hemp space will feel similar pressure.

Importantly, the 2018 Farm Bill is also set for reauthorization in 2026 – in fact, H.R. 5371 itself includes an extension of the 2018 Farm Bill through September 30, 2026. The Farm Bill is essential for commodity support, conservation, and nutrition programs, making its passage politically unavoidable. Hemp industry stakeholders can and likely will push to attach amendments to the 2026 Farm Bill that either revert the definition of hemp to the 2018 standard or, more likely, propose a new, less-restrictive regulatory framework for hemp-derived intoxicating cannabinoids. If such an amendment were successfully included in the final Farm Bill (or within other must-pass legislation such as appropriations, national defense, and debt ceiling bills) and signed into law, it would effectively override the corresponding provisions within H.R. 5371 before they take effect in November 2026.

Conclusion

If unamended, H.R. 5371 will end the current era of federally legal intoxicating hemp-derived cannabinoids on November 12, 2026, and from a practical perspective the impacts of the new law are already manifesting and will accelerate.  At the same time, the new law provides clearer terms than the U.S. hemp industry have ever previously known, and additional significant clarification will come from FDA within the next 90 days. Companies on all sides of the cannabis and hemp industries that assess the impacts of the new law, stay abreast of developments, and execute with urgency, discipline, and foresight will be well-positioned to participate and succeed in the new market that is emerging.

Businesses operating in the hemp, wellness or cannabis-adjacent markets should begin evaluating how H.R. 5371 may affect their production, supply chains, contracts and long-term strategy. The attorneys at Scarinci Hollenbeck advise clients across the hemp, cannabis and regulated products sectors on federal compliance, risk mitigation and operational restructuring. To learn more about how our firm can assist, visit our Cannabis Industry page.

If you have questions about H.R. 5371 or need guidance tailored to your operations, contact us to speak with an experienced attorney.