Colorado regulators on Monday announced plans to crack down on companies that illegally sell cheap and potentially dangerous hemp products as marijuana.
The state’s Marijuana Enforcement Agency said it had discovered “regulatory compliance issues” that threaten to disrupt the cannabis industry in the nation’s first legal retail market.
These issues “pose significant risks to public safety, market integrity, and the tax revenue framework that supports Colorado’s regulated cannabis industry,” the agency said in an industry bulletin.
A January investigation by the Denver Gazette and ProPublica reported that although Colorado was one of the first states to ban the sale of hemp products that cause intoxication, the Legislature and regulators failed to adopt many of the regulations that other states have adopted to keep hemp products off marijuana dispensary shelves.
Producing e-cigarettes and edible distillates from hemp is much cheaper than using marijuana, giving companies a competitive advantage.
But regulators say they are concerned because manufacturers rely on toxic and potentially dangerous chemicals to convert CBD, a non-intoxicating compound found mostly in hemp, into THC, the psychoactive compound that makes people feel high. Regulators have banned such chemical synthesis because they are concerned that chemical residues could remain in the final product and pose a risk to consumers.
Colorado manufacturers continue to use hemp to make products sold as marijuana, taking advantage of gaps in the state’s inspection and enforcement system, despite violating state law, according to regulatory investigations, past agency bulletins, and testimony and laboratory results included in several lawsuits.
In 2024, state investigators discovered that one popular brand of marijuana vape sold in dispensaries was not only derived from hemp, but was also contaminated with methylene chloride, a chemical commonly used to convert CBD from hemp to THC. It has been banned by Colorado cannabis regulators and banned for most use by the U.S. Environmental Protection Agency because it can cause liver and lung cancer and damage the nervous, immune and reproductive systems.
Warehouse, the company that manufactured these e-cigarettes, returned its marijuana license in response to the investigation. Warehouse owner Thanh Howe and the company’s lawyer declined to comment.
Congress passed a law in November banning nearly all intoxicating cannabis products nationwide starting this fall, but it’s unclear how the government will enforce the ban, and cannabis manufacturers are calling for it to be repealed.
In December, President Donald Trump issued an executive order directing aides to work with Congress to develop regulations that would allow some cannabis products.
Colorado’s Cannabis Enforcement Agency said in a bulletin Monday that it has “identified and investigated” evidence that cannabis companies are manufacturing products using illegal practices and prohibited methods, without relying on cannabis that should be tracked for safety.
The Colorado Cannabis Association and the Colorado Cannabis Education Association did not respond to requests for comment.
Beyond safety concerns, the bulletin also noted that some cannabis manufacturers and growers are avoiding cannabis tax obligations through a “pattern of non-compliance” in sales transactions that report to the state’s “seed-to-sale” tracking system. The tracking system tracks marijuana from the first planting to dispensaries selling pot, e-cigarettes and other products.
Companies are falsely reporting bulk sales of marijuana at nominal prices, in some cases as low as $1 per pound for raw marijuana material, the bulletin said. These products can fetch as much as $600 per pound on the open market, depending on the marijuana category, according to industry insiders.
Industry officials say such fraudulent reporting has robbed state and local governments of millions of dollars in marijuana tax revenue, but there are no official estimates.
The agency said it would pursue emergency rules to address these issues. The report emphasized that if the state discovers suspicious or unusual transactions or inventory, it will prompt an investigation. Regulators warned that companies caught using cannabis or other illegal materials disguised as marijuana could face “immediate product embargoes, license suspension or revocation, significant fines, and referral to law enforcement.”
The Denver Gazette and ProPublica tried to track the unusual transactions, but the Marijuana Enforcement Agency insisted that sales transaction records are private, even if they do not identify a company.
Marijuana industry representatives met with sector regulators late last month to press for a more aggressive response from regulators to marijuana alternatives, despite the potential impact on some companies in the industry. Representatives argued that bad actors are unfairly lowering prices and shifting the tax burden to manufacturers and growers who are trying to play by the rules. This report was released a few weeks after that meeting.
“The department is also considering additional modifications to testing and screening protocols to detect ‘illegal products and prohibited methods,’ and may require additional laboratory testing of products throughout the supply chain, as appropriate,” the agency’s bulletin states.
