What happened

Shares of Charlotte's Web Holdings (CWBHF -1.90%) were off to the races Thursday, surging by as much as 22.2% during morning trading. As of 12:38 p.m. EDT, the stock was still up by more than 15%.

The passage of a new California law cleared the way for the company to increase its sales of CBD-based products in the country's most populous state.

So what

In a press release that dropped early Thursday, Charlotte's Web said it would expand its retail distribution in California in response to the passage of Assembly Bill 45 (AB45), which "formally permits retail sale of products containing hemp-derived cannabidiol (CBD), including dietary supplements, topicals, over-the-counter, and pet products."

A farmer looks closely at a hemp plant.

Image source: Getty Images.

Until now, California law prohibited the sale of topical and ingestible products that contained CBD. The newly enacted law allows for the addition of CBD to a wide range of consumer goods, including dietary supplements, cosmetics, and pet food, as well as food and beverages.

The change will be a boon to those among California's roughly 40 million residents who are "seeking wider access to the benefits of safe, high-quality hemp dietary supplements, the retailers who want to sell them, and the farmers and manufacturers who make and ship them," said Charlotte's Web CEO Deanie Elsner.

Now what

It's important to note under federal law, CBD still cannot be legally added to dietary supplements or food. AB45 also mandates strict testing and labeling rules, and it forbids CBD/hemp products to have a concentration of more than 0.3% of THC -- the psychoactive ingredient in marijuana. The law marks the beginning of a new push by California to develop a robust regulatory system for hemp and CBD products.

Investors recognized this legal shift as a massive opportunity for Charlotte's Web. California generated $730 million in CBD sales in 2019. For context, sales in second-place Florida came in at $290 million.