FDA’s proposal to tighten food safety oversight by mandating GRAS notification, if finalized as-is, could complicate or even delay the ability of companies or innovators researching and developing cutting-edge ingredients to land sponsors, fundraise or execute a merger or acquisition, warns a food and beverage lawyer.
The resulting uncertainty could extend beyond individual deals to reshape how ingredients and products are developed – or abandoned.
If investors, strategic partners and potential acquirers become more cautious about ingredients with uncertain GRAS status, innovators may have a harder time securing the capital and commercial partnerships necessary to scale from the lab to the market. This could mean fewer moonshots in favor of more incremental innovations that are perceived as safer bets, while commercial partners may be less willing to build products around ingredients whose regulatory status could later be challenged.
This potential fallout could change the calculus for how, and when, companies approach the process of self-affirming an ingredient as Generally Recognized As Safe or submitting its GRAS conclusions to FDA for evaluation. While notifying FDA of GRAS determination currently is voluntary, many companies choose to do so with the goal of obtaining a “no questions” letter from the agency, which – while not an approval – can provide manufacturers and commercial partners with additional confidence in the company’s GRAS conclusion.
Given FDA notification of GRAS status has been voluntary, reviewing the dossier, scientific support and regulatory status of new ingredients wasn’t historically an area where potential investors or commercial partners invested significant due diligence, said Daniel Travakoli, a partner in the New York office of Akin focused on private equity transactions, food-tech and mergers and acquisitions among other areas.
“There wasn’t a lot of return or value in deep-diving on GRAS and the system that companies were using internally” because there were independent GRAS conclusions, there was no FDA correspondence and companies had private dossiers without a consistent tracking or compliance method, he said.
But, if the overhaul of the GRAS rule that FDA proposed Aug. 11 goes into effect, “the framework changes the way the risk shows up. And, if this rule is passed, GRAS diligence is going to be an active workstream for companies in this space,” he added.
He further explained that if the rule passes, “these positions are going to be more visible and more quantifiable – so, it is really a diligence exercise in addition to regulatory exercise that people need to focus on.”
That shift could matter particularly for early-stage companies, where an unresolved GRAS issue could become a financing or partnership hurdle before an ingredient ever reaches commercialization.
What would FDA’s proposed rule change?
Under the agency’s proposed rule, notifying FDA of a GRAS determination would become mandatory – not voluntary as it is currently – and failure to comply could be a factor FDA could consider when prioritizing a substance for post-market review.
The proposal includes a few exceptions to the notification requirement, including a time-limited option for companies to streamline a FDA submission for certain intended uses of substances already in interstate commerce.
It also would update the rules for the threshold of regulation exemption for human food to reflect updated scientific guidance and cover substances used both in food and as food-contact substances.
Proposed rule could make GRAS risk a key diligence issue
While the proposed rule faces significant challenges and could be delayed or modified based on stakeholder comments, which are due Dec. 11, it could substantially alter how potential partners, investors or buyers evaluate ingredients with uncertain GRAS status, said Travakoli.
He explained if the rule passes, stakeholders will want to more fully understand their exposure risk, which will include fully understanding what substances are used in each of the products that the company makes, the GRAS pathway and conditions of use, the supporting record and if there were any prior FDA interactions.
“The goal is to understand not the position the company is taking, but where did the position come from and how well it is supported,” he said.
Test the support
Stakeholders would next want to “test the support behind the conclusion,” he advised.
This includes verifying the documentation matches the substance and how it is used, whether the analysis and exposure assumptions are still current, and if the public scientific support is sufficient.
Knowing who holds the records will also be critical – are they with the manufacturer? The supplier? The target company?
“This becomes an important distinction because you are not just asking if a GRAS position exists. You are asking if the position is defensible. And if it not defensible, what is it going to cost for you to have a defensible GRAS portfolio,” he said.
Quantify the cost of fixing gaps
After a due diligence process of this magnitude, a company may need to update its GRAS portfolio, which could include expert reviews, and additional testing.
“You need to cooperate with suppliers if the records aren’t held by the target,” Travakoli said.
He explained this could include reformulating depending on what the GRAS findings are and how the FDA responds.
Setting realistic expectations
The proposed rule will complicate timelines for stakeholders that want to invest in or acquire a company before or while it is notifying FDA of its GRAS status. That could leave investors and acquirers exposed to the cost of additional testing, reformulation or other remediation after the deal closes.
“You might do a deal with a company next year, and they might not hear back from the FDA until a year later. So, you might have an unknown GRAS for a set of years,” he said, noting back and forth between the agency and company could extend the review period.
If GRAS risk is material, buyers could seek specific deal protections, rather than relying solely on general representations and warranties, or require the seller to remediate the problems before closing.
However, he acknowledged, the proposed rule is “very, very new” and so investment or M&A evaluations will be “very fluid based on how the ultimate rules end up and the liability allocation thereunder.”
But, he added, thinking about how the regulatory framework connects to deal execution is important.
For investors, he advises “having a well-supported and organized GRAS portfolio reduces uncertainty and increases speed and execution.”
For sellers in the market, “that speed is key and something to be thinking about” along with “how to set up a proper portfolio, how to track those things, thinking about compliance,” he said.
Ultimately, for companies developing novel ingredients, the stakes therefore may extend beyond complying with a new FDA notification requirement. A GRAS conclusion that once lived largely inside a company’s regulatory files could increasingly become part of how investors, commercial partners and acquirers decide whether — and at what price — to back the next product.
