The U.S. Food & Drug Administration (FDA) has come out and proposed to extend its tobacco authority to additional tobacco products, including e-cigarettes. What the public needs to know is that the FDA is targeting e-cigarettes here.

Another thing that the public needs to know is that tobacco and nicotine critics are likely to be unimpressed. Products that would be deemed to be subject to FDA regulation are those that meet the statutory definition of a tobacco product. This includes currently unregulated marketed products like electronic cigarettes, cigars, pipe tobacco, nicotine gels, waterpipe (or hookah) tobacco and dissolvables not already under the FDA’s authority.

Altria Group Inc. (NYSE: MO) will be paying close attention here. Altria has been considered as late to the party (perhaps very late) in getting into e-cigarettes. If regulation were to get tougher, it might even rekindle those old merger rumors of Lorillard Inc. (NYSE: LO) being acquired by Reynolds American Inc. (NYSE: RAI). We previously mentioned that this March rumor would consolidate the pure-play tobacco companies in America from three down to two, but a Reynolds-Lorillard would currently seem to be more dominant in e-cigarettes than Altria.

The FDA currently regulates cigarettes, cigarette tobacco, roll-your-own tobacco and smokeless tobacco. While much of the public is for less regulation, it will seem silly to many that the FDA was not regulating these other forms of tobacco and/or nicotine delivery agents. Makers of the “newly deemed tobacco products” potentially would be required to do the following:

• Register with the FDA and report product and ingredient listings.
• Only market new tobacco products after FDA review.
• Only make direct and implied claims of reduced risk if the FDA confirms that scientific evidence supports the claim and that marketing the product will benefit public health as a whole.
• And not distribute free samples.

Also, the following provisions would apply to newly deemed tobacco products:

• Minimum age and identification restrictions to prevent sales to underage youth
• Requirements to include health warnings
• A prohibition of vending machine sales, unless in a facility that never admits youth

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Before e-cigarette consumers panic, they should keep in mind that these are all proposed rules. The FDA has to get enforcement on them. The FDA is also proposing different compliance dates for various provisions so that all regulated entities will have adequate time to comply with the requirements of the proposed rule. How long that will be is anyone’s guess, but the proposed rule will be available for public comment for 75 days.

The full proposals are far from set in stone. Still, you can bet your assets that Altria, Lorillard and Reynolds American will all be watching closely — and participating in such regulation. Thousands of pop-up e-cigarette retailers will be watching closely as well. On average, shares of all three are indicated up 1% or so after Altria’s earnings report — and Altria just hit a new high of $38.75.

Another consideration here is that Altria’s gain now puts its dividend under 5% — at 4.955%.

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