the banned hazardous substance in model rocket motors is of course the black powder propellant charge itself. If a hybrid contains no such banned substances then it is outside the regulation of the CPSC. If it did include a small BP chunk to facilitate ignition, the chunk might first qualify as an igniter. I don't think the CPSC regulates igniters. If the chunk didn't qualify as a igniter, then if as long as the chunk is labeled correctly, it would be exempt from CPSC as is BP model rocket motors if they are labeled correctly. But this all assumes of course that minors will be purchasing G size hybrids, and I think the rocketry community and industry is self-regulating itself by only allowing adults to purchase G(or below) hybrids.
IMO hybrids should stay outside of CPSC regulation. Just say NO to selling them to kidz.
everybody is familiar with 1500.85 but 1500.83 is also interesting:
Sec. 1500.83 Exemptions for small packages, minor hazards, and special circumstances
(36) Individual toy rocket propellant devices and separate delay train and/or recovery system activation devices intended for use with premanufactured model rocket engines are exempt from bearing the full labeling required by section 2(p)(1) of the act (repeated in Sec. 1500.3(b)(14)(i)) insofar as such requirements would be necessary because the articles are flammable or generate pressure, provided that: (i) The devices are designed and constructed in accordance with the specifications in Sec. 1500.85(a) (8) or (9): (ii) Each individual device or retail package of devices bears the following: (A) The statement ``WARNING--FLAMMABLE: Read instructions before use''; (B) The common or usual name of the article; (C) A statement of the type of engine and use classification; (D) Instructions for safe disposal; and (E) Name and place of business of manufacturer or distributor; and (iii) Each individual rocket engine or retail package of rocket engines distributed to users is accompanied by an instruction sheet bearing complete cautionary labeling and instructions for safe use and handling of the individual rocket engines.