The Law:

ATF Ruling 95-3 specifically states: “37/38 mm gas/flare guns possessed with cartridges containing wood pellets, rubber pellets or balls, or bean bags are classified as destructive devices for purposes of the Gun Control Act, 18 U.S.C. Chapter 44, and the National Firearms Act, 26 U.S.C. Chapter 53

What this means to you:  Unless you Fill out a Form 1 with the ATF and get an approval to register your launcher as a destructive device,  you can not posses any 37/38mm cartridge that is intended to inflict harm on any living thing. 

Non Anti Personnel Rounds Used In a Defensive or Offensive Manner:

If you use a 37/38mm cartridge that is not designed as an anti-personnel round (signal round, practice rounds, or other) in a offensive or defensive manner you are still guilty of owning an un-registered destructive device.  EXAMPLE - You and your Buddy's are messing around and you decided it would be a good idea to shoot a practice round at him, you have just turned that practice round into a anti-personal round.  You would be in violation of the law and subjected to mandatory fines and jail time if you were convicted.  

Explosive Material:

A unregistered launcher is limited to 1/4 ounce of explosive material.  This includes your lift charge and payload.  Do your self a favor and buy a scale!!! Do not guess. 1/4 ounce of black powder is ROUGHLY 109 grains of powder.  Remember you measure black powder by volume and not weight, so different kinds of black powder will measure very differently. 

Flash Powder:

Never use any type of flash Powder in any 37mm launcher registered or not.  Flash powder is incredibly unstable and the sudden force of a cartridge going threw you barrel can cause it to blow up in your face and seriously hurt or kill you.  More than one person has blown off there hands using flash powder in a 37mm.  

Follow this link to Grog's Safety page for some HORRIBLE pictures of what happens when a launcher blows up using flash power.  http://www.freewebs.com/grog/safety1.htm