Canadian pot companies should expect higher underwriting fees and more bankers trudging through their grow operations in the wake of CannTrust Holdings Inc.’s regulatory breach, according to the former chief of staff of the U.S. Drug Enforcement Administration.

“The banks will have an increased need to understand what the rules are and how the companies are compliant,” said Jodi Avergun, a Washington-based partner at Cadwalader, Wickersham & Taft LLP.

“It will involve significant costs,” which the pot companies will bear, she said.

CannTrust, which fired its chief executive officer after it disclosed it grew cannabis in unlicensed rooms, was the first Canadian pot company to have an equity offering led by a group of big U.S. banks.

Bank of America Merrill Lynch, Citigroup, Credit Suisse Securities and RBC Capital Markets were the lead book runners for the May offering, which raised approximately $170 million (U.S.). The shares have dropped 56 per cent to $2.16 since the regulatory breach was announced, well below the $5.50 offer price.

Trust-but-Verify

CannTrust’s violation isn’t likely to deter big U.S. banks from working with Canadian pot companies in the future, but it is likely to make them more cautious and thorough in their assessments, said Avergun, who was also formerly chief of the Narcotic and Dangerous Drug Section of the U.S. Department of Justice’s Criminal Division, and now works with clients in the legal cannabis industry on banking and financial transactions.

“There will be more of a trust-but-verify attitude,” she said. “When you think of it, how would a bank, other than going there themselves to look at the grow operation, know that CannTrust’s Ontario operations had five rooms that weren’t compliant?”

Ultimately, however, the revenue potential of the cannabis industry means U.S. banks are unlikely to shy away completely.

“I think this is a cautionary tale but not a reason for banks to suddenly turn their back on the potential of cannabis banking or funding cannabis businesses,” Avergun said.