Neuregulin1 (NRG1) is a single transmembrane protein that plays a critical role in neural development and synaptic plasticity. Both NRG1 and its receptor, ErbB4, are well-established risk genes of schizophrenia. The NRG1 ecto-domain (ED) binds and activates ErbB4 following proteolytic cleavage of pro-NRG1 precursor protein. Although several studies have addressed the function of NRG1 in brain, very little is known about the cleavage and shedding mechanism. Here we show that the neuronal vesicular protein calcyon is a potent activator and key determinant of NRG1 ED cleavage and shedding. Calcyon stimulates clathrin-mediated endocytosis and endosomal targeting; and its levels are elevated in postmortem brains of schizophrenics. Overexpression of calcyon stimulates NRG1 cleavage and signaling in vivo, and as a result, GABA transmission is enhanced in calcyon overexpressing mice. Conversely, NRG1 cleavage, ErbB4 activity and GABA transmission are decreased in calcyon null mice. Moreover, stimulation of NRG1 cleavage by calcyon was recapitulated in HEK 293 cells suggesting the mechanism involved is cell-autonomous. Finally, studies with site-specific mutants in calcyon and inhibitors for the major sheddases indicate that the stimulatory effects of calcyon on NRG1 cleavage and shedding depend on clathrin-mediated endocytosis, β-secretase 1, and interaction with clathrin adaptor proteins. Together these results identify a novel mechanism for NRG1 cleavage and shedding.