The sensory and motor neuron-derived factor (SMDF) is a type III neuregulin that regulates development and proliferation of Schwann cells. Although SMDF has been shown to be a type II protein, the molecular determinants of membrane biogenesis, insertion, and topology remain elusive. Here we used heterologous expression of a yellow fluorescent protein-SMDF fusion protein along with a stepwise deletion strategy to show that the apolar/uncharged segment (Ile(76)-Val(100)) acts as an internal, uncleaved membrane insertion signal that defines the topology of the protein. Unexpectedly, removal of the transmembrane segment (TM) did not eliminate completely membrane association of C-terminal fragments. TM-deleted fusion proteins, bearing the amino acid segment (Ser(283)-Glu(296)) located downstream to the epidermal growth factor-like motif, strongly interacted with plasma membrane fractions. However, synthetic peptides patterned after this segment did not insert into artificial lipid vesicles, suggesting that membrane interaction of the SMDF C terminus may be the result of a post-translational modification. Subcellular localization studies demonstrated that the 40-kDa form, but not the 83-kDa form, of SMDF was segregated into lipid rafts. Deletion of the N-terminal TM did not affect the interaction of the protein with these lipid microdomains. In contrast, association with membrane rafts was abolished completely by truncation of the protein C terminus. Collectively, these findings are consistent with a topological model for SMDF in which the protein associates with the plasma membrane through both the TM and the C-terminal end domains resembling the topology of other type III neuregulins. The TM defines its characteristic type II membrane topology, whereas the C terminus is a newly recognized anchoring motif that determines its compartmentalization into lipid rafts. The differential localization of the 40- and 83-kDa forms of the neuregulin into rafts and non-raft domains implies a central role in the protein biological activity.