Collagen XXIII belongs to the class of type II orientated transmembrane collagens. A common feature of these proteins is the presence of two forms of the molecule: a membrane-bound form and a shed form. Here we demonstrate that, in mouse lung, collagen XXIII is found predominantly as the full-length form, whereas in brain, it is present mostly as the shed form, suggesting that shedding is tissue-specific and tissue-regulated. To analyze the shedding process of collagen XXIII, a cell culture model was established. Mutations introduced into two putative proprotein convertase cleavage sites showed that altering the second cleavage site inactivated much of the shedding. This supports the idea that furin, a major physiological protease, is predominantly responsible for shedding. Furthermore, our studies indicate that collagen XXIII is localized in lipid rafts in the plasma membrane and that ectodomain shedding is altered by a cholesterol-dependent mechanism. Moreover, newly synthesized collagen XXIII either is cleaved inside the Golgi/trans-Golgi network or reaches the cell surface, where it becomes protected from processing by being localized in lipid rafts. These mechanisms allow the cell to regulate the amounts of cell surface-bound and secreted collagen XXIII.