A wide variety of RNAs encode small open-reading-frame (smORF/sORF) peptides, but their functions are largely unknown. Here, we show that Drosophila polished-rice (pri) sORF peptides trigger proteasome-mediated protein processing, converting the Shavenbaby (Svb) transcription repressor into a shorter activator. A genome-wide RNA interference screen identifies an E2-E3 ubiquitin-conjugating complex, UbcD6-Ubr3, which targets Svb to the proteasome in a pri-dependent manner. Upon interaction with Ubr3, Pri peptides promote the binding of Ubr3 to Svb. Ubr3 can then ubiquitinate the Svb N terminus, which is degraded by the proteasome. The C-terminal domains protect Svb from complete degradation and ensure appropriate processing. Our data show that Pri peptides control selectivity of Ubr3 binding, which suggests that the family of sORF peptides may contain an extended repertoire of protein regulators.

Adult stem cells must continuously fine‐tune their behavior to regenerate damaged organs and avoid tumors. While several signaling pathways are well known to regulate somatic stem cells, the underlying mechanisms remain largely unexplored. Here, we demonstrate a cell‐intrinsic role for the OvoL family transcription factor, Shavenbaby (Svb), in balancing self‐renewal and differentiation of Drosophila intestinal stem cells. We find that svb is a downstream target of Wnt and EGFR pathways, mediating their activity for stem cell survival and proliferation. This requires post‐translational processing of Svb into a transcriptional activator, whose upregulation induces tumor‐like stem cell hyperproliferation. In contrast, the unprocessed form of Svb acts as a repressor that imposes differentiation into enterocytes, and suppresses tumors induced by altered signaling. We show that the switch between Svb repressor and activator is triggered in response to systemic steroid hormone, which is produced by ovaries. Therefore, the Svb axis allows intrinsic integration of local signaling cues and inter‐organ communication to adjust stem cell proliferation versus differentiation, suggesting a broad role of OvoL/Svb in adult and cancer stem cells.