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Its a feature of the firmware having removed support for sideloaded kEpubs.
Yes it is based on location of the book; the challenge though is that when books are placed in the location where the f/w supports stats, they are not scanned and added to the Kobo Database, so are not accessible via the reader.
In order for them to be seen, all required database entries would need to be added by the driver, and this is a moire challenging / risky procedure.
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