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It's the lie, kobo does not properly support epub3*.. the epub 2 files you have disabled should work fine.. I don't know why they warn you about looking bad. The one reason that is often cited for preferring epubs on Kobo is the more technically correct typography.
Personally, I use kepub almost exclusively on Kobos,, so much just works better. (with the exception of a minor glitch in the lates firmware update.)
* Kobo will open epub3 files, but only the epub2 structures and features actually work. Epup3 Table of contents and formatting features do not.
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