You cannot build factional MICs outside your homelands until the Polybian era, and not outside Italy until the Marian one. So, recruitment wise, there is no benefit to building type II governments until the reforms. Setting up puppet-rulers outside of your homelands is certainly not ahistorical.
I am not sure why one would make a distinction between cities captured from the Eleutheroi or factions. Remember that the Eleutheroi are simply factions that didn't make it into the game. Type III and IV both represent puppet rulers, they just differ in the amount of control your faction has over the government.
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