http://en.wikipedia.org/wiki/M.U.G.E.N

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The license agreements for usage of M.U.G.E.N from Elecbyte have expired and it appears that a new license agreement will never be granted. Thus, any current distribution of M.U.G.E.N has not been authorized by Elecbyte and is technically illegal. With the license expired on all versions, when running the M.U.G.E.N program, the user is reminded of this through a nag screen. While illegal, some view that the purpose of the executable's nag screen was to encourage adoption of newer iterations of the engine. Evidence of this can be inferred by the brief period of time that a license was made available from the release date of a version of the engine--it was often not long enough to develop an original character from start to finish. However, Elecbyte has never taken any legal action; the company has disappeared without explanation. People chose to continue using M.U.G.E.N, and deprecated versions of it, despite the lack of a new license (the DOS version was still in widespread use when its license had expired at a time when the Linux version's license was still valid). Creations, such as characters and stages, for use with M.U.G.E.N are not a part of Elecbyte's license (provided those creations do not include the executable as well), only the software itself is.[5] It is up to the individual whether or not to violate Elecbyte's license by using M.U.G.E.N. Elecbyte itself has not made a public statement since 2003, when they stated that the project had "hit a snag".[21]

Most characters and stages are of dubious legality as well, as most are made using sprites and sounds ripped from copyrighted games. For this reason, some standing communities enforced a loose "time-release" rule, whereby they do not allow linking to characters made from recent games. [22] Eventually the time-release rule was limited to Neo-Geo games as those could be emulated as soon as a ROM was dumped and released. While this has no actual impact on the legality of the materials in question, it served to avoid any legal pressure from the copyright holders, and as a means to keep M.U.G.E.N from 'competing' with commercial games and drawing their ire.

Not all companies have a fanart approach to the engine/game. SNK Playmore responding to an email query asking directly about their material being used in M.U.G.E.N creations that they don't support any usage of intellectual property outside of their company,[23] However this decision was later reversed and they allow M.U.G.E.N works as long as they are for private, non-commercial use or resale. A later email query was sent by former MugenGuild admin Messatsu to clarify the situation further, allowing for the works to be distributed freely over the internet.[24] Capcom was sent a similar email query, the response stating they understand that it is just fan art[25] and as such, are not threatened by it. The response under closer inspection is actually just a re-wording of their stance on fan art websites. It should also be noted however that the subject of M.U.G.E.N has come up on Capcom USA's forums with no hostility shown by Capcom's staff, a response very different to that given to projects like Street Fighter Online to support themselves.[26]

However, French-Bread (known as Watanabe Seisakujo prior to 2003), the creator of the Queen of Heart games, and the co-creators of Melty Blood, have asked that content from their work not be made for the M.U.G.E.N or the game Knuckle Fighter X. [27] However, they began loosening their stance regarding conversions, when during the release of Melty Blood, they requested that sounds and voices from the game itself not to be used with the converted characters, as opposed to outright content bans earlier imposed. [27] This limitation for the Melty Blood series was removed in subsequent installments of the game series; however, previous other content bans persist, notably in regards to the Queen of Heart series. Since then, French Bread has not expressed objections of conversions from their later games, like Glove on Fight or Ragnarok Battle Offline.