Honestly, if it was shown off as a finished product, the developers would be served a full-blown lawsuit instead of a harmless cease & desist threat. I'll take a C&D over a lawsuit any day.

Oh and OH MY GOD! I CAN NOT BELIEVE KONAMI WOULD PROTECT THEIR TRADEMARK AND SHUT THESE GUYS DOWN! I TOTALLY DID NOT SEE THAT COMING! WHAT A SHOCKING SURPRISE! On a different note, I AM surprised to see the fan-made Final Fantasy 7 brawler game still be available, because I know that game's exposed to the internet so I doubt Square-Enix won't run into it eventually. And last I checked, Square-Enix isn't following Capcom's lead in being nice to fan-made projects at the cost of risking their trademark protection.

Anyways, it's a shame they couldn't last long enough to announce whatever they wanted to announce in mid-March. I'm going to hazard a guess and say they got professional voice actors involved. Maybe even David Hayter. A rather poor guess in my opinion, since uh... Aren't those guys and girls in unions?

I don't see the situation being different had this been finished as they stated they would receive no money from this project, Konami's legal approach would have been the same regardless, however if finished it could be hosted by people indefinitely like how you can still obtain Streets of Rage Remake.

(random gif i made during design discussions about the addition of a jet ski stage )

The legal repercussion changes in the sense that technically you can sue for the existence of the Streets of Rage remake since it uses somebody else's intellectual property without authorization, and I doubt fair use would protect them no matter how much transformative work was done on that (which I assume to be built from scratch). If anything, it's more considered derivative work since it relies heavily on the Streets of Rage design, characters, story, and setting.

So if the MGS remake was finished and spread around the internet and incapable of being stopped, then Konami would simply sue the developers and request monetary compensation to make up for the damages of infringing on their intellectual property (again, not doing anything would risk losing the legal protection). As I don't really understand law that well, I'm not sure if any copyright is being infringed here, since everything should be done from scratch (voice clips maybe?), but the trademark is definitely being used and character names are used as well. At best, they could change names and artwork, as well as adjust anything that copies whatever game designs are patented by Konami. (I imagine patents protect only very specific things, so you should be able to copy stealth action games with radar detection just fine.)

With that said, Sega did attempt to sue Fox Interactive, Electronic Arts, and Radical Entertainment for The Simpsons: Road Rage... 2 years after its release *cough*... And Sega ended up with a settlement. And aside from the game design of driving customers from point A to B within a time limit with over the top physics, The Simpsons: Road Rage doesn't contain any Crazy Taxi assets whatsoever. And yet fair use didn't protect them whatsoever. Plus everyone could tell it was a rip-off of Crazy Taxi anyways. Hilarious how they waited 2 years before attacking them though.

Oh and one last thing, fair use law doesn't look at whether the defendant makes any money out of the transformative work or not. You can make money out of it, and still be able to use fair use law to defend your work as long as it is transformative work for purposes of parody, critique, and/or education (like say, MAD TV or Saturday Night Live skits). The idea that doing something for free would keep the rights holders off your back because they won't lose money out of it... Is something we keep telling ourselves (myself included back during the Half-Life modding days). Legally speaking, it isn't even considered a factor whatsoever.