I don't see how there would be any legal ramifications. They are not selling this game for a profit and you still need brawl to play it. I thought the entire reason things like action replay are legal, and sold at refutable stores is because you are allowed to make altercations to a game that you have purchased. I think this big scare about Nintendo calling for a C&D are a little ridiculous. I know theres a case a gaming company tried to make against an altercation of a game that already failed.
Yes, you need to own Brawl to play Project M, but you don't need to own Smash 4. If they start adding features that were thus far exclusive to Smash 4, especially new characters, it could mean people who would otherwise have purchased Smash 4 turning to Project M.
Nintendo doesn't want that, obviously, and I believe it's within their rights to shut down a group that's essentially providing content that's copyrighted by Nintendo to people who have not paid for that specific content. Even if they weren't, they've got more money to spend on lawyers. They'll win one way or the other.
In all likelihood, Project M will only survive as long as Nintendo feels that they are pushing sales for Brawl more than they are detracting sales from Smash 4.