Thanks for the input. I am planning to get on the phone with PayPal tomorrow and see what their position is. I used to sell Diablo II merchandise via PayPal way back in the day (and got my account frozen and funds locked for that) so I know what you mean :)
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Yeah, they do that all the time. Now, if you can get a written response, even as an email, it'll be good so that they don't change the rules later on (assuming they say they're ok right now).
I don't know if its legal (or usable in a court) to record the conversation, so that's why I'm suggesting written responses.