V3 is complete on its own, but you can add characters. Open the chars folder. Any new character folder must have a .def file. Then open data/select.def with Notepad and add the character's folder name to the roster list. Keep the order to avoid crashes.
Use 7-Zip (free) or WinRAR. Right-click the archive and select "Extract to Sonic Battle MUGEN v3". Do not extract to Program Files or the Windows directory. A folder on your desktop or C:\Games\MUGEN\ is best.
I strongly advise against downloading pre-made Mugen builds from obscure file hosts (MediaFire, Userscloud, Mega.nz with no password). Many contain:
Always scan any downloaded .exe or .7z file with VirusTotal before running.
If you see "Error loading fonts/default.fnt," you have an incomplete build. Return to your download source and look for a "fonts.zip" patch. If sound is missing, ensure your Windows sound driver is set to 16-bit, 44100 Hz (Stereo) in Sound Control Panel.
Sega has historically been tolerant of Sonic fan games, provided they are not sold for profit. Sonic Battle Mugen is freeware. Never pay for a download link. If you see a site asking for a "premium membership" to access v3, it is a scam.
Also, remember to support official Sega releases like Sonic Superstars or Sonic Origins to keep the franchise alive.