About particle effects, do they count as sprites?  I mean, if you have like 20 squares pop out of 1 square to signify an explosion, will that be going against the rules.  Also is cutting shapes allowed?  Example making a circle into a semi circle will still be counted as once shape.

No, particle effect are different game objects and the. And particle effect make many of the same sprite, as like to think of them, so they are allowed. Cut shapes are only allowed if the are merged with another shape, which is limited to 4 in the rules.