I think the idea of defining upgrades by equipment would be a big pitfall for a Sonic RPG. Sonic's attire consists entirely of GLOVES and SHOES. So uh, no armour, no helmets, no shields, no SWORD for pete's sake. It's a Sonic RPG, not Generic Knight Adventure V-2.
egg you keep talking about how it should avoid typical cheesy RPG stuff by not having unarmed fighters... but like... The main hero weilding a sword? Way to side step every RPG cliche.
Upgrades, if not handled solely by stat increases and bonuses, which is what Bioware might be liable to do I think?, should be kept the way they are in the games generally. Like, equipping the Ancient Light allows Sonic to use the Light Speed Attack or whatever. That brings to mind FF9's system of learning skills, if skills are learnable by items...
Unarmed fighting + RPG + primarily using legs (c'mon, Knux would be the puncher, obviously :P) brings Regal from Tales of Symphonia to mind. His story is that he had to kill his lover (I think?) because she had become an Exsphere monster, and as some self punishment he shackled his wrists so he could do no more harm to others with his hands. Therefore, he fights exclusively with kicking. And he is by no means a cheesy character in his moves. Some of his tech skill combos look more interesting than the sword-fighters' do in that game.
That's not to say that upgrades CAN'T be weapons. Shadow could have guns, I guess. Omega would have gun add-ons. Tails will probably have gadgets.
Seeing as it's not gonna be pick-from-a-menu gameplay... I envisage it being "hack and slash", and I use the term loosely. It'd be more... "jump and bounce" I guess. Random encounters really wouldn't work, so I envisage single-character roleplay in an open game field which enemies and other NPCs appear. i.e. like Morrowind kinda thing. Can't say I've played a Bioware RPG myself.
If random encounters were to feature, I certainly hope there is no turnbased crap. I already mentioned a Tales game, and I think a Sonic battle system would work well in that style... the reason I didn't envisage that at first is because random encounters would suck.
Conclusion: I don't have a fuddy duddy of a clue what this game will be like. BUT I SURE CONJECTURED IT. HARD.