The Restriction you're suggesting is a strict subset of the allowed rules in Adventurer's League Play

5th Edition Adventurer's League has a "PHB +1" rule for character creation, that requires that each character created for AL play be based only on materials found in

• The Player's Handbook, or
• One (1) additional officially published 5th Edition Sourcebook.

So your rule is a strict subset of that rule: of the officially published 5th Edition sourcebooks, you are only permitting Sword Coast Adventurer's Guide, for all characters. As such, while it's more restrictive than normal AL rules, it's definitely not absurd or unreasonable.

SCAG is probably a good pick for the restriction

Sword Coast Adventurer's Guide is unique compared to other Sourcebooks in that of the sourcebooks in the game, it focuses more on augmenting existing PHB material rather than providing whole new options wholecloth.

For example, unlike the other 5e sourcebooks, SCAG's only Racial options are variants on existing PHB races: Dwarves, Gnomes, Half-Elves, Halflings, and Tieflings

The only new spells SCAG offers are some (admittedly very powerful) melee-focused cantrips for Wizards, Warlocks, and Sorcerers

SCAG only introduces a small number of additional class archetypes, one each, for Barbarian, Cleric, Fighter, Monk, Paladin, Warlock, and Wizard. It also has two for Rogue and one for Sorcerer and one for Monk that were later reprinted in Xanathar's Guide to Everything.

And SCAG offers a fair number of new Background options, which were already customizable as-written in the PHB.

So if the goal is to keep character creation from getting overly complicated, limiting to the PHB and SCAG is a valid option.

Personal Experience: Allowing 5e sourcebooks, disallowing Unearthed Arcana or Homebrew, is pretty manageable for new players

The big "Expansion Sourcebook" in 5e is Xanathar's Guide to Everything, which contains multiple class archetypes for all of the 5th edition classes, has lots of new spells, has lots of new racial options, and also contains a lot of variant rules for DMs to use. So if you're worried about complexity, that's definitely the big one to watch out for; most of the other sourcebooks contain about as much player material as SCAG.

Having said that though, the options provided in Xanathar's (and the other 5th edition books) has been, in my experience, pretty manageable by players. The trick is assuring players that try to use any of these books that most of the material found in these books, even in Xanathar's, is flavor text that they don't need when creating their character (or at least they can ignore while they're trying to work out, mechanically, what they want to play). If you go through and enumerate/index each of the choices that are actually offered by each book, it'll make these choices easier for players.

That last point is important: it's a lot easier to figure out "what kind of Paladin do I want to be?" if you can choose from a specific list, i.e.

• Devotion (Player's Handbook)
• Ancients (Player's Handbook)
• Vengeance (Player's Handbook)
• Oathbreaker (Dungeon Master's Guide)
• Conquest (Xanathar's Guide to Everything)
• Redemption (Xanathar's Guide to Everything)
• Crown (Sword Coast Adventurer's Guide)

As opposed to trying to search through each book for the specific sections that describe each of those archetypes. If you put together lists like this for each class/racial option, your players will be a lot less overwhelmed by the choices they're being offered.

The one risk is background or class options that clash with your campaign: Guildmasters' Guide to Ravnica, for example, offers some Background options that are extremely enticing (especially for spellcasters), but which probably won't mesh well with any non-Ravnica based campaign. Other books have similar restrictions; SCAG, for example, offers the Bladesinger class to Wizards, which normally is restricted to elves and half-elves only. There's nothing stopping you, as DM, from lifting that restriction (and indeed, the text as seen in SCAG literally suggests lifting that restriction to suit the campaign if needed) but this is one more example of how you might need to tweak things or set ad-hoc rules on what players are or are not allowed to take.

So it's up to you. PHB + SCAG is definitely a reasonable restriction, but most newer players won't be too overwhelmed by allowing the other 5th edition sourcebooks as well, just plan to index the contents of Xanathar's Guide to Everything if you do decide to allow it, to make picking options out of it a little easier.

A possessed character is already AL compliant

So long as you aren't expecting stat bonuses for gradually transforming, no AL rule is broken by saying that your warlock, for example, broke his pact and is stealing the power instead, causing the entity to gradually exert more control over the warlock until he's just a pawn of the entity.

This is difficult to do in the AL setting of game stores, with folks rotating in and out and not always caring about roleplaying that much, but especially with an AL legal group of friends this could work out very well.

That being said, you should talk to your DM about who is responsible for this second entity, and whether the entity would want to work with the party when it takes full control. If the entity is not willing to work with the party, be prepared to wave your character goodbye (at least for the current party/campaign).

You should also think about what happens when someone inevitably casts dispel evil and good, because of its explicitly possession-removing effect.