Actually, no - it’s intended behaviour from the registry modification. In effect what it does is whenever “notepad.exe” is called is execute Notepad2.exe (in the relevant folder) instead.
Of course avast! does not know this is going to happen, and so unless it is programmed to look at that value it’s not going to work (with the exception of if you manually go to the Notepad2 install directory, right click it and choose Always run in sandbox).

This part is not even particularly important as I know Notepad2 is safe to use (I actually built a custom version of it myself from the Source) - the .net issue is important however - the only reason I brought the Notepad2 thing up is simply because I was looking for ways where the Sandbox is not behaving as expected.