What are Linden Lab's policies towards Child Avatars
Policies towards child avatars are largely focused on the actions of the avatars, not the avatars themselves.
Child avatars are allowed within Second Life. A child avatar, even within a mature sim (but not participating in mature (in this case, sexual) activities is allowed. A child avatar is allowed do everything any other avatar is, with the following exceptions
Child avatars in sexual situations (sexual congress obviously, though it is unclear beyond this) are not allowed and abuse reportable (ARable).
Public promotion (classified listing, profile, etc.) of sexual situations with child avatars is not allowed and ARable.
Creating areas for the purpose of sexual ageplay is not allowed and is ARable. This includes having items with sexual content (sexual poseballs or equipment) in proximity to items traditionally associated with children (swingsets, etc.)
Indicating that the *real age* of a child avatar (as opposed to a stated SL/role playing age) is below main grid age is not allowed and ARable.
As with all things, context is key, and err on the side of caution.