I don't know about the legal issues, but if the band itself is a cover band, then you should at least try to use MySpace as the marketting tool that it is. As long as you place credit where credit is due, I think you'll be all right.
If there is a legal issue, I doubt anyone will notice to begin with, and when they do, it'll be because your group is gaining attention, at which point, your name will get you the gigs, and you won't need the demos on MySpace
Myspace says on the sign up page that you have to own the copyright on any songs you upload........
Nothing stopping you from putting them in a flash player though Just becomes a problem if you want to sell them...... and here comes the royalty police
I play in a covers band and had the same dilemma. We wound up making a long demo that is a string of a few seconds of each tune, so there's hopefully not enough of each tune to infringe copyright.
What became difficult was when, a nearly a year later, we decided to try and put some footage together to match the demo. Pretty hard miming to a random medley!
Just becomes a problem if you want to sell them...... and here comes the royalty police 
