Are you referring to them encouraging children to wear costumes or the part about the costumes not being “scary”? If it’s the latter I would say that the purpose is to discourage people from terrifying children (since this is an activity for children). Normally children’s costumes aren’t made all that scary, so I’d guess that is directed toward the older crowd that likes to dress up.

I don’t take my kids to Scare on the Square anymore. It’s all waiting in line and people are so rude. We try to catch all the Trunk or Treats and our scout group has a Halloween party.