WD I dont really know on that, jay psi240 was pretty decent in SM with a mild suspension (shock spring) and also was a decently fast KA at 11.9.
As for your questions though I checked out the unofficial sts rules again (caught something on camber plates being allowed I didnt know was true) and they can be found HERE.
According to this you may swap in a dohc engine as long as it is in its intirety. Basically states you cant pull some parts off of it and use hat to build up your motor, like the hybred hondas and the such, but you must use the entire unmodified assembly..
One thing that is good about sts is that it only allows the use of street tires (basically falken azenis are the best bet now). This allows you to learn the car more, and makes you work as hard as possible to get the most out of it. Once you have a full feeling of the car and the tires hold you back then would be a good time to go to R compound. I know you didnt ask about it but IIRC sts - stx are the only classes that are limited to a street tire with a plus 140 tread wear.
I personally think it would be a cheaper / and better route to go sts for a while. As you gain some time in the seat and learn you will become more competitive. I ran my last 5 events in novice but will switch to sts on the 6th. I judged my time vs the best sts time and I knoticed that over the past few events they have constantly gotten closer, thus this means I must be learning

All the basic bolt ons could be done to the car, increasing the hp output, and it would be a blast none the less. I feel it may be better to start out lower and learn, eventually getting competitive, then to start out in a race car and take longer to learn what you could in a less capable car.
I know what you mean by its not important to win, as Im just out there for fun as well. If everytime you go out there you are dead last it may take a blow to your ego, and being in such a difficult class, it could be a lot harder / costly to catch up, thus making you give up... Like myself, I grannied it my first few events (and still do), and started out with a decent STS car, in novice hehe. I wanted to change this and that so that I would be faster, but found out this is wrong and every larger change I make takes time to learn from, thus not really helping, and I would have improved given the time anyway. Another thing is that it will take a few runs just to see what pressures to run in your tires for best performance, mine used to be 36f 38r (suspension was sloppy due to the subframe).
I placed my 4 of the 5 events in the middle and finally got a 4th place trophy. While not much, and not out there to win, being in fourth place one run then 5th made me go out and regain my place

I shaved another .5 off the time and took 4th away for my final run. It was a nice feeling, and now I am ready (well have no choice) to move up mentaly. In this class I have a setup that should work nicely I just need to work on my skills. I added subframe spacers but it was needed and I feel much more confident with the car, well see on the 6th though.
As for a competitive SM car its hard to say. Jay had alot of power from the ka... I dont know how much he was using, as I dont know what his boost settings where. His suspension consisted of upgraded bars, tokico blues and prokits IIRC, and he may of had various sperical bearing parts but like I said I dont really know. But the basis of the suspension wasnt a coilover setup, and he placed 3rd iirc at his last in SM.
I was just reading how SM isnt that old (which I knew) and a very competitive SM could be made for 10k... SM cars are some of the fastest cars out their, not just becuase of the car but because of the seat time, well then again alot of experienced drivers also stay stock hehe (where the 240 is pretty out matched at times).
I dont know, I rambled ALOT it seems. My approach is to stay in STS, learn the car and if I want to mod it, do so in the class rules, like my next mods will be a r200v and a 5 speed

which should help a bit, but wont alter the handling too much (I hope), but that is on pause for a few more events. If I feel Im ready for the SM class Ill add the turbo for more power, swap out to metal bushings, then coilovers, and finally a set of R compounds one day.