After hours of searching for a bug, it works - User accounts in sandbox mode, currently they are not persistent between restarts (ie restarting opensim.exe) but should be persistent between sessions (login/ logout).

Use the -account command line arg to enable them and then create new accounts through the web interface

OpenSim.Framework/UserProfile.cs

@@ -32,6 +32,7 @@ namespace OpenSim.Framework.User
             Circuits = new Dictionary<LLUUID, uint>();
             Inventory = new AgentInventory();
             homeregionhandle = Helpers.UIntsToLong((997 * 256), (996 * 256)); ;
+            
         }
 
         public void InitSessionData()