I have no problem with people using books or sheets. I've been known to do it myself from time to time, and I've seen professional musicians work from music stands as well (yes, in folk clubs). That's not the same thing as not preparing your song for your audience - we can all have memory problems.
I've never known a folk venue stop anyone from singing or playing, nor have I encountered discourtesy to anyone contributing to an evening (and that's in a good many years and a good many different folk venues) although I have heard some fairly dire performances from time to time. Not often. But it happens. The worst time is when I have non-folkie friends or family along on my recommendation or even to see me, but even then I don't remember hearing any unpleasant comments.
I don't think anyone has been suggesting that amateur singarounds have caused any problems at all for folk music and I absolutely agree that it's a disgrace the way the media and the general public make fun of Morris and some of our other traditions. The question was more specific. Yes, in some situations ability to perform is important. In some other situations it doesn't matter at all.
I run voice workshops - I tell my participants it doesn't matter if they go out of tune, get the words wrong, get the timing or key wrong or develop an attack of hiccups or giggles. And it doesn't - and even paid performers can get away with it with the right audience. But - and it's a big but - if it's a regular problem and not a rare occurrence then it's probably something you should work at not to do.

Anne