This "loop circuit" is for toys with matrixed keypads/buttons which can "stutter" if you quickly press a key/button repeatedly. The addition of this circuit allows for normal use of the keys/buttons when circuit is not in use.
If you have already looked at using rotary switches to replace a membrane keypad this will make more sense, hopefully.
After you have determined the wiring of rotaries all you need to do is use an osc and 4016 (bi-lateral switches) chip in place of the momentary switch/button.
The rate of the osc determines how quickly or slowly to close the 4016 switch thus "restarting the loop". Experiment with osc types and component values.
For toys without a slow pitch remove R2. For toys with pitch mods that can slow down I recommend building your osc with 2 pots in series to control the rate, similar to a "rough" and "fine" setup. That way when you play at regular pitch you have one pot (rough) turned to no resistance and the other pot (fine) will control loop duration/osc rate. When you slow the pitch use both pots, otherwise your loop duration will not be long enough.
Power the osc and 4016 from the toy's powersupply. Be sure to wire in an on/off to the osc/4016 so they do not drain the toy's batteries when not in use.
S1 is an on/off (SPST) switch for the signal to the 4016 switch. You can see the osc rate/loop duration on the LED if S1 is open or closed.