The good news is that, going by the current convential wisdom for husbandry for this species, using a five gallon tank is more or less perfect. You could easily house ten dwarfs in this tank and still have room for any surviving fry.
The bad news is that LR is not typically suggested for use in dwarf tanks. Why? It can be a source of pest species that are harmful to the SH - bristleworms, hydroids, and any shrimps. If you can freshwater dip or otherwise treat the LR to prevent bristleworms and shrimp, and to minimize the hydroid problem, you might be able to use it.
The hydroids, which are like teeny jellyfish, come up in dwarf SH tanks most often when using BBS that is not decapsulated. Seahorsesource.com also happens to offer up hatchable decapp'ed BBS eggs which is very convenient and simple to do.
You are aware that they need live food two to three times per day, yes? Prefereably copepods or newly hatched BBS, or well fortified BBS (using phytoplankton like DT's or naturose or Selcon).
I would read up as much as possible on the little tikes before you settle on them. They are a delight and I loved them, but I did not follow the conventional method of keeping them. They are a bit more work than the larger species because of hatching/rearing their food and keeping after the water quality in their tanks. Dont let me discourage you though, do some searches online for Hippocampus zosterae and keep asking about here and on the seahorse sites for more info.
>Sarah